UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
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for
the fiscal year ended December 31, 2006
or
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
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for
the transition period from
to
Commission
File Number 001-22302
ISCO
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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36-3688459
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1001
Cambridge Drive
Elk
Grove Village, Illinois
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60007
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (847) 391-9400
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, Par Value $0.001 Per Share
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American
Stock Exchange
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of class)
None
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the
Act. Yes ¨ No
x
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 the definitive proxy or information statements
incorporated by reference in Part III of this on Form 10-K or any amendment
to
this on Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
Accelerated filer
¨
Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
x
As
of
June 30, 2006, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately $32.3 million
based
on the last sale price of the common stock on such date as reported on the
American Stock Exchange. This calculation excludes more than 88 million
shares held by directors, executive officers, and two holders of more than
10%
of the registrant’s common stock.
As
of
March 1, 2007, there were 190,388,033 shares of the registrant’s common
stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
As
stated
in Part III of this Annual Report on Form 10-K, portions of the registrant’s
definitive proxy statement for the registrant’s 2007 Annual Meeting of
Stockholders to be held on June 8, 2007 are incorporated by reference in
Part III of this Annual Report on Form 10-K.
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Forward
Looking Statements |
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Item 1.
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Item
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Item
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Item
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Item 15.
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52
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Because
we want to provide investors with more meaningful and
useful information, this Annual Report on Form 10-K (“Form 10-K”) contains, and
incorporates by reference, certain forward-looking statements that reflect
our
current expectations regarding its future results of operations, performance
and
achievements. We have tried, wherever possible, to identify these
forward-looking statements by using words such as “anticipates,” “believes,”
“estimates,” “expects,” “designs,” “plans,” “intends,” “looks,” “may,” and
similar expressions. These statements reflect our current beliefs and are
based
on information currently available to us. Accordingly, these statements are
subject to certain risks, uncertainties and contingencies, including the
factors
set forth under Item 1A, Risk Factors, which could cause our actual
results, performance or achievements for 2007 and beyond to differ materially
from those expressed in, or implied by, any of these statements. You should
not
place undue reliance on any forward-looking statements. Except as otherwise
required by federal securities laws, we undertake 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
Annual Report on Form 10-K or to reflect the occurrence of unanticipated
events.
PART
I
HISTORY
We
were
founded in 1989 by ARCH Development Corporation, an affiliate of the University
of Chicago, to commercialize superconductor technologies initially developed
by
Argonne National Laboratory. We were incorporated as Illinois Superconductor
Corporation in Illinois on October 18, 1989 and reincorporated in Delaware
on September 24, 1993. In 2001, we shifted our focus from solely a
superconductive filter (high-temperature superconductor product line referred
to
as “HTS”) provider to a customer-driven provider of more specialized Radio
Frequency (“RF”) management solutions, with a particular focus on interference
management, changing our name to ISCO International, Inc. We continue to
broaden
our solutions with an increasingly comprehensive approach toward optimization
of
the full radio link of a number of diverse wireless networks. Our facilities
and
principal executive offices are located at 1001 Cambridge Drive, Elk Grove
Village, Illinois 60007 and our telephone number is (847) 391-9400. We
maintain a website at http://www.iscointl.com.
The
information contained therein is not incorporated into this annual
report.
BUSINESS
STRATEGY
Our
strategic goal is to become the leading supplier of RF management solutions
to
wireless operators. We seek to accomplish our goal by:
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Marketing
our products aggressively to leading wireless
operators;
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Providing
customers comprehensive radio link management infrastructure-based
solutions for wireless networks;
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Continuing
to build on our strong intellectual property position selectively,
emphasizing speed to market; and
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Outsourcing
product manufacturing and reducing product
cost.
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We
focus
on winning the support of the world’s leading wireless operators for our RF
management solutions. We believe that our ANF and RF² product families, as well
as professional service support and other products, make us a preeminent
RF
management specialist in the market. We have taken steps to expand into a
digital delivery platform for our ANF technologies, and expect this trend
to
continue. We believe that the ability to solve interference problems using
the
delivery size, capabilities and cost benefits of a digital platform will
greatly
enhance our addressable market within the field of wireless
telecommunications.
We
currently outsource production of our products. We believe that this model
will
allow us to maintain or achieve targeted product gross margins, minimize
capital
needs while reducing product costs, and maintain a very high quality level.
We
also believe that offering the lowest product cost will further strengthen
our
ability to achieve our strategic objectives.
RF
MANAGEMENT ISSUES, INCLUDING INTERFERENCE, AND WIRELESS
SYSTEMS
RF
management issues are a growing problem limiting cell site coverage, capacity
and range, as well as mobile transmit power and related battery-life issues.
RF
Link (or “Link”) problems cause dropped calls, poor call quality, and other
service problems that lead to subscriber dissatisfaction and turnover (churn).
Interference enters a carrier’s operating frequencies from such sources as: home
electronic devices including portable phones, two-way radios used by commercial
enterprises and governmental agencies, air-to-ground radio, police, fire
and
emergency services radio, military radio, wireless data networking systems,
television and radio broadcasts, radar and other cellular networks. Interference
is also created by electrical sources used to power cellular base station
equipment. Interference may begin within a particular frequency or migrate
from
another frequency. Increased usage of co-location (multiple providers and/or
multiple architectures from a single vendor using the same towers), increased
sensitivity of non-voice applications, and the continued surge in wireless
traffic result in increasing the impact of interference on wireless networks.
With the proliferation of data applications and the limitations on tower
availability and related budgets, wireless operators are finding that their
own
preferred technology combinations for their cell sites are creating interference
with each other. Wireless operators also create self interference during
the
planned re-mining of existing spectrum with 3G/4G broadband technologies.
We
believe the proliferation of wireless devices and high data rate services
will
exacerbate the amount of interference bombarding carriers’ operating
frequencies. Conventional cellular base station equipment does not effectively
cope with interference issues. More importantly, the wireless telecommunications
industry is undergoing significant transformation as it attempts to integrate
existing infrastructure and technologies with newer 3G equipment. Additionally,
the recent merger activity is forcing merged companies to integrate disparate
technology platforms, sometimes using two and three different architectures
in
the same site in order to handle planned traffic. We believe this trend will
continue. Our products are designed to address this expanding market
need.
In
the
face of expanding subscriber bases, increased minutes of cell phone use,
demand
for high data rate services, the ease of customer churn (changing providers)
due
to number portability, restricted capital budgets and intense competition,
the
provisioning and optimization of wireless system infrastructure is a major
challenge for operators. As a result of these industry conditions, wireless
equipment manufacturers, including independent wireless technology companies
and
large original equipment manufacturers (OEM’s) are working intensely to develop
technologies that provide operators the tools necessary to monetize the growing
demand for wireless services.
Using
our
solutions to tightly integrate disparate technologies while simultaneously
optimizing the radio link, including the mitigation of interference, operators
can capture additional capacity and utilization, expand cell site range and
coverage, reduce dropped calls, and significantly improve overall call quality.
High speed data applications have placed a tremendous additional strain on
wireless networks. Higher data rates require much cleaner signals than
traditional voice-oriented networks to support the data throughput required
for
many of the highest average revenue per unit applications (including VoIP,
music, television and video). As a result, we believe the value proposition
and
payback of our solutions are improving with increasing demand for high speed
data, which we believe will result in increased demand for our solutions.
Network capacity, quality and throughput are today the critical competitive
differentiators in commercial wireless networks. All of our products improve
one
or more of these performance factors.
We
estimate the economic payback to operators as a result of the use of our
solutions should typically occur in less than one year, sometimes well under
one
year, depending on traffic levels and overall link quality. We believe our
solutions often present the best overall value of all alternatives available
in
many applications.
Target
Market
We
believe demand for our products will be primarily driven by the following
factors:
1.
Existing networks are straining under heavy traffic. According to many sources,
the annual growth rate in wireless telecommunications is roughly 15-20%.
The
number of handsets sold during 2006 has been reported to be more than 900
million units worldwide.
2.
The
ongoing transition from predominantly voice based networks to data based
networks will continue to drive demand for infrastructure enhancements to
achieve data and error rates required to support near real time data
applications (including VoIP, music, television and video).
3.
Interference and coverage issues are primary causes of poor call quality,
dropped calls and poor data throughput. We believe that as a result of
increasing use of devices such as cellular phones, wireless data networking
equipment, and wireless consumer appliances, wireless network operators are
coming to view interference and coverage management technologies as necessary
to
protect against their customer bases “churning” to other carriers, especially
since the full implementation of number portability (the ability to retain
one’s
phone number when changing wireless operators - historically a barrier to
changing providers).
4.
We
believe that newer, data-driven wireless networks and expansion into higher
frequencies will require smaller operating cells and more base stations than
existing cellular networks in order to cover the same geographic area. This
is
based, in part, on the requirement for a higher quality radio link in order
to
enable full 3G throughputs required by the most popular applications, as
well as
inherent limitation of RF transmissions in higher frequencies. High frequency
RF
signals require more transmission points for equivalent coverage than signals
of
lower frequency. Since most 3G technologies are deployed at high frequencies,
an
operator has to add a significant number of additional cells to match coverage
and in-building penetration capabilities they achieved with their 2G
deployments. To minimize the capital investment and maximize the performance
and
customer satisfaction of their data-driven networks, operators are compelled
to
look at technology options to overcome these inherent obstacles.
5.
The
wireless telecommunications industry is undergoing significant transformation
due to industry consolidation. The primary competitive driver is to reduce
the
cost bases, both capital and recurring costs, mostly achieved by reducing
the
number of cells required to support the combined customer base and to increase
penetration such as by providing better in-building coverage. This creates
demanding requirements to integrate disparate technologies, frequency spectrums,
and legacy platforms while at the same time enabling the integrations of
advanced technologies and services. Our products enable this integration
while
simultaneously optimizing the RF performance of the overall system.
In
summary, we believe we have differentiated technologies in radio link management
and optimization and are customer-driven to closely align our solutions to
their
specific needs thereby maximizing our value-add to our customers. Our goal
is to
continue to position ourselves as a leader in this segment of the wireless
industry.
TECHNOLOGY
OVERVIEW
A
wireless base station is roughly divided into two halves: the digital portion
and the so-called “RF” portion.
Our
core
expertise is the application of technology and experience to RF systems,
though
we are beginning to implement RF solutions utilizing digital technologies.
The
components in the receiver front-end are designed to acquire the desired
information-bearing signal and pass it through to the digital portion of
the
system, where it is processed digitally and the user information is extracted.
Typically, a portion of the signal is lost as it passes through the RF
components. Further, undesired interference (in band and out of band) also
leaks
into the system due to imperfections in the characteristics of the RF
devices.
The
use
of our solutions for wireless RF systems is based on creating RF systems
which
block or mitigate the impact of interference, optimize signal processing
within
the radio path while introducing very little signal loss or
degradation.
Our
two
current primary product families are: (i) Adaptive Notch Filter (ANF ™),
which dynamically and adaptively identifies and eliminates direct in-band
interference in the radio link of a wide-band system such as CDMA or UMTS;
(ii) Radio Link Radio Frequency Fidelity (RF² ™), which includes ultra
linear low-noise amplifier receivers, multi-couplers, filters and duplexers
that
enable full and integrated upgrades of legacy systems to 3G technologies
resulting in a significant overall improvement in system performance, such
as
both dropped calls and increased data throughput. These products are designed
for efficient production, emphasizing solid-state electronics over mechanical
devices with moving parts.
RF²
(Radio link Radio Frequency Fidelity)
We
introduced our RF² products in September 2003, we began to add new products to
our RF² family in 2004, and added a significant number of products in 2005 and
2006. The RF² product family is comprised of solutions that focus on optimizing
RF handling in order to improve system performance, integrate the disparate
technologies utilized by operators, and enable next generation 3G upgrades.
The
RF² product family is designed to improve capacity and coverage in cellular base
stations through state of the art low noise RF amplification, filtering,
and
combining and integration technologies.
The
basic
RF² product is a radio link solution designed and priced for network-wide
deployment, improving system coverage integrity, in-building penetration,
and
voice/data capacity. This leads to improvement in wireless user perceived
quality by reducing failed connection attempts and dropped calls, and improving
handset battery life.
Our
RF²
products are easy to install, maintenance-free, and often present a performance
benefit over alternative solutions in terms of tighter integration into/with
existing equipment, continued ability to utilize diagnostics and monitoring
equipment, and higher performance. Additionally, our RF² solutions have been
shown to deliver results generally comparable to HTS-based solutions without
a
cryogenic cooler or other moving parts, and with a tighter integration and
much
lower cost. We believe that the ease of integration and higher value compete
strongly with other solutions.
RF²
Competition
OEM
competition includes solutions such as adding a carrier to the cell sites
(to
increase capacity), cell splitting, or even adding an entirely new base station
so as to add capacity and coverage. After-market competition includes repeaters,
TMA’s (tower-mounted amplifiers), GMA’s (ground-mounted amplifiers) and HTS
receiver front ends, as well as duplexers and other non-integrated solutions.
We
believe these products may generally improve the coverage of the network,
but
lack the value of our fully integrated link management solutions.
Adaptive
Notch Filters
Our
patented ANF system identifies and suppresses in-band interference in the
radio
link of a wide-band system such as CDMA or UMTS. If interference is not
eliminated, the radio link of the system may be reduced, possibly to the
point
of not allowing any calls on the entire channel. The ANF unit continuously
monitors the power spectral density across the carriers in use and identifies
narrow-band interference. The severity of multiple in-band interferers is
prioritized, and through software control, the ANF unit dynamically inserts
a
highly selective filter to eliminate multiple interferers with minimal impact
on
the desired broadband signal. The objective of the ANF system is for operators
to realize significant gains in performance in coverage, capacity and data
throughput. An entire network of ANF hardware can be managed via the web-based
management software that supports the hardware. We believe our patented ANF
technology is the only in-band dynamically controlled interference management
solution commercially available to the marketplace today.
Our
products, including projected expansions, are focused on CDMA and other
wide-band spread spectrum systems (W-CDMA), including, for example, upgrades
of
GSM systems to UMTS and similar 3G technology. During 2006 we launched our
first
ANF solution that protects PCS (1900 MHz). We empowered this and other ANF
platforms with a digital front end and modular design for easy adaptation
to
customer requirements. This new platform has significantly expanded our
addressable market and will also serve as an enabler to a larger suite of
dynamically adaptable RF multiplexer solutions.
We
have
also developed a network-wide, web-based network management tool (web monitor),
allowing our customers to perform management functions for all ANF units
throughout the system. This tool with a graphical user interface allows the
service provider to control, configure, and monitor the ANF units remotely
from
the network management center. This includes:
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Remote
configuration of parameters within all ANF
units;
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Remote
monitoring of alarm status for all ANF
units;
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Observation
of interference and notch activity from all units;
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The
ability to view on-line event data and reports based on measured
performance data.
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We
have
industry leading expertise in the optimization of networks. To facilitate
rapid
penetration of ANF, we offer professional services to the service providers’
engineering teams to identify and quantify interference, and, its effects
on
network performance. We have developed several custom software and hardware
tools to perform interference analysis and interference audit. iSMART
(Interference from System Metric Analysis Rules Tool) is a software tool
that
enables a service provider to identify potential ANF candidate sectors/cell
sites by analyzing the system performance metrics data generated in their
network. Automated Test Equipment, ANF-on-wheels and ANF Web Monitor is a
software/hardware system that allows us to perform interference audits at
cell
sites of service providers regardless of the frequency band of operation.
This
service helps quantify interference and identify new markets (frequency bands)
with high interference.
We
have
recently added a digital front-end to our ANF products, and are working on
a
fully digital version that we expect to complete during 2007. We believe
a fully
digital ANF solution would integrate well into operator plans and provide
the
economics to allow far greater penetration into customer networks, as well
as
access to wireless applications outside of traditional cellular (e.g., WiFi
and
WiMax architectures), as well as mobile devices such as handsets.
ANF
competition
We
believe our patented ANF technology is the only in-band dynamically controlled
interference management solution commercially available to the marketplace
today. We hold proprietary technology on ANF. We do, however, face competition
as described below.
Direct
Competition — After-Market Vendors
Fixed-frequency
notch filters are the main form of direct competition. However, these will
only
work in a static interference environment, and hence do not satisfy the need
of
dynamic interference detection and elimination as observed in a vast majority
of
in-band interference scenarios. Smart antennas were also developed with the
intent of in-band interference mitigation. However, we believe these solutions
have limited applicability and effectiveness in eliminating in-band
interference, particularly in a CDMA-based network, and are typically
substantially more expensive (in addition to being less effective) than our
ANF
solution.
Direct
Competition — OEMs
Digital-signal-processing
based solutions may be under development by the various OEMs. Even if the
manufacturers do develop such a solution for in-band interference, we believe
that they would have limited dynamic range and hence would only be able to
mitigate low-power interference. Most importantly they would likely not be
available for deployment on the hundreds of thousands of legacy cell sites
currently in service.
Indirect
Competition — OEMs
Indirect
competition does not directly address the problem of in-band interference,
but
could be viewed as a method for circumventing the problem. Examples include
adding a carrier to a cell site (to increase capacity), cell splitting, or
even
adding an entirely new base station. These methods seek to overcome the effects
of the interference by a brute force of added capacity and higher
signal-to-noise in a problematic location. However, we believe these solutions
to be relatively costly and do not guarantee adequate increased performance
due
to absolute limiting effects of in-band interference in certain
situations.
Indirect
Competition — After-Market Vendors
Other
forms of indirect competition include repeaters, TMA’s, and HTS receiver front
ends. As with the OEM-based solutions, we do not believe these directly address
the problem of in-band interference. There are several entities attempting
to
develop and market digital solutions that address part of the problem that
our
ANF solutions address, but we believe they operate in a very different fashion
and will not achieve the same benefits. Additionally, they are typically
entities without significant current revenue streams or operator access.
We have
the benefit of a growing existing customer base and the ability to work with
our
customers in tightly matching next generation solutions with their
needs.
Product
Benefits
Our
products are designed to address the high performance RF needs of domestic
and
international commercial wireless telecommunication systems by providing
the
following advantages:
Enable
Deployment of Data Networks.
Beginning in 2005, our solutions have been utilized with data network
deployments. These deployments require upgrades and changes to existing
infrastructure. Our products have proven effective in helping customers in
this
area. It is generally expected that data networks will continue to be widely
deployed, in the United States and internationally, during 2006 and
beyond.
Technology
Integration due to Expansion or Consolidation.
The
wireless telecommunications industry is undergoing significant transformation
due to industry consolidation. The primary competitive driver is to reduce
the
cost bases, both capital and reoccurring costs, mostly achieved by reducing
the
number of cells required to support the combined customer base. This creates
demanding requirements to integrate disparate technologies, frequency spectrums,
and legacy platforms while at the same time enabling the integrations of
advanced technologies and services. Our products enable this integration
while
simultaneously optimizing the RF performance of the overall system.
Greater
Network Capacity and Utilization.
Our
solutions can increase capacity and utilization by up to 70% or more. In
some
cases, capacity increases because channels which were previously unusable
due to
interference are recovered. In other cases, system utilization increases
because
of lower levels of blocked or dropped calls, and increases in the ability
of the
system to permit weak signals to be processed with acceptable call
quality.
Improved
Base Station Range.
Our RF
systems have been shown to extend the radio link range of a wireless system
by
up to 50%. Greater range can reduce a service operator’s capital expenditure per
customer in lower density areas by filling in coverage gaps in existing systems
or by reducing the number of required cell sites for new system
deployments.
Improved
Flexibility in Locating Base Stations.
Our RF
products can allow wireless telecommunications service providers to co-locate
base stations near other RF transmitters. Our products allow the cell site
radio
to better tolerate RF interference while reducing out-of band signals that
could
interfere with other nearby wireless telecommunication operators.
Improved
Call Quality - Fewer Dropped Calls and Failed Connection
Attempts.
Our
products improve call quality by reducing dropped and blocked calls. During
commercial installations, our RF products have demonstrated drastic reduction
in
dropped calls, by as much as 50% or more. Our products similarly reduce the
number of ineffective connection attempts and dead zones within
networks.
Reduced
Mobile Transmit Power.
By
improving the radio link, reducing the system’s noise floor and mitigating the
destructive impact of interference, our solutions greatly reduce required
mobile
transmit power. This improves battery life, among other benefits.
COMPANY
HIGHLIGHTS
Sales
and Marketing
We
have
historically focused our sales and marketing effort on U.S. wireless service
providers for retrofit applications. To date, we have sold our products to
many
of the largest cellular operators in the United States as well as to mid-size
and smaller U.S. wireless operators.
We
have
targeted certain international customers, marketing both our existing products
and presenting the benefits of our interference-management technology in
the
design and early stage deployments of new systems. Targeted regions have
included China and other parts of the Far East as well as several countries
within Latin America and Europe. We have engaged professional representatives
in
these areas to facilitate entry into the markets and follow-on services.
Such
representatives typically help by providing customer contacts and relationships,
in marketing, field support, and distribution.
Sales
to
three customers accounted for 98%, 97%, and 94% of our total revenues for
2006,
2005 and 2004, respectively. During 2006, the top three customers were Verizon
Wireless, Alltel Corporation, and Bluegrass Cellular Corporation, respectively.
In addition, a significant amount of our technical and managerial resources
have
been focused on working with these and a limited number of other operators
and
OEMs. Our sales, in dollars, to non-”top three” customers during 2006 was
similar to the 2005 amount, reflecting additional penetration in our largest
customers offsetting the continued expansion in our customer base.
Manufacturing
We
outsource our manufacturing processes in order to provide predictable product
yields and easy expansion to meet increased customer demand. Toward that
end, we
currently produce all of our products through third party manufacturers.
We
believe there are multiple sources available for manufacturing and foresee
no
problem continuing to apply our outsourcing strategy. Our internal manufacturing
and test capability can be found in Elk Grove Village, IL.
Research
and Development
Our
R&D efforts have been focused on developing and improving RF products for
wireless telecommunications systems. As a result of such efforts, product
performance has been improved, product size has been reduced, production
costs
have been lowered, product functionality has been increased, and product
packaging has been streamlined. We are currently developing related products
that are synergistic with our core offerings and which utilize our core
technical competencies in the radio link management arena, allowing us to
deliver our solutions to more customers.
Our
total
R&D expenses during 2006, 2005 and 2004 were approximately $2,012,000,
$1,767,000, and $1,119,000, respectively.
Intellectual
Property and Patents
We
regard
certain elements of our product design, fabrication technology and manufacturing
process as proprietary and protect our rights in them through a combination
of
patents, trade secrets and non-disclosure agreements. We also have obtained
exclusive and non-exclusive licenses for technology developed with or by
our
research partners, which have included Argonne National Laboratory and
Northwestern University. We believe that our success will depend in part
upon
the protection of our proprietary information, our patents and licenses of
key
technologies from third parties, and our ability to operate without infringing
on the proprietary rights of others.
HTS
Technology
We
spent
many years developing HTS applications, resulting in a number of products,
processes and materials related to HTS. This experience has helped us offer
our
current set of state of the art solid-state solutions, such that the underlying
technology is being utilized in the marketplace today and may be even more
fully
utilized in the future.
There
are
two ways of designing an HTS component - “thin-film” and “thick-film”
techniques. We have technologies in both aspects that may have application
to
specific, but currently limited markets. We are prepared to address those
segments should the opportunity present itself, but currently have chosen
to
focus on higher value-added, solid state solutions appropriate for the wireless
telecommunications application.
Patents
We
have
applied for patents for inventions developed internally and acquired patents,
through assignment of a license from the Canadian government, in connection
with
the purchase of the Adaptive Notch Filtering business unit of Lockheed Martin
Canada. One of our patents is jointly owned with Lucent Technologies, Inc.
Furthermore, we expect to pursue foreign patent rights on certain inventions
and
technologies critical to our products. Please refer to Note 2 of our Financial
Statements for a discussion of patent useful lives and
amortization.
Government
Regulations
Although
we believe that our 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 our products would be incorporated is
subject
to FCC approval. Base stations and the equipment marketed for use therein
must
meet specified technical standards. Our ability to sell our RF 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
our base station products must enable them to meet FCC technical
standards.
We
may use certain hazardous materials in our research,
development and any manufacturing operations. As a result, we may be 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 us to make substantial expenditures for preventive
or
remedial action, reduction of chemical exposure, or waste treatment or disposal.
We believe we are in material compliance with all environmental regulations
and
to date we have not had to incur significant expenditures for preventive
or
remedial action with respect to the use of hazardous materials.
Employees
As
of
January 19, 2007, we had a total of 39 employees, 13 of whom hold advanced
degrees. Of the employees, 5 are engaged in manufacturing and production,
17 are
engaged in research, development and engineering, and 11 are engaged in
marketing and sales, and 6 are engaged in finance and administration. We
also
periodically employ other consultants and independent contractors on as
as-needed basis. None of our employees are covered by a collective bargaining
agreement. We believe that our relationship with our employees is
good.
The
following factors, in addition to other information contained herein, should
be
considered carefully in evaluating us and our business.
RISKS
RELATED TO THE OPERATIONS AND FINANCING OF THE COMPANY
We
have a history of losses that raises doubts about our ability to continue
as a
going concern
We
were
founded in October 1989 and through 1996 we were engaged principally in research
and development, product testing, manufacturing, marketing and sales activities.
Since 1996, we have been actively selling products to the marketplace and
we
continue to develop new products for sale. We have incurred net losses since
inception. As of December 31, 2006, our accumulated deficit was
approximately $164 million. We have only recently begun to generate revenues
from the sale of our ANF and RF² products, having sold more in the past two
years than in the fourteen years of company history prior to 2005. Accordingly,
although we showed a substantial improvement in revenues and we have indicated
the expectation of continued improvement during 2007, it is nonetheless possible
that we may continue to experience net losses and cannot be certain if or
when
we will become profitable.
These
conditions raise substantial doubt about our ability to continue as a going
concern. The accompanying consolidated financial statements have been prepared
assuming we will continue as a going concern and do not include any adjustments
relating to the recoverability of reported assets or liabilities should we
be
unable to continue as a going concern.
If
we fail to obtain necessary funds for our operations, we may be unable to
maintain or improve on our technology position and unable to develop and
commercialize our products
To
date,
we have financed our operations primarily through public and private equity
and
debt financings, and most recently through several financings with affiliates
of
our two largest shareholders. We believe that we have sufficient funds to
operate our business until $11.3 million of our debt becomes due in August
2007.
That debt is held by our two largest shareholders, including affiliates.
While
we expect to refinance this debt no such refinancing has occurred as of the
reporting date, therefore, the ability to refinance our debt and maintain
adequate working capital is necessary for us to continue as a going concern.
Additionally, we project increases in working capital requirements in order
to
pursue significant business opportunities during 2007 and beyond, and also
expect to spend additional financial resources in the expansion of our business
and product offering. As such, we may require additional capital prior to
August
2007. We intend to look into augmenting our existing capital position by
continuing to evaluate potential short-term and long-term sources of capital
whether from debt, equity, hybrid, or other methods. The primary covenant
in our
existing debt arrangement involves the right of the lenders to receive debt
repayment from the proceeds of new financing activities. This covenant may
restrict our ability to obtain new sources of financing and/or to apply the
proceeds of a financing event toward operations until the debt is repaid
in
full.
Our
continued existence is therefore dependent upon our continued ability to
raise
funds through the issuance of our equity securities or borrowings. Our plans
in
this regard are to obtain other debt and equity financing until such time
as
profitable operation and positive cash flow are achieved and maintained.
Although we believe, based on the fact that we have raised funds through
sales
of common stock and from borrowings over the past several years, that we
will be
able to secure suitable additional financing for our operations, there can
be no
guarantee that such financing will continue to be available on reasonable
terms,
or at all. As a result, there is no assurance that we will be able to continue
as a going concern.
The
actual amount of future funding requirements will depend on many factors,
including: the amount and timing of future revenues, the level of product
marketing and sales efforts to support our commercialization plans, the
magnitude of research and product development programs, the ability to improve
or maintain product margins, any merger and acquisition activity, and the
costs
involved in protecting patents or other intellectual property.
We
have limited experience in manufacturing, sales and marketing and dependence
on
third party manufacturers
For
us to
be financially successful, we must either manufacture our products in
substantial quantities, at acceptable costs and on a timely basis or enter
into
outsourcing arrangements with qualified manufacturers that will allow us
the
same result. Currently, our manufacturing requirements are met by third party
contract manufacturers. The efficient operation of our business will depend,
in
part, on our ability to have these and other companies manufacture our products
in a timely manner, cost-effectively and in sufficient volumes while maintaining
the required quality. Any manufacturing disruption could impair our ability
to
fulfill orders and could cause us to lose customers.
In
the
event that we are unable to maintain manufacturing arrangements on acceptable
terms with qualified manufacturers then we would have to produce our products
in
commercial quantities in our own facilities. Although to date we have produced
limited quantities of our products for commercial installations and for use
in
development and customer field trial programs, production of large quantities
of
our products at competitive costs presents a number of technological and
engineering challenges. We may be unable to manufacture such products in
sufficient volume. We have limited experience in manufacturing, and substantial
costs and expenses may be incurred in connection with attempts to manufacture
larger quantities of our products. We may be unable to make the transition
to
large-scale commercial production successfully.
Our
sales
and marketing experience to date is very limited. We may be required to further
develop our marketing and sales force in order to effectively demonstrate
the
advantages of our products over other products. We also may elect to enter
into
arrangements with third parties regarding the commercialization and marketing
of
our products. If we enter into such agreements or relationships, we would
be
substantially dependent upon the efforts of others in deriving commercial
benefits from our products. We may be unable to establish adequate sales
and
distribution capabilities, we may be unable to enter into marketing arrangements
or relationships with third parties on financially acceptable terms, and
any
such third party may not be successful in marketing our products. There is
no
guarantee that our sales and marketing efforts will be successful.
Management
of our growth
Growth
may cause a significant strain on our management, operational, financial
and
other resources. The ability to manage growth effectively may require us
to
implement and improve our operational, financial, manufacturing and management
information systems and expand, train, manage and motivate employees. These
demands may require the addition of new management personnel and the development
of additional expertise by management. Any increase in resources devoted
to
product development and marketing and sales efforts could have an adverse
effect
on financial performance in future fiscal quarters. If we were to receive
substantial orders, we may have to expand current facilities, which could
cause
an additional strain on our management personnel and development resources.
The
failure of the management team to effectively manage growth could have a
material adverse effect on our business, operating results and financial
condition.
RISKS
RELATED TO OUR COMMON STOCK AND CHARTER PROVISIONS
Volatility
of common stock price
The
market price of our common stock, like that of many other high-technology
companies, has fluctuated significantly and is likely to continue to fluctuate
in the future. Since January 1, 2005 and through December 31, 2006,
the closing price of our common stock has ranged from a low of $0.25 per
share
and high of $0.46 per share. Announcements by us or others regarding the
receipt
of customer orders, quarterly variations in operating results, acquisitions
or
divestitures, additional equity or debt financings, results of customer field
trials, scientific discoveries, technological innovations, litigation, product
developments, patent or proprietary rights, government regulation and general
market conditions may have a significant impact on the market price of our
common stock. In addition, fluctuations in the price of our common stock
could
affect our ability to maintain the listing of our common stock on the American
Stock Exchange.
Risk
of dilution
As
of
December 31, 2006, we had outstanding options to purchase 4.9 million
shares of common stock at a weighted average exercise price of $0.41 per
share
(fewer than 0.1 million of which have not yet vested) issued to employees,
directors and consultants pursuant to the 2003 Equity Incentive Plan and
its
predecessor 1993 Stock Option Plan, as amended, the merger agreement with
Spectral Solutions, and individual agreements with management and directors.
In
addition, on the same date we had 8.7 million unvested shares of restricted
stock outstanding. In order to attract and retain key personnel, we may issue
additional securities, including grants of restricted shares, in connection
with
or outside our company employee benefit plans, or may lower the price of
existing stock options.
The
exercise of options and warrants for common stock and the issuance of additional
shares of common stock, shares of restricted stock and/or rights to purchase
common stock at prices below market value would be dilutive to existing
stockholders and may have an adverse effect on the market value of our common
stock.
Concentration
of our stock ownership
At
the
time of this filing, officers, directors and principal stockholders (holding
greater than 5% of outstanding shares) together control approximately 50%
of the
outstanding voting power on a fully diluted basis. The two largest stockholders,
along with their affiliates, are also our lenders, holding all of our
outstanding debt instruments. Consequently, these stockholders, if they act
together, would be able to exert significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. In addition, this concentration of
ownership may delay or prevent a change of control of us, even if such a
change
may be in the best interests of our stockholders. The interests of these
stockholders may not always coincide with our interests or the interests
of
other stockholders. Accordingly, these stockholders could cause us to enter
into
transactions or agreements that we would not otherwise consider.
Certain
provisions in our charter documents have an anti-takeover
effect
There
exist certain mechanisms that may delay, defer or prevent such a change of
control. For instance, our Certificate of Incorporation and By-Laws provide
that
(i) our Board of Directors has authority to issue series of our preferred
stock with such voting rights and other powers as the Board of Directors
may
determine and (ii) prior specified notice must be given by a stockholder
making nominations to the Board of Directors or raising business matters
at
stockholders meetings. The effect of the anti-takeover provisions in our
charter
documents may be to deter business combination transactions not approved
by our
Board of Directors, including acquisitions that may offer a premium over
market
price to some or all stockholders.
Reporting
requirements of a public company
As
a
public company, we are required to comply with various reporting obligations.
These obligations change from time to time, and currently include full
compliance with Section 404 of the Sarbanes-Oxley Act for our fiscal year
ending December 31, 2007. The process of achieving full compliance might
involve the commitment of significant resources, including substantial levels
of
management attention. If we fail to comply with the reporting obligations
of the
Exchange Act and Section 404 of the Sarbanes-Oxley Act, or if we fail to
achieve and maintain adequate internal controls over financial reporting,
our
business, results of operations and financial condition, and investors’
confidence in us, could be materially adversely affected.
As
a
public company, we are required to comply with the periodic reporting
obligations of the Exchange Act, including preparing annual reports, quarterly
reports and current reports. Our failure to prepare and disclose this
information in a timely manner could subject us to penalties under federal
securities laws, expose us to lawsuits and restrict our ability to access
financing. In addition, we are required under applicable law and regulations
to
integrate our systems of internal controls over financial reporting. We plan
to
evaluate our existing internal controls with respect to the standards adopted
by
the Public Company Accounting Oversight Board. During the course of our
evaluation, we may identify areas requiring improvement and may be required
to
design enhanced processes and controls to address issues identified through
this
review. This could result in significant delays and cost to us and require
us to
divert substantial resources, including management time, from other
activities.
TECHNOLOGY
AND MARKET RISKS
We
are dependent on wireless telecommunications
The
principal target market for our products is wireless telecommunications.
The
devotion of substantial resources to the wireless telecommunications market
creates vulnerability to adverse changes in this market. Adverse developments
in
the wireless telecommunications market, which could come from a variety of
sources, including future competition, new technologies or regulatory decisions,
could affect the competitive position of wireless systems. Any adverse
developments in the wireless telecommunications market may have a material
adverse effect on our business, operating results and financial
condition.
We
are dependent on the enhancement of existing networks and the build-out of
next-generation networks, and the capital spending patterns of wireless network
operators
Increased
sales of products are dependent on a number of factors, one of which is the
build-out of next generation (3G and 4G) enabled wireless communications
networks as well as enhancements of existing infrastructure. Building wireless
networks is capital intensive, as is the process of upgrading existing
equipment. Further, the capital spending patterns of wireless network operators
is beyond management’s control and depends on a variety of factors, including
access to financing, the status of federal, local and foreign government
regulation and deregulation, changing standards for wireless technology,
the
overall demand for wireless services, competitive pressures and general economic
conditions. The build-out of next-generation networks may take years to
complete. The magnitude and timing of capital spending by these operators
for
constructing, rebuilding or upgrading their systems significantly impacts
the
demand for our products. Any decrease or delay in capital spending patterns
in
the wireless communication industry, whether because of a general business
slowdown or a reevaluation of the prospective demand for data and other
services, would delay the build-out of these networks and may significantly
harm
business prospects.
Our
success depends on the market’s acceptance of our products
Our
RF
products, including our ANF and RF² products, have not been sold in very large
quantities and a sufficient market may not develop for these products. Customers
establish demanding specifications for performance, and although we believe
we
have met or exceeded these specifications to date, there is no guarantee
that
the wireless service providers will elect to use these solutions to solve
their
wireless network problems. Although we have enjoyed substantial revenue growth
over the past two years, including the best three revenue quarters in our
history during 2006, there is no assurance that we will continue to receive
orders from these customers.
Rapid
technological change and future competitive technologies could negatively
affect
our operations
The
field
of telecommunications is characterized by rapidly advancing technology. Our
success will depend in large part upon our ability to keep pace with advancing
our high performance RF technology and efficient, readily available low cost
materials technologies. Rapid changes have occurred, and are likely to continue
to occur, in the development of wireless telecommunications. Development
efforts
may be rendered obsolete by the adoption of alternative solutions to current
wireless operator problems or by technological advances made by
others.
BUSINESS
RISKS
Dependence
on a limited number of customers
Sales
to
three customers accounted for 98%, 97%, and 94% of our total revenues for
2006,
2005 and 2004, respectively. During 2006, the top three customers were Verizon
Wireless, Alltel Corporation, and Bluegrass Cellular Corporation, respectively.
In addition, a significant amount of our technical and managerial resources
have
been focused on working with these and a limited number of other operators
and
OEMs. Our sales, in dollars, to non-”top three” customers during 2006 was
similar to the 2005 amount, reflecting additional penetration in our largest
customers offsetting the continued expansion in our customer base. The loss
of
any of these large customers might have a material adverse effect on our
business, operating result, and financial condition.
We
expect
that if our products achieve market acceptance, a limited number of wireless
service providers and OEMs will account for a substantial portion of revenue
during any period. Sales of many of our products depend in significant part
upon
the decisions of prospective and current customers to adopt and expand their
use
of these products. Wireless service providers, wireless equipment OEMs and
our
other customers are significantly larger than we are, and are able to exert
a
high degree of influence over us. Customers’ orders are affected by a variety of
factors such as new product introductions, regulatory approvals, end user
demand
for wireless services, customer budgeting cycles, inventory levels, customer
integration requirements, competitive conditions and general economic
conditions. The failure to attract new customers would have a material adverse
effect on our business, operating results and financial condition.
We
have lengthy sales cycles
Prior
to
selling products to customers, we may be required to undergo lengthy approval
and purchase processes. Technical and business evaluation by potential customers
can take up to a year or more for products based on new technologies. The
length
of the approval process is affected by a number of factors, including, among
others, the complexity of the product involved, priorities of the customers,
budgets and regulatory issues affecting customers. We may not obtain the
necessary approvals or ensuing sales of such products may not occur. The
length
of customers’ approval process or delays could make our quarterly revenues and
earnings inconsistent and difficult to trend.
We
are dependant on limited sources of supply
Certain
parts and components used in our RF products are only available from a limited
number of sources. Our reliance on these limited source suppliers exposes
us to
certain risks and uncertainties, including the possibility of a shortage
or
discontinuation of certain key components and reduced control over delivery
schedules, manufacturing capabilities, quality and costs. Any reduced
availability of such parts or components when required could materially impair
the ability to manufacture and deliver products on a timely basis and result
in
the cancellation of orders, which could have a material adverse effect on
our
business, operating results and financial condition.
In
addition, the purchase of certain key components involves long lead times
and,
in the event of unanticipated increases in demand for our products, we
may be
unable to manufacture products in quantities sufficient to meet customers’
demand in any particular period. We have few guaranteed supply arrangements
with
our limited source suppliers, do not maintain an extensive inventory of
parts or
components, and customarily purchase parts and components pursuant to actual
or
anticipated purchase orders placed from time to time in the ordinary course
of
business.
Related
to this topic, we produce substantially all of our products through third-party
contract manufacturers. Like raw materials, the elimination of any of these
entities or delays in the fulfillment process, for whatever reason, may impact
our ability to fulfill customer orders on a timely basis and may have a material
adverse effect on our business, operating results, or financial
condition.
To
satisfy customer requirements, we may be required to stock certain long
lead-time parts and/or finished product in anticipation of future orders,
or
otherwise commit funds toward future purchase. The failure of such orders
to
materialize as forecasted could limit resources available for other important
purposes or accelerate the requirement for additional funds. In addition,
such
excess inventory could become obsolete, which would adversely affect financial
performance. Business disruption, production shortfalls or financial
difficulties of a limited source supplier could materially and adversely
affect
us by increasing product costs or reducing or eliminating the availability
of
such parts or components. In such events, the inability to develop alternative
sources of supply quickly and on a cost-effective basis could materially
impair
the ability to manufacture and deliver products on a timely basis and could
have
a material adverse effect on our business, operating results and financial
condition.
Dependence
on key personnel
Our
success will depend in large part upon our ability to attract and retain
highly
qualified management, engineering, manufacturing, marketing, sales and R&D
personnel. Due to the specialized nature of our business, it may be difficult
to
locate and hire qualified personnel. The loss of services of one of our
executive officers or other key personnel, or the failure to attract and
retain
other executive officers or key personnel, could have a material adverse
effect
on our business, operating results and financial condition.
Failure
of products to perform properly might result in significant warranty
expenses
In
general, our products carry a warranty of one or two years, limited to
replacement of the product or refund of the cost of the product. In addition,
we
offer our customers extended warranties. Repeated or widespread quality problems
could result in significant warranty expenses and/or the loss of customer
confidence. The occurrence of such quality problems could have a material
adverse effect on our business, operating results and financial
condition.
Intense
competition, and continued consolidation in our industry could create stronger
competitors and harm the business
The
wireless telecommunications equipment market is very competitive. Many of
these
companies have substantially greater financial resources, larger research
and
development staffs and greater manufacturing and marketing capabilities than
we
do. Our products compete directly with products which embody existing and
future
competing commercial technologies. Other emerging wireless technologies may
also
provide protection from RF interference and offer enhanced range to wireless
communication service providers, potentially at lower prices and/or superior
performance, and may therefore compete with our products. High performance
RF
solutions may not become a preferred technology to address the needs of wireless
communication service providers. Failure of our products to improve performance
sufficiently, reliably, or at an acceptable price or to achieve commercial
acceptance or otherwise compete with existing and new technologies, would
have a
material adverse effect on our business, operating results and financial
condition.
LEGAL
RISKS
Intellectual
Property and Patents
Our
success will depend in part on our ability to obtain patent protection for
our
products and processes, to preserve trade secrets and to operate without
infringing upon the patent or other proprietary rights of others and without
breaching or otherwise losing rights in the technology licenses upon which
any
of our products are based. We have applied for patents for inventions developed
internally and acquired patent rights in connection with the purchase of
the
Adaptive Notch Filtering business unit of Lockheed Martin Canada. One of
the
patents is jointly owned with Lucent Technologies, Inc. We believe there
are a
large number of patents and patent applications covering RF products and
other
products and technologies that we are pursuing. Accordingly, the patent
positions of companies using RF technologies, including us, are uncertain
and
involve complex legal and factual questions. The patent applications filed
by us
or others may not result in issued patents or the scope and breadth of any
claims allowed in any patents issued to us or others may not exclude competitors
or provide competitive advantages. In addition, patents issued to us, our
subsidiaries or others may not be held valid if subsequently challenged or
others may claim rights in the patents and other proprietary technologies
owned
or licensed by us. Others may have developed or may in the future develop
similar products or technologies without violating any of our proprietary
rights. Furthermore, the loss of any license to technology that we might
acquire
in the future may have a material adverse effect on our business, operating
results and financial condition.
Some
of
the patents and patent applications owned by us are subject to non-exclusive,
royalty-free licenses held by various U.S. governmental units. These licenses
permit these U.S. government units to select vendors other than us to produce
products for the U.S. Government, which would otherwise infringe our patent
rights that are subject to the royalty-free licenses. In addition, the U.S.
Government has the right to require us to grant licenses (including exclusive
licenses) under such patents and patent applications or other inventions
to
third parties in certain instances.
Older
patent applications in the U.S. are currently maintained in secrecy until
patents are issued. In foreign countries and for newer U.S. patent applications,
this secrecy is maintained for a period of time after filing. Accordingly,
publication of discoveries in the scientific literature or of patents themselves
or laying open of patent applications in foreign countries or for newer U.S.
patent applications tends to lag behind actual discoveries and filing of
related
patent applications. Due to this factor and the large number of patents and
patent applications related to RF materials and technologies, and other products
and technologies that we are pursuing, comprehensive patent searches and
analyses associated with RF technologies and other products and technologies
that we are pursuing are often impractical or not cost-effective. As a result,
patent and literature searches cannot fully evaluate the patentability of
the
claims in our patent applications or whether materials or processes used
by us
for our planned products infringe or will infringe upon existing technologies
described in U.S. patents or may infringe upon claims in patent applications
made available in the future. Because of the volume of patents issued and
patent
applications filed relating to RF technologies and other products and
technologies that we are pursuing, we believe there is a significant risk
that
current and potential competitors and other third-parties have filed or will
file patent applications for, or have obtained or will obtain, patents or
other
proprietary rights relating to materials, products or processes used or proposed
to be used by us. In any such case, to avoid infringement, we would have
to
either license such technologies or design around any such patents. We may
be
unable to obtain licenses to such technologies or, if obtainable, such licenses
may not be available on terms acceptable to us or we may be unable to
successfully design around these third-party patents.
Our
participation in litigation or patent office proceedings in the U.S. or other
countries to enforce patents issued or licensed to us, to defend against
infringement claims made by others or to determine the ownership, scope or
validity of the proprietary rights of us and others, could result in substantial
cost to, and diversion of effort by, us. The parties to such litigation may
be
larger, better capitalized than we are and better able to support the cost
of
litigation. An adverse outcome in any such proceedings could subject us to
significant liabilities to third parties, require us to seek licenses from
third
parties and/or require us to cease using certain technologies, any of which
could have a material adverse effect on our business, operating results and
financial condition.
Litigation
We
have
no active lawsuits, nor any pending or threatened to the best of our knowledge.
The act of defending against any potential claim may be costly and divert
management attention. If we are not successful in defending against whatever
claims and charges may be made against us in the future, there may be a
material
adverse effect on our business, operating results and financial
condition.
Government
Regulations
Although
we believe that our wireless telecommunications products themselves are not
subject to licensing by, or approval requirements of, the FCC, the operation
of
base stations is subject to FCC licensing and the radio equipment into which
our
products would be incorporated is subject to FCC approval. Base stations
and the
equipment marketed for use therein must meet specified technical standards.
The
ability to sell our wireless telecommunications products is dependent on
the
ability of wireless base station equipment manufacturers and wireless base
station operators to obtain and retain the necessary FCC approvals and licenses.
In order for them to be acceptable to base station equipment manufacturers
and
to base station operators, the characteristics, quality and reliability of
our
base station products must enable them to meet FCC technical standards. We
may
be subject to similar regulations of foreign governments. Any failure to
meet
such standards or delays by base station equipment manufacturers and wireless
base station operators in obtaining the necessary approvals or licenses could
have a material adverse effect on our business, operating results and financial
condition. In addition, certain RF filters are on the U.S. Department of
Commerce’s export regulation list. Therefore, exportation of such RF filters to
certain countries may be restricted or subject to export licenses.
We
are
subject to governmental labor, safety and discrimination laws and regulations
with substantial penalties for violations. In addition, employees and others
may
bring suit against us for perceived violations of such laws and regulations.
Defending against such complaints could result in significant legal costs
for
us. Although we endeavor to comply with all applicable laws and regulations,
we
may be the subject of complaints in the future, which could have a material
adverse effect on our business, operating results and financial
condition.
Environmental
Liability
Certain
hazardous materials may be used in research, development and to the extent
of
any manufacturing operations. As a result, we are 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 us to make substantial expenditures for preventive
or
remedial action, reduction of chemical exposure, or waste treatment or disposal.
We believe we are in material compliance with all environmental regulations
and
to date have not had to incur significant expenditures for preventive or
remedial action with respect to the use of hazardous materials.
However,
our operations, business or assets could be materially and adversely affected
by
the interpretation and enforcement of current or future environmental laws
and
regulations. In addition, although we believe that our safety procedures
for
handling and disposing of such materials comply with the standards prescribed
by
state and federal regulations, there is the risk of accidental contamination
or
injury from these materials. In the event of an accident, we could be held
liable for any damages that result. Furthermore, the use and disposal of
hazardous materials involves the risk that we 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 available resources
or
otherwise have a material adverse effect on the business, results of operations
and financial condition. We carry property and worker’s compensation insurances
in full force and effect through nationally known carriers which include
pollution cleanup or removal and medical claims for industrial
incidents.
RISKS
RELATED TO ACQUISITIONS AND BUSINESS EXPANSION
Risks
of future acquisitions
In
the future, we may pursue acquisitions to
obtain products, services and technologies that we believe would complement
or
enhance our current product or services offerings. At present, no definitive
agreements or similar arrangements exist with respect to any such acquisition.
An acquisition may not produce the revenue, earnings or business synergies
as
anticipated and may attach significant unforeseen liabilities, and an acquired
product, service or technology might not perform as expected. If an acquisition
is pursued, our management could spend a significant amount of time and effort
in identifying and completing the acquisition and may be distracted from
the
operations of the business. In addition, management would probably have to
devote a significant amount of resources toward integrating the acquired
business with the existing business, and that integration may not be
successful.
International
operations
We
are in
discussions and have agreements in place with companies in non-U.S. markets
to
form manufacturing, product development joint ventures and other marketing,
distribution or consulting arrangements. We also have agreements with foreign
entities for international distribution as well as foreign sources of components
to be used in North America. These agreements and relationships help us optimize
our competitive position and cost structure. There are many such entities
that
exist, domestically and internationally, that offer similar capabilities,
and
thus could reduce risk exposure to the loss of such foreign
entities.
We
believe that non-U.S. markets could provide a substantial source of revenue
in
the future. However, there are certain risks applicable to doing business
in
foreign markets that are not applicable to companies doing business solely
in
the U.S. For example, we may be subject to risks related to fluctuations
in the
exchange rate between the U.S. dollar and foreign currencies in countries
in
which we do business. In addition, we may be subject to the additional laws
and
regulations of these foreign jurisdictions, some of which might be substantially
more restrictive than similar U.S. ones. Foreign jurisdictions may also provide
less patent protection than is available in the U.S., and we may be less
able to
protect our intellectual property from misappropriation and infringement
in
these foreign markets.
We
maintain our corporate headquarters in a 15,000 square foot building located
in
Elk Grove Village, Illinois under a lease which expires in October 2014.
This
facility houses our manufacturing, research, development, engineering,
administration and marketing activities. We also maintain a 4,000 square
foot
facility located in Elk Grove Village, Illinois under a lease which expires
in
October 2014, which is used for R&D purposes. We believe that these
facilities are adequate and suitable for our current needs and that additional
space would be available on commercial terms as necessary to meet any future
needs.
None.
We
were not involved in any such proceedings during 2006 nor are we aware of
any
pending or threatened litigation.
None.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Our
common stock has been listed since June 2002 on the American Stock Exchange
under the symbol “ISO.” Prior to that, and until April 1999, our stock had been
listed on the OTC Bulletin Board under the symbol “ISCO.” From 1993 until April
1999, our common stock was listed on the NASDAQ National Market. The following
table shows, for the periods indicated, the reported high and low sale prices
for the common stock. Such prices reflect prices between dealers, without
retail
mark up, mark down, or commissions and may or may not reflect actual
transactions.
|
|
|
High
|
|
|
Low
|
|
FISCAL
YEAR ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.52
|
|
$
|
0.28
|
|
Second
Quarter
|
|
$
|
0.41
|
|
$
|
0.22
|
|
Third
Quarter
|
|
$
|
0.29
|
|
$
|
0.23
|
|
Fourth
Quarter
|
|
$
|
0.45
|
|
$
|
0.25
|
|
FISCAL
YEAR ENDED DECEMBER 31, 2006
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.43
|
|
$
|
0.30
|
|
Second
Quarter
|
|
$
|
0.43
|
|
$
|
0.25
|
|
Third
Quarter
|
|
$
|
0.36
|
|
$
|
0.27
|
|
Fourth
Quarter
|
|
$
|
0.45
|
|
$
|
0.30
|
|
On
December 31, 2006, there were approximately 300 holders of record of our
common stock. On such date the closing bid price for our common stock as
reported on the American Stock Exchange was $0.34.
We
have
never paid cash dividends on the common stock and we do not expect to pay
any
dividends on our common stock in the foreseeable future. In addition, borrowings
under our line of credit are collateralized by all of our assets — we are
prohibited from paying any dividends, other than dividends consisting solely
of
common stock or rights to purchase common stock, unless our lenders waive
such
prohibition.
Except
as
reported on our Current Reports on Form 8-K filed with the Securities and
Exchange Commission on July 26, 2006 and August 3, 2006, there were no
recent sales of unregistered securities during 2006. Further, there were
no
repurchases of equity securities by us during the fourth quarter of
2006.
The
following table presents selected consolidated financial data with respect
to us
as of and for the years ended December 31, 2002, 2003, 2004, 2005, and
2006. The selected consolidated financial data for each of the years in the
five-year period ended December 31, 2006 have been derived from our audited
consolidated financial statements. The information set forth below should
be
read in conjunction with Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and Item 8. “Financial
Statements and Supplementary Data.”
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
CONSOLIDATED
STATEMENT OF
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONS
DATA
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
|
3,662,805
|
$
|
3,238,402
|
$
|
2,621,933
|
$
|
10,264,428
|
$
|
14,997,320
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
3,565,140
|
|
1,639,540
|
|
1,527,554
|
|
5,121,650
|
|
9,066,929
|
|
Research
and development
|
|
2,737,084
|
|
988,425
|
|
1,119,406
|
|
1,767,447
|
|
2,011,652
|
|
Selling
and marketing
|
|
2,201,195
|
|
959,798
|
|
1,164,830
|
|
1,861,065
|
|
3,207,882
|
|
General
and administrative
|
|
7,972,948
|
|
5,614,492
|
|
4,757,935
|
|
3,691,070
|
|
4,287,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
(12,813,562)
|
|
(5,963,853)
|
|
(5,947,792)
|
|
(2,176,804)
|
|
(3,576,223)
|
|
Other
income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
62,954
|
|
5,087
|
|
8,660
|
|
77,383
|
|
118,590
|
|
Interest
expense
|
|
(327,224)
|
|
(1,197,309)
|
|
(1,028,169)
|
|
(877,461)
|
|
(907,351)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expense, net
|
|
(264,270)
|
|
(1,192,222)
|
|
(1,019,509)
|
|
(800,078)
|
|
(788,761)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(13,077,832)
|
$
|
(7,156,075)
|
$
|
(6,967,301)
|
|
(2,976,882)
|
$
|
(4,364,984)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per
|
|
|
|
|
|
|
|
|
|
|
|
common
share
|
$
|
(0.09)
|
$
|
(0.05)
|
$
|
(0.04)
|
$
|
(0.02)
|
$
|
(0.02)
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
common
shares outstanding
|
|
142,884,921
|
|
148,080,749
|
|
158,977,249
|
|
170,786,657
|
|
185,506,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE
|
|
|
|
|
|
|
|
|
|
|
|
SHEET
DATA
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
216,119
|
$
|
346,409
|
$
|
402,391
|
$
|
3,486,430
|
$
|
2,886,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
1,333,827
|
|
735,840
|
|
979,413
|
|
6,396,541
|
|
(1,422,309)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
19,183,000
|
|
17,723,035
|
|
17,133,752
|
|
22,905,633
|
|
26,875,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
2,000,000
|
|
5,000,000
|
|
7,500,000
|
|
10,520,369
|
|
5,131,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
15,380,306
|
|
10,943,247
|
|
7,247,635
|
|
10,530,716
|
|
8,164,192
|
|
We
received $150,000 from our landlord for leasehold improvements during late
2004
and early 2005. Consistent with the appropriate accounting treatment of showing
these items separately (i.e., showing the full value of the leasehold
improvement within fixed assets and the unamortized value of the landlord
credit
within current liabilities) working capital and total assets were reclassified
in the 2004 figure above to conform to the 2005 presentation of these items.
This reclassification has no material effect on the business condition or
results.
A
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
The
discussion below contains certain forward-looking statements that reflect
our
current expectations regarding the Company’s future results of operations,
performance and achievements. Please see the discussion of such forward-looking
statements under “Forward Looking Statements” above.
Overview
We
have
employed an outsourced manufacturing model wherein we supply raw materials
to
external parties and products are then completed. Further, this system allows
us
to outsource procurement in the future if we choose to do so. Manufacturing
partners then produce to specification with Company personnel on hand to
assist
with quality control. Our products are designed for efficient production
in this
manner, emphasizing solid-state electronics over mechanical devices with
moving
parts. The cost benefits associated with these developments, coupled with
enhanced product functionality, have allowed us to realize good margins and
efficiently managed overhead costs. Extensions of developed technology, based
on
substantial input from customers, have allowed us to launch the RF² product
family and consider additional solutions while generally controlling total
R&D cost.
Wireless
telecommunications has undergone significant merger activity in recent years,
a
trend which we believe will continue. These activities often result in operators
with disparate technologies and spectrum assets, and the need to integrate
those
assets. In addition, the deployment of data applications is adding to the
industry requirement to integrate disparate technologies into base stations
and
other fixed points of access, resulting in the need to manage multiple wireless
signals and keep them from interfering with each other. We are focused on
providing solutions that address these types of requirements. During 2006,
we
bid on substantially larger business opportunities than we had in recent
years.
These proposals often are accompanied by long approval cycles and we may
bear
up-front product development costs. We believe the potential benefits to
outweigh these costs, and expect to continue to bid on these types of business
opportunities.
We
announced several significant recent events during 2006 and early 2007,
including a continuing trend of substantially increased revenue during 2006
which saw the three best quarterly revenue figures in our history, increased
international sales and sourcing activities, additional penetration into
our
largest customers, our first products based partly on digital technology,
and $5
million in funding intended to support new product development. Despite these
improvements, the wireless telecommunications industry is subject to risks
beyond our control that can negatively impact customer capital spending budgets
(as occurred during 2003) and/or spending patterns (as occurred during 2004
and
to a lesser extent on a quarterly basis after 2004). In addition, a large
portion of our debt ($11.3 million) matures in August 2007 and must be
refinanced. For these and other reasons, our financial statements have been
prepared assuming we will continue as a going concern.
From
a
company-specific view, we have invested in measured infrastructure growth
to
allow for potentially substantial revenue expansion. This has caused spending
to
increase from 2004 levels. We believe that we now have the infrastructure
largely in place to allow for such potential revenue expansion, and therefore
as
a general guideline do not expect fixed costs to rise, except for some R&D
associated with product initiatives, during 2007.
We
are
pursuing digital technologies, evidenced by the deployment of our digital
(front
end) ANF solution platform during 2006, subsequent extensions of that platform,
and our expectation to complete a fully digital ANF platform during 2007.
We
believe that producing solutions on a digital platform will allow us to extend
coverage in the wireless telecommunications realm, both in more aspects of
the
cellular market and beyond the cellular market, and thus greatly increase
our
available market.
Results
of Operations
Years
Ended December 31, 2006 and 2005
Our
net
sales increased $4,733,000, or 46%, from $10,264,000 in 2005 to $14,997,000
in
2006. This increase was due primarily to the expansion of the RF² product family
and related revenues, particularly from data network deployments. An incremental
improvement was also seen from the shipment of more ANF products during 2006
than during prior years. We saw our first deferred software revenue during
2006,
carrying nearly $0.2 million in deferred software maintenance revenue into
2007.
We anticipate our unit volume and related revenue to increase during 2007
as
compared to 2006, due to existing and/or anticipated customer orders. Our
order
backlog as of December 31, 2006 remained minimal, which was consistent with
the end of 2005. However, we are pursuing substantial potential revenue
opportunities as of the beginning of 2007.
Cost
of
products sold increased $3,945,000, or 77%, from $5,122,000 in 2005 to
$9,067,000 in 2006. The increase in cost of sales was due to the increase
in
sales volume, as well as a less favorable product mix than was realized during
the prior year. RF² products have varied gross margins, but typically are below
margins for ANF products, and the expansion of lower margin products outpaced
that of the higher margin products. We believe that our consistent gross
margin
of 40% during 2006 is superior to the industry norm, but it was below our
record
50% achieved during 2005.
Our
internally funded research and development expenses increased $245,000, or
14%,
from $1,767,000 in 2005 to $2,012,000 during 2006. We expensed approximately
$200,000 of capitalized patent-related charges during the second quarter
2005,
as we deemed such items to be unlikely to generate significant future revenues,
so the increase in 2006 cash spend over 2005 was $200,000 more than reported
above. We added a significant number of products to our RF² product family
during 2006, including a GMA (“ground mounted amplifier”), as well as the first
digital platformed ANF products. We expect to continue to invest more in
R&D
during 2007 than we did during 2006 as we expand both our existing product
families and develop two new product lines that would be applicable in wireless
technologies beyond cellular telecommunications, particularly in the digital
space.
Selling
and marketing expenses increased $1,347,000, or 72%, from $1,861,000 during
2005
to $3,208,000 during 2006. The increase in expense was attributable to the
continued addition of personnel in this area as we pursue additional customers
and larger, more diverse opportunities (these elements contributed to the
46%
annual revenue growth increase in 2006 over 2005; and higher if viewed on
a
quarterly basis during the last three quarters of 2006). We have also performed
extensive customer development activities as we have added new customers
and
launched new products, including a very detailed and comprehensive interference
study over a wide geographic range (a one-time cost of approximately $0.2
million).
General
and administrative expenses increased $596,000, or 16%, from $3,691,000 in
2005
to $4,287,000 during 2006. This increase was largely attributable to a $0.5
million increase in non-cash equity charges associated with stock-based
compensation.
Interest
income increased $42,000, or 55%, from $77,000 in 2005 to $119,000 during
2006.
This increase was due to the timing of payments and funding from the June
2006
financing proceeds. Additionally, we saw improved cash flows from operations
during the second half of 2006.
Interest
expense increased $30,000, or 3.4%, from $877,000 in 2005 to $907,000 during
2006. We borrowed $5 million under a convertible debt arrangement during
June
2006 with our two largest shareholders, including affiliates, which also
hold
the remainder of our debt which matures August 2007.
Years
Ended December 31, 2005 and 2004
Our
net
sales increased $7,642,000, or 291%, from $2,622,000 in 2004 to $10,264,000
in
2005. This increase was due primarily to the expansion of the RF² product family
and related revenues, particularly from data network deployments. An incremental
improvement was also seen from the shipment of more ANF products during 2005,
such that we earned more revenue from ANF sales than any prior year, including
2004.
Cost
of
products sold increased $3,594,000, or 235%, from $1,528,000 in 2004 to
$5,122,000 in 2005. The increase in cost of sales was due to the increase
in
sales volume offset by the more efficient allocation of fixed expenses, the
expanded sourcing of raw materials and resulting cost decreases, and other
efficiencies.
Our
internally funded research and development expenses increased $648,000, or
58%,
from $1,119,000 in 2004 to $1,767,000 during 2005. We expensed approximately
$200,000 of capitalized patent-related charges during the second quarter
2005,
as we deemed such items to be unlikely to generate significant future revenues.
We added a significant number of products to our RF² product family during 2005,
including a multicoupler solution and a PCS spectrum portfolio.
Selling
and marketing expenses increased $696,000, or 60%, from $1,165,000 during
2004
to $1,861,000 during 2005. We have continued to add personnel in this area
as we
pursue larger business opportunities and additional customers, and thus expect
to continue to incur a higher level of selling and marketing expenses in
future
periods. It should be noted that this cost as a percentage of revenue has
decreased from 44% during 2004 to 18% during 2005, reflecting efficiencies
in
higher sales volume as fixed expenses are allocated over a larger
base.
General
and administrative expenses decreased $1,067,000, or 22%, from $4,758,000
in
2004 to $3,691,000 during 2005. This decrease was attributable to a $1 million
decrease in legal expenses, primarily related to the concluded patent
litigation, the reduction in facility costs by approximately $250,000 annually,
which is offset by various increases in personnel and related costs due to
growth in our size.
Interest
income increased $68,000, or 756%, from $9,000 in 2004 to $77,000 during
2005.
This increase was due to the timing of payments and funding from the credit
line
and the August 2005 financing proceeds.
Interest
and warrant expense decreased $151,000, or 15%, from $1,028,000 in 2004 to
$877,000 during 2005. We borrowed $1 million under our credit line arrangement
during 2005, but pursuant to a financing agreement with our lenders, the
interest rate was reduced from 14% to 9% as of April 2005.
Liquidity
and Capital Resources
The
accompanying financial statements have been prepared assuming that we will
continue as a going concern. As discussed in Note 3 to the financial statements,
we incurred a net loss of $4 million during the year ended December 31,
2006, and, as of that date, our accumulated deficit is $164 million. In
addition, we have consistently used, rather than provided, cash in our
operations. These factors, among others, as discussed in Note 3 to the financial
statements, raise substantial doubt about our ability to continue as a going
concern. We have been engaged in developing new solutions, and toward that
end
development spending has preceded sales revenues. Management’s plans in regard
to these matters include the focusing of development efforts on products
with a
greater probability of commercial sales, increased efficiencies and reduced
product costs within our outsourced production model, all of which are also
described in Note 3. The financial statements do not include any adjustments,
including any adjustments relating to the recoverability and classification
of
recorded asset amounts or amounts and classification of liabilities that
might
result from the outcome of this uncertainty. Significant uses of cash during
2006 included the cost to produce inventory, personnel costs, facility related
costs, increased product development (engineering) costs and sales and marketing
efforts. Significant sources of cash during 2006 included sales and the
resulting realization of customer receivables, the sale of $5 million in
convertible debt in June 2006 to entities that, along with their affiliates,
are
our lenders and also our largest two shareholders.
Current
assets including accounts receivable and inventory, and current liabilities
including accounts payable and accrued expenses, increased from the prior
year
figure due to overall higher business levels. Quarterly and annual revenue
during 2006 were the highest in our history and, on average, roughly 50%
larger
than that of the prior year, and thus created larger working capital balances.
Working capital includes the classifications listed above.
In
view
of the matters described in the preceding paragraph, recoverability of a
major
portion of the recorded asset amounts shown in the accompanying balance sheet
is
dependent upon continued operations, which in turn is dependent upon our
ability
to meet our financing requirements on a continuing basis, to maintain present
financing, and to succeed in our future operations.
At
December 31, 2006, our cash and cash equivalents, excluding restricted
certificates of deposit, were $2,886,000, a decrease of $600,000 from the
December 31, 2005 balance of $3,486,000. This decrease was primarily
attributable to the increase in working capital (inventories and accounts
receivable) associated with our higher revenue levels and the timing of orders
and related shipments.
The
continuing development of, and expansion in, sales of our product lines,
any
potential merger and acquisition activity, as well as any required defense
of
our intellectual property, may require a commitment of funds to undertake
product line development and to market and sell our RF products. The actual
amount of our future funding requirements will depend on many factors,
including: the amount and timing of future revenues, the level of product
marketing and sales efforts to support our commercialization plans, the
magnitude of our research and product development programs, our ability to
improve or maintain product margins, and the costs involved in protecting
our
patents or other intellectual property.
We
believe that we have sufficient funds to operate our business until $11.3
million of our debt becomes due in August 2007. That debt is held by our
two
largest shareholders, including affiliates. While we expect to refinance
this
debt no such refinancing has occurred as of the reporting date, therefore,
the
ability to refinance our debt and maintain adequate working capital is necessary
for us to continue as a going concern Additionally, we project increases
in
working capital requirements in order to pursue significant business
opportunities during 2007 and beyond, and also expect to spend additional
financial resources in the expansion of our business and product offerings.
As
such, we may require additional capital prior to August 2007. We intend to
look
into augmenting our existing capital position by continuing to evaluate
potential short-term and long-term sources of capital whether from debt,
equity,
hybrid, or other methods. The primary covenant in our existing debt arrangement
involves the right of the lenders to receive debt repayment from the proceeds
of
new financing activities. This covenant may restrict our ability to obtain
additional financing or to apply the proceeds of a financing event toward
operations until the debt is repaid in full.
Uncommitted
Line of Credit (2002 Credit Line)
As
of the
reporting date, we have drawn $8.5 million of debt financing under a credit
line, as described below. During October 2002, we entered into an uncommitted
line of credit with our two largest shareholders, an affiliate of Elliott
Associates, L.P. (Manchester Securities Corporation) and Alexander Finance,
L.P.
This line initially provided up to $4 million to us. This line was uncommitted,
such that each new borrowing under the facility would be subject to the approval
of the lenders. Borrowings on this line bore an initial interest rate of
9.5%
and were collateralized by all the assets of the Company. Outstanding loans
under this agreement would be required to be repaid on a priority basis should
we receive new funding from other sources. Additionally, the lenders were
entitled to receive warrants to the extent funds were drawn down on the line.
The warrants bore a strike price of $0.20 per share of common stock and were
to
expire on April15, 2004. The credit line was to mature and be due, including
accrued interest thereon, on March 31, 2004. Due to a subsequent agreement
between the parties no warrants were issued with subsequent
borrowings.
According
to existing accounting pronouncements and SEC guidelines, we allocated the
proceeds of these borrowings between their debt and equity components. As
a
result of these borrowings during 2002, we recorded a non-cash charge of
$1.2
million through the outstanding term of the warrants (April, 2004). $250,000
and
$862,000 of that amount were recorded during 2004 and 2003, respectively.
These
warrants were valued at $1.2 million of the $2 million debt instrument based
on
a Black-Scholes valuation that included the difference between the value
of our
common stock and the exercise price of the warrants on the date of each warrant
issuance and a 30% discounted face value of the notes, leaving the remaining
$0.8 million as the underlying value of the debt. This $1.2 million was
amortized over the vesting period of the warrants (six quarters from the
fourth
quarter 2002 through the first quarter 2004).
During
October 2003, we entered into an agreement with our lenders to supplement
the
credit line with an additional $2 million, $1 million of which was drawn
immediately and $1 million subsequently drawn upon our request and subject
to
the approval of the lenders. This supplemental facility bore a 14% rate
of
interest and was due October 31, 2004. The term of the previous credit
line was
not affected by this supplement, and as such the $4 million borrowed under
that
line, plus accrued interest, remained due March 31, 2004.
During
February 2004, the credit line was extended to a due date of April 2005,
with
interest after the initial periods to be charged at 14%. No warrants or
other
inducements were issued with respect to this extension. Additionally, lenders
exercised their 10 million warrants during February 2004, agreeing to let
us use
the funds for general purposes as opposed to repaying debt.
During
July 2004, we and our lenders agreed to increase the aggregate loan commitments
under the credit line from $6,000,000 to $6,500,000. Simultaneously, we
drew the
remaining $1,500,000 of the financing.
During
November 2004, we and our lenders agreed to increase the line of credit
to up to
an additional $2 million to an aggregate loan commitment of $8,500,000,
$1
million of which was drawn immediately by us with the remaining $1 million
drawable upon our request and subject to the approval of the lenders, which
occurred during January 2005.
During
February 2005, the credit line was extended until April 2006. Interest
during
the extension period was to be charged at 9%. No warrants or other inducements
were issued with respect to this extension.
On
August
2, 2005, we and our lenders agreed to extend the due date from April 2006
until
August 2007, and the lenders also agreed to waive the Company’s obligation to
repay its debt with proceeds from an equity financing transaction with
its
lenders, including affiliates, in August 2005. No warrants or other inducements
were issued as a result of this transaction.
2006
Convertible Debt
During
June 2006 we entered into a Securities Purchase Agreement (the “Agreement”) and
convertible notes (the “Notes”) with Alexander Finance, L.P., and Manchester
Securities Corporation L.P. (together, the “Lenders”), pursuant to which the
Lenders have agreed, to each loan us $2,500,000, or an aggregate of $5,000,000,
in convertible debt. The Lenders, including affiliates, are our two largest
shareholders and the lenders of the 2002 Credit Line referenced above. The
transaction was structured as a private placement of securities pursuant
to
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”)
and Rule 506 promulgated thereunder.
The
Notes
will mature on June 22, 2010 and bear an interest rate of 5% due at maturity.
Both the principal amount and any accrued interest on the Notes are convertible
into our common stock at a rate of $0.33 per share, subject to certain
anti-dilution adjustments. The Lenders have the right to convert the Notes,
both
principal and accrued interest, into shares of common stock at the rate of
$0.33
per share at any time. We have the right to redeem the Notes in full in cash
at
any time beginning two years after the date of the Agreement. The conversion
rate of the Notes will be subject to customary anti-dilution protections,
provided that the number of additional shares of common stock issuable as
a
result of changes to the conversion rate will be capped so that the aggregate
number of shares of common stock issuable upon conversion of the Notes will
not
exceed 19.99% of the aggregate number of shares of common stock presently
issued
and outstanding.
The
Notes
are secured on a first priority basis by all of our intangible and tangible
property and assets. Payment of the Notes is guaranteed by our two inactive
subsidiaries, Spectral Solutions, Inc. and Illinois Superconductor Canada
Corporation. The Agreement contains customary representations, warranties
and
covenants. We filed a registration statement covering the resale of the shares
of common stock issuable upon conversion of the Notes with the Securities
and
Exchange Commission. Concurrently with the execution of the Agreement, the
Lenders have waived their right under the 2002 Credit Line to receive the
financing proceeds from the issuance of the Notes, allowing us to use the
funds
for product development or general working capital purposes. No fees were
paid
to any financial advisor, placement agent, broker or finder in connection
with
the transactions contemplated by the Agreement and the Notes.
Assuming
the Notes are held for the full four year term,
18,505,719 shares of common stock would be required upon settlement, for
both
principal and interest. This amount is approximately 10% of the then
approximately 186 million shares of common stock currently issued and
outstanding. As of December 31, 2006, the Lenders, including their affiliates,
owned approximately 43% of the Company’s outstanding shares. As a result of this
transaction, the combined holdings of the Lenders would be approximately
48% of
the Company’s outstanding common stock.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent
assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or
conditions.
Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and potentially result in materially different
results under different assumptions and conditions. We believe that our critical
accounting policies are limited to those described below. For a detailed
discussion on the application of these and other accounting policies, see
Note 2
in the notes to the consolidated financial statements.
Revenue
Recognition
In
accordance with SAB No. 104, we recognize revenue when the following criteria
are met: persuasive evidence of an arrangement exists, delivery has occurred
or
services have been rendered, price is fixed and determinable, and collectability
is reasonably assured. Revenues from product sales are generally recognized
at
the time of shipment and are recorded net of estimated returns and allowances.
Revenues from services are generally recognized upon substantial completion
of
the service and acceptance by the customer. We have under certain conditions,
granted customers the right to return product during a specified period of
time
after shipment. In these situations, we establish a liability for estimated
returns and allowances at the time of shipment and make the appropriate
adjustment in revenue recognized for accounting purposes. During 2006, no
revenue was recognized on products that included a right to return or otherwise
required customer acceptance after December 31, 2006. We have established a
program which, in certain situations, allows customers or prospective customers
to field test our products for a specified period of time. Revenues from
field
test arrangements are recognized upon customer acceptance of the
products.
During
2006, we began to sell the dANF product which contains software that is
essential to the functionality of the product and as such is required to
be
accounted for in accordance with SOP 97-2, “Software Revenue Recognition,” as
amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions.” The revenue recognized for each separate
element of a multiple-element software contract is based upon vendor-specific
objective evidence of fair value, which is based upon the price the customer
is
required to pay when the element is sold separately. The dANF product is
recognized as revenue upon shipment while the maintenance is deferred and
recognized on a straight line basis during the applicable maintenance period,
typically 1-3 years.
We
warrant our products against defects in materials and workmanship typically
for
a 1-2 year period from the date of shipment, though these terms may be
negotiated on a case by case basis. A provision for estimated future costs
related to warranty expenses is recorded when revenues are recognized.
At both
December 31, 2006 and 2005 we accrued $34,000 for warranty costs. This
warranty reserve is based on the cost to replace a percentage of products
in the
field at a given point, adjusted by actual experience. Returns and allowances
were not significant in any period reported, and form a data point in
establishing the reserve. Should this warranty reserve estimate be deemed
insufficient, by new information, experience, or otherwise, an increase
to
warranty expense would be required.
Goodwill
and Intangible Assets
During
2006, we completed our annual process of evaluating goodwill for impairment
under SFAS No. 142 “Goodwill and Other Intangible Assets”. As the fair value of
the enterprise, using quoted market prices for our common stock, exceeded
the
carrying amount, goodwill was determined to be not impaired. We assess the
potential for impairment of goodwill annually, or more frequently if events
or
changes in circumstances indicate that the asset might be impaired. If we
determine that the carrying value of goodwill is less than its fair value,
a
write-down may be required. In accordance with SFAS No. 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets”, we review our identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Recoverability
of the
intangible assets is measured by a comparison of the carrying amount to the
fair
value. If intangible assets are considered to be impaired, the impairment
to be
recognized is measured by the amount by which the carrying amount of the
asset
exceeds the fair value.
Allowance
for Doubtful Receivables
An
allowance for doubtful receivables may be maintained for potential credit
losses. Management specifically analyzes accounts receivable, on a client
by
client basis, when evaluating the adequacy of our allowance for doubtful
receivables including customer credit worthiness and current economic trends
and
records any necessary bad debt expense based on the best estimate of the
facts
known to date. Alternatives to this approach include applying a fixed and/or
empirical rate of bad debts to receivables. Bad debts have historically been
very low (none in 2006 or 2005). We believe our current method to be less
arbitrary and more reliable than the alternatives as described. Should the
facts
regarding the collectability of receivables change, the resulting change
in the
allowance would be charged or credited to income in the period such
determination is made. Such a change could materially impact our financial
position and results of operations.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123R, "Share-Based Payment," ("FAS 123R") which
establishes accounting for equity instruments exchanged for employee services.
Under the provisions of FAS 123R, share-based compensation cost is measured
at
the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employee's requisite service period (generally
the vesting period of the equity grant). Performance-based grants (grants
that
vest upon a future event and not due to the passage of time) are not expensed
until we believe it probable that vesting will occur. We elected to adopt
the
modified prospective transition method as provided by FAS 123R and, accordingly,
financial statement amounts for the prior periods have not been retroactively
adjusted to reflect the fair value method of expensing share-based compensation.
Under the modified prospective method, share-based expense recognized after
adoption includes: (a) share-based expense for all awards granted prior to,
but
not yet vested as of January 1, 2006, based on the grant date fair value
and (b)
share-based expense for all awards granted subsequent to January 1, 2006.
We
changed our equity compensation practices at the same time to emphasize grants
of restricted stock as opposed to stock options. As most options were fully
vested as of January 1, 2006, only a small portion of its total equity
compensation expense came from stock options, with the vast majority coming
from
grants of restricted stock. Grants of restricted stock are valued at the
market
price on the date of grant and amortized during the service period on a
straight-line basis or the vesting of such grant, whichever is higher.
Contractual
Obligations, Commitments, and Off Balance Sheet
Arrangements
No
such
arrangements existed as of December 31, 2006, except for leases as
described and the minimum lease payments as detailed in this
document.
Contractual
Obligations
|
|
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 1
|
|
|
|
|
|
|
|
|
More
than
|
|
Year
|
|
|
Total
|
|
|
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
5
Years
|
|
Long
Term Debt Obligations
|
|
$
|
17,787,000
|
|
$
|
11,746,000
|
|
|
-
|
|
$
|
6,041,000
|
|
|
-
|
|
Operating
Lease Obligations
|
|
$
|
1,659,000
|
|
$
|
201,000
|
|
$
|
413,000
|
|
$
|
427,000
|
|
$
|
618,000
|
|
Total
|
|
$
|
19,446,000
|
|
$
|
11,947,000
|
|
$
|
413,000
|
|
$
|
6,468,000
|
|
$
|
618,000
|
|
Recent
Accounting Pronouncements
In
September 2006, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides guidance on how the effects of
the
carryover or reversal of prior year financial statement misstatements should
be
considered in quantifying a current year misstatement. Prior practice allowed
the evaluation of materiality on the basis of (1) the error quantified as
the
amount by which the current year income was misstated ("rollover method")
or (2)
the cumulative error quantified as the cumulative amount by which the current
year balance sheet was misstated ("iron curtain method"). The guidance provided
by SAB 108 requires both methods to be used in evaluating materiality.
Immaterial prior year errors may be corrected with the first filing of prior
year financial statements after adoption. The cumulative effect of the
correction would be reflected in the opening balance sheet with appropriate
disclosure of the nature and amount of each individual error corrected in
the
cumulative adjustment, as well as a disclosure of the cause of the error
and
that the error had been deemed to be immaterial in the past. We adopted SAB
108
for the year ended December 31, 2006, as required, and the adoption did not
have
a significant impact on our results of operations or financial position.
In
July 2006, FASB released FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement
No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for
uncertainties in income tax positions. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN
48 is
effective for fiscal years ending after December 15, 2006. We will adopt
FIN 48
as of January 1, 2007, as required. The cumulative effects, if any, of applying
this Interpretation will be recorded as an adjustment to retained earnings
as of
the beginning of the period of adoption. We do not believe the adoption of
FIN
48 will impact our results of operations or financial position.
In
May
2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error
Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. This
statement applies to all voluntary changes in accounting principle, and requires
retrospective application to prior periods’ financial statements for changes in
accounting principle. SFAS No. 154 was effective for us beginning on January
1,
2006. This statement didn't have a material impact on our financial statements.
Effective
January 1, 2006, we adopted SFAS No. 123(R), “Share Based Payments,” as
described in Note 7, in the Notes to the Consolidated Financial Statements.
For
the year ended December 31, 2006, the effect on the results of operations
of
recording stock-based compensation in accordance with SFAS 123(R) was $1.6
Million.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We
do not
have any material market risk sensitive instruments.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
ISCO
International, Inc.
We
have
audited the accompanying consolidated balance sheets of ISCO International,
Inc.
(a Delaware corporation) and subsidiaries, as of December 31, 2006 and
2005, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years ended December 31, 2006.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of ISCO
International, Inc. and subsidiaries as of December 31, 2006 and 2005, and
the consolidated results of their operations and their cash flows for each
of
the three years ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3, the Company incurred
a
net loss of $4,364,984 during the year ended December 31, 2006, and, as of
that date, the Company’s accumulated deficit was $164,405,272. In addition, the
Company has consistently used, rather than provided, cash in its operations.
These factors, among others, as discussed in Note 3 to the financial statements,
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As
discussed in Notes 2 and 7 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standard
Number 123 (revised 2004), “Share Based Payments.”
Grant
Thornton LLP
Chicago,
Illinois
March 30,
2007
ISCO
INTERNATIONAL
CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Assets:
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
2,886,476
|
|
$
|
3,486,430
|
|
Inventory
|
|
|
6,368,599
|
|
|
2,715,170
|
|
Accounts
Receivable, net
|
|
|
2,554,716
|
|
|
1,677,334
|
|
Prepaid
Expenses and Other
|
|
|
168,741
|
|
|
253,167
|
|
Total
Current Assets
|
|
|
11,978,532
|
|
|
8,132,101
|
|
Property
and Equipment
|
|
|
1,334,203
|
|
|
1,037,432
|
|
Less:
Accumulated Depreciation
|
|
|
(811,167)
|
|
|
(720,142)
|
|
Net
Property and Equipment
|
|
|
523,036
|
|
|
317,290
|
|
Restricted
Certificates of Deposit
|
|
|
162,440
|
|
|
242,180
|
|
Goodwill
|
|
|
13,370,000
|
|
|
13,370,000
|
|
Intangible
assets, net
|
|
|
841,187
|
|
|
844,062
|
|
Total
Assets
|
|
$
|
26,875,195
|
|
$
|
22,905,633
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
1,172,844
|
|
$
|
416,095
|
|
Inventory-related
material purchase accrual
|
|
|
328,663
|
|
|
530,134
|
|
Employee-related
accrued liability
|
|
|
284,653
|
|
|
208,408
|
|
Accrued
professional services
|
|
|
93,000
|
|
|
279,000
|
|
Other
accrued liabilities and current deferred revenue
|
|
|
225,724
|
|
|
301,923
|
|
Current
Portion of LT Debt, including related interest, with related
parties
|
|
|
11,295,957
|
|
|
|
|
Total
Current Liabilities
|
|
|
13,400,841
|
|
|
1,735,560
|
|
|
|
|
|
|
|
|
|
Deferred
facility reimbursement
|
|
|
102,500
|
|
|
118,988
|
|
Deferred
revenue - non current
|
|
|
75,900
|
|
|
|
|
Notes
and related accrued interest with related parties, net of current
portion
|
|
|
5,131,762
|
|
|
10,520,369
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock; 300,000 shares authorized; No shares issued and outstanding
|
|
|
|
|
|
|
|
at December 31, 2006 and December 31, 2005
|
|
|
|
|
|
|
|
Common
stock ($.001 par value); 250,000,000 shares authorized;
189,622,133
|
|
|
|
|
|
|
|
and 183,252,018 shares issued and outstanding at December 31,
2006 and
|
|
|
|
|
|
|
|
December 31, 2005, respectively
|
|
|
189,622
|
|
|
183,252
|
|
Additional
paid-in capital
|
|
|
172,379,842
|
|
|
170,387,752
|
|
Accumulated
deficit
|
|
|
(164,405,272)
|
|
|
(160,040,288)
|
|
Total
Shareholders' Equity
|
|
|
8,164,192
|
|
|
10,530,716
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
26,875,195
|
|
$
|
22,905,633
|
|
See
the
accompanying Notes which are an integral part of the financial
statements.
ISCO
INTERNATIONAL
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net
sales
|
|
$
|
14,997,320
|
|
$
|
10,264,428
|
|
$
|
2,621,933
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
9,066,929
|
|
|
5,121,650
|
|
|
1,527,554
|
|
Research
and development
|
|
|
2,011,652
|
|
|
1,767,447
|
|
|
1,119,406
|
|
Selling
and marketing
|
|
|
3,207,882
|
|
|
1,861,065
|
|
|
1,164,830
|
|
General
and administrative
|
|
|
4,287,080
|
|
|
3,691,070
|
|
|
4,757,935
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
18,573,543
|
|
|
12,441,232
|
|
|
8,569,725
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(3,576,223)
|
|
|
(2,176,804)
|
|
|
(5,947,792)
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
118,590
|
|
|
77,383
|
|
|
8,660
|
|
Non-cash
warrant expense
|
|
|
-
|
|
|
|
|
|
(250,297)
|
|
Interest
expense
|
|
|
(907,351)
|
|
|
(877,461)
|
|
|
(777,872)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expense, net
|
|
|
(788,761)
|
|
|
(800,078)
|
|
|
(1,019,509)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,364,984)
|
|
|
(2,976,882)
|
|
$
|
(6,967,301)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.02)
|
|
|
(0.02)
|
|
$
|
(0.04)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
185,506,261
|
|
|
170,786,657
|
|
|
158,977,249
|
|
See
the
accompanying Notes which are an integral part of the financial
statements.
ISCO
INTERNATIONAL
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2004, 2005, and 2006
|
|
Common
|
|
Common
|
|
Additional
|
|
Accumulated
|
|
|
|
|
|
Stock
|
|
Stock
|
|
Paid-In
|
|
Deficit
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
|
|
Total
|
|
Balance
as of December 31, 2003
|
|
150,149,927
|
$
|
150,150
|
$
|
160,889,202
|
$
|
(150,096,105)
|
$
|
10,943,247
|
|
Exercise
of Stock Options
|
|
1,063,776
|
|
1,064
|
|
140,676
|
|
-
|
|
141,740
|
|
Exercise
of Warrants
|
|
10,000,000
|
|
10,000
|
|
1,990,000
|
|
-
|
|
2,000,000
|
|
Stock-Based
Compensation
|
|
-
|
|
-
|
|
879,652
|
|
-
|
|
879,652
|
|
Non-cash
Warrant Expense
|
|
-
|
|
-
|
|
250,297
|
|
-
|
|
250,297
|
|
Net
Loss
|
|
-
|
|
-
|
|
-
|
|
(6,967,301)
|
|
(6,967,301)
|
|
Balance
as of December 31, 2004
|
|
161,213,703
|
$
|
161,214
|
$
|
164,149,827
|
$
|
(157,063,406)
|
$
|
7,247,635
|
|
Exercise
of Stock Options
|
|
2,038,333
|
|
2,038
|
|
265,078
|
|
-
|
|
267,116
|
|
Equity
Financing
|
|
20,000,000
|
|
20,000
|
|
4,280,000
|
|
-
|
|
4,300,000
|
|
Section
16b recovery
|
|
-
|
|
-
|
|
607,223
|
|
-
|
|
607,223
|
|
Stock-Based
Compensation
|
|
-
|
|
-
|
|
1,085,624
|
|
-
|
|
1,085,624
|
|
Net
Loss
|
|
-
|
|
-
|
|
-
|
|
(2,976,882)
|
|
(2,976,882)
|
|
Balance
as of December 31, 2005
|
|
183,252,036
|
$
|
183,252
|
$
|
170,387,752
|
$
|
(160,040,288)
|
$
|
10,530,716
|
|
Exercise
of Stock Options
|
|
2,582,826
|
|
2,583
|
|
427,330
|
|
-
|
|
429,913
|
|
Stock
Grants Vested
|
|
3,787,271
|
|
3,787
|
|
(3,787)
|
|
-
|
|
|
|
Section
16b recovery
|
|
-
|
|
-
|
|
3,124
|
|
-
|
|
3,124
|
|
Stock-Based
Compensation
|
|
-
|
|
-
|
|
1,565,423
|
|
-
|
|
1,565,423
|
|
Net
Loss
|
|
-
|
|
-
|
|
-
|
|
(4,364,984)
|
|
(4,364,984)
|
|
Balance
as of December 31, 2006
|
|
189,622,133
|
$
|
189,622
|
$
|
172,379,842
|
$
|
(164,405,272)
|
$
|
8,164,192
|
|
See
the
accompanying Notes which are an integral part of the financial
statements.
ISCO
INTERNATIONAL
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,364,984)
|
|
$
|
(2,976,882)
|
|
$
|
(6,967,301)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
92,963
|
|
|
81,174
|
|
|
633,794
|
|
Amortization
|
|
|
54,431
|
|
|
56,560
|
|
|
50,325
|
|
Non-cash
compensation charges
|
|
|
1,565,423
|
|
|
1,085,624
|
|
|
879,651
|
|
Non-cash
warrant issuance-related expense
|
|
|
-
|
|
|
-
|
|
|
250,297
|
|
Patent-related
charge
|
|
|
-
|
|
|
199,819
|
|
|
32,564
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(877,382)
|
|
|
(1,554,874)
|
|
|
1,047,251
|
|
Inventories
|
|
|
(3,653,429)
|
|
|
(1,746,122)
|
|
|
(290,687)
|
|
Prepaid
expenses and other
|
|
|
84,426
|
|
|
341,321
|
|
|
(273,341)
|
|
Accounts
payable
|
|
|
756,749
|
|
|
213,482
|
|
|
(41,034)
|
|
Accrued
liabilities and deferred revenue
|
|
|
476,837
|
|
|
1,290,565
|
|
|
499,616
|
|
Deferred
occupancy costs
|
|
|
106,250
|
|
|
-
|
|
|
-
|
|
Net
cash used in operating activities
|
|
|
(5,758,716)
|
|
|
(3,009,333)
|
|
|
(4,178,865)
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Decrease/
(Increase) in restricted certificates of deposit
|
|
|
79,740
|
|
|
48,847
|
|
|
(250,500)
|
|
Payment
of patent costs
|
|
|
(51,556)
|
|
|
(49,121)
|
|
|
(38,707)
|
|
Acquisition
of property and equipment, net
|
|
|
(302,458)
|
|
|
(80,694)
|
|
|
(117,686)
|
|
Net
cash used in investing activities
|
|
|
(274,274)
|
|
|
(80,968)
|
|
|
(406,893)
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from warrants
|
|
|
-
|
|
|
-
|
|
|
2,000,000
|
|
Proceeds
from equity issuance
|
|
|
-
|
|
|
4,300,000
|
|
|
-
|
|
Proceeds
from Section 16b recovery
|
|
|
3,124
|
|
|
607,223
|
|
|
-
|
|
Exercise
of stock options
|
|
|
429,912
|
|
|
267,117
|
|
|
141,740
|
|
Proceeds
from issuance of notes
|
|
|
5,000,000
|
|
|
1,000,000
|
|
|
2,500,000
|
|
Net
cash provided by financing activities
|
|
|
5,433,036
|
|
|
6,174,340
|
|
|
4,641,740
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
(599,954)
|
|
|
3,084,039
|
|
|
55,982
|
|
Cash
and cash equivalents at beginning of period
|
|
|
3,486,430
|
|
|
402,391
|
|
|
346,409
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,886,476
|
|
$
|
3,486,430
|
|
$
|
402,391
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
See
the
accompanying Notes which are an integral part of the financial
statements
Notes
to the Financial Statements
1.
Description of Business
ISCO
International (including its inactive subsidiaries, Spectral Solutions, Inc.,
and Illinois Superconductor Canada Corporation, the “Company”) addresses RF
(Radio Frequency) and radio link optimization issues, including interference
issues, within wireless communications. The Company uses unique products,
including ANF, RF², and other solutions, as well as service expertise, in
improving the RF handling of a wireless system, particularly the radio link
(the
signal between the mobile device and the base station). A subset of this
capability is mitigating the impact of interference on wireless communications
systems. These solutions are designed to enhance the quality, capacity, coverage
and flexibility of wireless telecommunications services. The Company has
historically marketed its products to cellular, PCS and wireless
telecommunications service providers and OEM’s located both in the United States
and in international markets.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and
its
wholly owned subsidiaries. All intercompany balances and transactions have
been
eliminated.
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of demand deposits, time deposits, money market
funds,
and commercial paper which have original maturities of three months or less
from
the date of purchase. Management believes that the financial institutions
in
which it maintains such deposits are financially sound and, accordingly,
minimal
credit risk exists with respect to these deposits.
Accounts
receivable
The
majority of the Company’s accounts receivable is due from companies in the
telecommunications industry. Credit is extended based on evaluation of a
customers’ financial condition and, generally, collateral is not required.
Accounts receivable are typically due within 30 days and are stated at amounts
due from customers, net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past
due.
The Company determines its allowance for doubtful accounts by considering
a
number of factors, including the length of time trade accounts receivable
are
past due, the Company’s previous loss history, the customer’s current ability to
pay its obligation to the Company, and the condition of the general economy
and
the industry as a whole. The Company writes-off accounts receivable when
they
become uncollectible, and payments subsequently received on such receivables
are
credited to the allowance for doubtful accounts. The allowance could be
materially different if economic conditions change or actual results deviate
from historical trends.
Inventories
Inventories
are stated at the lower of cost (determined on a first in, first out basis)
or
market.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation, and are
depreciated over the estimated useful lives of the assets using both straight
line and accelerated methods. The accelerated method used is the double
declining balance method. Software is typically amortized over 3 years
utilizing
the straight-line method. Leasehold improvements are amortized using the
straight-line method over the shorter of the useful life of the asset or
the
term of the lease. Amortization of leasehold improvements is included in
depreciation expense. The useful lives assigned to property and equipment
for
the purpose of computing book depreciation follow:
Manufacturing
equipment
|
|
3 to 4 years
|
Office
equipment
|
|
3
to 5 years
|
Furniture
and fixtures
|
|
5
years
|
Leasehold
improvements
|
|
Life of lease
|
Income
Taxes
Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using
the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company uses a valuation allowance when it determines
the amount of deferred tax asset to include in its financial statement for
the
current period is not realizable. This valuation allowance is based on
historical patterns of taxable income, recognized deferred tax liabilities,
and
other factors that could impact the current view of future tax asset
utilization.
Revenue
Recognition
Revenues
from product sales are generally recognized at the time of shipment and are
recorded net of estimated returns and allowances. Revenues from services
are
generally recognized upon substantial completion of the service and acceptance
by the customer. We have under certain conditions, granted customers the
right
to return product during a specified period of time after shipment. In these
situations, we establish a liability for estimated returns and allowances
at the
time of shipment and make the appropriate adjustment in revenue recognized
for
accounting purposes. During 2006, no revenue was recognized on products that
included a right to return or otherwise required customer acceptance after
December 31, 2006. We have established a program which, in certain
situations, allows customers or prospective customers to field test our products
for a specified period of time. Revenues from field test arrangements are
recognized upon customer acceptance of the products.
During
2006, we began to sell the dANF product which contains software that is
essential to the functionality of the product and as such is required to
be
accounted for in accordance with SOP 97-2, “Software Revenue Recognition,” as
amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions.” The revenue recognized for each separate
element of a multiple-element software contract is based upon vendor-specific
objective evidence of fair value, which is based upon the price the customer
is
required to pay when the element is sold separately. The dANF product is
recognized as revenue upon shipment while the maintenance is deferred and
recognized on a straight line basis during the applicable maintenance period,
typically 1-3 years.
Product
Warranty
The
Company warrants its products against defects in materials and workmanship
typically for a 1-2 year period from the date of shipment, though these terms
may be negotiated on a case-by-case basis. A provision for estimated future
costs related to warranty expenses is recorded when revenues are recognized.
At
both December 31, 2006 and 2005 the Company accrued $34,000 for warranty
costs. This warranty reserve is based on the cost to replace a percentage
of
products in the field at a given point, adjusted by actual experience. Returns
and allowances were not significant in any period reported, and form a data
point in establishing the reserve. Should this warranty reserve estimate
be
deemed insufficient, by new information, experience, or otherwise, an increase
to warranty expense would be required.
Concentration
of Credit Risk
Sales
to
three of the Company’s customers accounted for 98%, 97% and 94% of the Company’s
total revenues for 2006, 2005 and 2004, respectively. The balance of Accounts
Receivable from our top three customers was $2.5 Million and $1.7 Million
as of
December 31, 2006 and 2005, respectively. During 2006 the top three
customers were Verizon Wireless, Alltel Corporation, and Bluegrass Cellular
Corporation, respectively.
Advertising
Costs
Advertising
costs are charged to expense in the period incurred.
Research
and Development Costs
Research
and development costs related to both present and future products are charged
to
expense in the period incurred.
Net
Loss Per Common Share
Basic
and
diluted net loss per common share are computed based upon the weighted average
number of common shares outstanding. Approximately 5 million common shares
issuable as of December 31, 2006 upon the exercise of options and warrants,
and 9 million unvested shares of restricted stock, are not included in the
per
share calculations since the effect of their inclusion would be
antidilutive.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Description
of Certain Concentrations and Risks
The
Company operates in a highly competitive and rapidly changing industry. Product
revenues are currently concentrated with a limited number of customers, and
the
supply of certain materials is concentrated among a few providers. The
development and commercialization of new technologies by any competitor could
adversely affect the Company’s results of operations.
Goodwill
and Intangible Assets
Patents
and trademarks represent costs, primarily legal fees and expenses, incurred
in
order to prepare and file patent applications related to various aspects
of the
Company’s technology and to its current and proposed products. Patents and
trademarks are recorded at cost and are amortized using the straight-line
method
over the shorter of their estimated useful lives or 17 years. The recoverability
of the carrying values of patents and trademarks is evaluated on an ongoing
basis by Company management. Factors involved in this evaluation include
whether
the item is in force, whether it has been directly threatened or challenged
in
litigation or administrative process, continued usefulness of the item in
current and/or expected utilization by the Company in its solution offerings,
perceived value of such material or invention in the marketplace, availability
and utilization of alternative or other technologies, the perceived protective
value of the item, and other factors.
During
2006 and 2005, the Company wrote off approximately $0 and $200,000,
respectively, in patent-related costs. Total capitalized patent and trademark
costs were approximately $841,000 and $844,000 at December 31, 2006 and
2005, respectively. Capitalized patent costs related to pending patents
were
approximately $289,000 and $266,000 at December 31, 2006 and 2005,
respectively. Patents and trademarks were reported net of accumulated
amortization of approximately $321,000 and $268,000 at December 31, 2006
and 2005, respectively.
As
of the
reporting date, the Company had recorded goodwill resulting from the
acquisitions of Spectral Solutions, Inc. and the Adaptive Notch Filter division
of Lockheed Martin Canada, Inc., both during 2000. Beginning January 1,
2002, goodwill is no longer to be amortized but rather to be tested for
impairment on an annual basis and between annual tests whenever there is
an
indication of potential impairment. Impairment losses would be recognized
whenever the implied fair value of goodwill is determined to be less than
its
carrying value. SFAS 142 prescribes a two-step impairment test to determine
whether the carrying value of the Company’s goodwill is impaired. The first step
of the goodwill impairment test is used to identify potential impairment,
while
the second step measures the amount of the impairment loss. Step one to this
test requires the comparison of the fair value of each reporting unit with
its
carrying amount, including goodwill. As the Company is comprised of a single
reporting unit, the question of fair value is centered upon whether the market
value, as measured by market capitalization, of the Company exceeds
shareholders’ equity. The excess of the Company’s market capitalization over its
reported shareholders’ equity indicates that the goodwill of the Company’s sole
reporting unit was not impaired as of December 31, 2006 and
2005.
The
Company’s balances of Goodwill and Intangible Assets were as
follows:
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(in thousands of dollars)
|
|
Patent,
gross
|
|
$
|
1,162
|
|
$
|
1,112
|
|
Accumulated
amortization
|
|
|
(321)
|
|
|
(268)
|
|
|
|
|
|
|
|
|
|
Other
amortizable intangibles, net
|
|
$
|
841
|
|
$
|
844
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
13,370
|
|
$
|
13,370
|
|
2007
|
|
|
|
|
|
51
|
|
2008
|
|
|
|
|
|
51
|
|
2009
|
|
|
|
|
|
51
|
|
2010
|
|
|
|
|
|
51
|
|
2011
|
|
|
|
|
|
50
|
|
Thereafter
|
|
|
|
|
|
587
|
|
Total
|
|
|
|
|
$
|
841
|
|
Fair
Value of Financial Instruments
The
carrying values of financial instruments, including accounts receivable,
accounts payable, and long-term debt, approximates fair value.
Long
Lived Assets
In
accordance with the provisions of SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived
assets, including property and equipment, for impairment whenever events
or
changes in business circumstances indicate the carrying amount of the assets
may
not be fully recoverable. Under SFAS No. 144, an impairment loss is
recognized when estimated undiscounted future cash flows expected to result
from
use of the asset and its eventual disposition are less than the carrying
amount.
Impairment, if any, is determined using discounted cash flows. The Company
had
no such impairment losses in 2006 or 2005.
Stock-Based
Employee Compensation
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment”
(SFAS No.123R). This statement requires that the compensation cost relating
to
share-based payment transactions be recognized in the financial statements.
Compensation cost is to be measured based on the estimated fair value of
the
equity-based compensation awards issued as of the grant date. The related
compensation expense will be based on the estimated number of awards expected
to
vest and will be recognized over the requisite service period (often the
vesting
period) for each grant. The statement requires the use of assumptions and
judgments about future events and some of the inputs to the valuation models
will require considerable judgment by management.
SFAS
No.123(R) replaces FASB Statement No.123 (SFAS No.123), “Accounting for
Share-Based Compensation,” and supersedes APB Opinion No.25, “Accounting for
Stock Issued to Employees.” The provisions of SFAS No.123(R) are required to be
applied by public companies that do not file as small business issuers, as
of
the first interim or annual reporting period that begins after June 15, 2005,
and all other public companies as of the first interim or annual reporting
period that begins after December 15, 2005. On April 14, 2005, the SEC adopted
a
new rule amending the effective date for Statement 123(R). Based on the amended
rule, registrants were required to implement Statement 123(R) as of the first
annual period beginning after June 15, 2005, which was January 1, 2006 for
us.
On
January 1, 2006, we adopted SFAS No.123(R), under the modified prospective
application transition method without restatement of prior interim periods.
This
resulted in our recognizing compensation cost based on the requirements of
SFAS
No.123(R) for all equity-based compensation awards issued after the effective
date of this statement. For all equity-based compensation awards that were
unvested as of that date, compensation cost is recognized for the unamortized
portion of compensation cost not previously included in the SFAS No.123 pro
forma footnote disclosure. The adoption of SFAS No.123(R) had a material
effect
on the Company’s results of operations with respect to equity issuances during
2006, with an equity compensation charge of $1.5 million during
2006.
The
effects on earnings and earnings per share if the value recognition provisions
of FAS 123(R) were applied to the twelve-month periods ended December 31,
2005
and 2004, respectively, is presented in the following tables:
In
thousands of dollars:
|
|
Twelve
months ended
December
31, 2005
|
|
Twelve
months ended
December
31, 2004
|
|
Net
loss, as reported
|
|
$
|
(2,977
|
)
|
$
|
(6,967
|
)
|
Deduct
net change in stock-based employee compensation expense determined
under
fair-value-based method of all rewards, net of tax
|
|
$
|
(273
|
)
|
$
|
(406
|
)
|
Pro
forma net loss
|
|
$
|
(3,250
|
)
|
$
|
(7,373
|
)
|
Pro
forma net loss per share (basic)
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
Pro
forma net loss per share (diluted)
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
The
following table summarizes the stock option activity during the fiscal year
ended December 31, 2006:
Outstanding,
December 31, 2005
|
|
|
8,146,000
|
|
Granted
|
|
|
|
|
Forfeited
or canceled
|
|
|
(651,000)
|
|
Exercised
|
|
|
(2,583,000)
|
|
Outstanding,
December 31, 2006
|
|
|
4,912,000
|
|
The
fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2005: no dividend yield, expected volatility
of
105%, risk-free interest rate of 3.8%, and an expected life of 4 years. No
options were granted during 2006.
At
December 31, 2006, a total of 4.9 million stock options were outstanding
under
the Company’s equity compensation plans, all but less than 0.1 million of which
are fully vested. Stock-based compensation expense recognized during the
fiscal
year ended December 31, 2006 includes compensation expense for stock options
granted prior to this period but not yet vested, based on the grant date
fair
value estimated in accordance with the pro forma provisions of FAS 123. Included
in stock-based compensation expense for the fiscal year ended December 31,
2006
was $0.1 million related to stock options.
Restricted
Share Rights
Restricted
share grants offer employees the opportunity to earn shares of the Company’s
stock over time. Grants issued during 2006 generally vest over two years
for
employees and one year for non-employee directors. For grants during 2007
and
beyond, we expect that the typical vesting period for employees will be four
years while the vesting period for non-employee directors will remain tied
to
the one year service period (directors are elected annually by our
shareholders). We recognize the issuance of the shares related to these
stock-based compensation awards and the related compensation expense on a
straight-line basis over the vesting period, or on an accelerated basis in
those
cases where the actual vesting is faster than the proportional straight line
value. Included within these grants are also performance-based shares, that
is,
shares that vest based on accomplishing particular objectives as opposed
to
vesting over time. No performance-based shares were vested during the fiscal
year ended December 31, 2006.
The
following table summarizes the restricted stock award activity during
2006.
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
Grant Date
|
|
|
|
Shares
|
|
|
Fair
Value (per share)
|
Outstanding,
December 31, 2005
|
|
|
None
|
|
|
None
|
|
Granted
|
|
|
15,598,000
|
|
$
|
0.35
|
|
Forfeited
or canceled
|
|
|
(3,097,000)
|
|
$
|
0.34
|
|
Vested
|
|
|
(3,787,000)
|
|
$
|
0.35
|
|
Outstanding,
December 31, 2006
|
|
|
8,714,000
|
|
$
|
0.35
|
|
The
total
fair value of restricted shares vested during the fiscal year ended December
31,
2006 was $1.3 million. Total non-cash equity compensation expense recognized
during the fiscal year ended December 31, 2006 was $1.6 million. Non-cash
equity
expense for the fiscal year ended December 31, 2006 included $1.3 million
for
vested restricted share grants, $0.1 million for the vesting of stock options
awarded prior to 2006, and $0.2 million for the straight-line amortization
of
restricted share grants that did not vest during the fiscal year ended December
31, 2006.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board issued SFAS No.
157,
"Fair Value Measurements" ("SFAS 157"). This statement defines fair value
as
used in numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP")
and
expands disclosure related to the use of fair value measures in financial
statements. SFAS 157 does not expand the use of fair value measures in financial
statements, but standardizes its definition and guidance in GAAP. SFAS 157
is
effective for fiscal years beginning after November 15, 2007. We plan to
adopt
the provisions of SFAS 157 on January 1, 2008. We are evaluating the potential
impact of SFAS 157, but at this time do not anticipate that it will have
an
impact on our financial statements when adopted.
In
September 2006, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides guidance on how the effects of
the
carryover or reversal of prior year financial statement misstatements should
be
considered in quantifying a current year misstatement. Prior practice allowed
the evaluation of materiality on the basis of (1) the error quantified as
the
amount by which the current year income was misstated ("rollover method")
or (2)
the cumulative error quantified as the cumulative amount by which the current
year balance sheet was misstated ("iron curtain method"). The guidance provided
by SAB 108 requires both methods to be used in evaluating materiality.
Immaterial prior year errors may be corrected with the first filing of prior
year financial statements after adoption. The cumulative effect of the
correction would be reflected in the opening balance sheet with appropriate
disclosure of the nature and amount of each individual error corrected in
the
cumulative adjustment, as well as a disclosure of the cause of the error
and
that the error had been deemed to be immaterial in the past. We adopted SAB
108
for the year ended December 31, 2006, as required, and the adoption did not
have
a significant impact on our financial statements.
During
July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes,”
which will impact the recognition, measurement, and disclosure of positions
taken for income tax purposes. The Interpretation is effective for fiscal
years
beginning after December 15, 2006 (January 1, 2007 for us). Because we have
historically posted losses and have maintained a full valuation allowance
on our
available future income tax benefit, we do not expect this Interpretation
to
have a material effect on our results of operations or financial
position.
Reclassifications
Certain
amounts reported in prior years have been reclassified from what was previously
reported to conform to the current year’s presentation.
3.
Realization of Assets
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which
contemplate continuation of the Company as a going concern. However, the
Company
has sustained substantial losses from operations in recent years, and such
losses have continued through the year ended December 31, 2006. In
addition, the Company has used, rather than provided, cash in its operations.
Consistent with these facts, the accompanying report from Grant Thornton,
LLP,
the Company’s independent registered public accounting firm, includes the
comment that there is substantial doubt about the Company’s ability to continue
as a going concern.
In
view
of the matters described in the preceding paragraph, recoverability of a
major
portion of the recorded asset amounts shown in the accompanying balance sheet
is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company’s ability to meet its financing requirements on a continuing
basis, to maintain present financing, and to succeed in its future operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company
be
unable to continue in existence.
The
Company has incurred, and continues to incur, losses from operations. For
the
years ended December 31, 2006, 2005, and 2004, the Company incurred net
losses of $4.4 million, $3.0 million, and $7.0 million, respectively. During
those years the Company implemented strategies to reduce its cash used in
operating activities. The Company’s strategy included the consolidation of its
manufacturing and research and development facilities and a targeted reduction
of the employee workforce, increasing the efficiency of the Company’s processes,
focusing development efforts on products with a greater probability of
commercial sales, reducing professional fees and discretionary expenditures,
and
negotiating favorable payment arrangements with suppliers and service providers.
More importantly, the Company configured itself along an outsourcing model,
thus
allowing for relatively large, efficient production without the associated
overhead. The combination of these factors has been effective in bringing
the
Company closer to profitability (from a net loss as high as $28 million during
2001) while enabling it to deliver significant quantities of solutions.
Beginning in 2005, the Company began to invest in additional product development
(engineering) and sales and marketing resources as it began to increase its
volume of business. While viewed as a positive development, these expenditures
have added to the funding requirements listed above.
We
believe that we have sufficient funds to operate our business until $11.3
million of our debt becomes due in August 2007. That debt is held by our
two
largest shareholders, including affiliates. While we expect to refinance
this
debt no such refinancing has occurred as of the reporting date, therefore,
the
ability to refinance our debt and maintain adequate working capital is necessary
for us to continue as a going concern Additionally, we project increases
in
working capital requirements in order to pursue significant business
opportunities during 2007 and beyond, and also expect to spend additional
financial resources in the expansion of our business and product offerings.
As
such, we may require additional capital prior to August 2007. We intend to
look
into augmenting our existing capital position by continuing to evaluate
potential short-term and long-term sources of capital whether from debt,
equity,
hybrid, or other methods. The primary covenant in our existing debt arrangement
involves the right of the lenders to receive debt repayment from the proceeds
of
new financing activities. This covenant may restrict our ability to obtain
additional financing or to apply the proceeds of a financing event toward
operations until the debt is repaid in full.
4.
Inventories
Inventories
consist of the following:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2006
|
2005
|
Raw
materials
|
|
$
|
2,675,000
|
|
$
|
1,368,000
|
|
Work
in process
|
|
|
2,332,000
|
|
|
443,000
|
|
Finished
product
|
|
|
1,362,000
|
|
|
904,000
|
|
Total
|
|
$
|
6,369,000
|
|
$
|
2,715,000
|
|
Inventory
balances are reported net of a reserve for obsolescence. This reserve is
computed by taking into consideration the components of inventory, the recent
usage of those components, and anticipated usage of those components in the
future. At December 31, 2006 and 2005, those reserves were approximately
$325,000 and $160,000, respectively.
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands of dollars)
|
|
Beginning
Balance
|
|
$
|
160
|
|
$
|
218
|
|
$
|
858
|
|
Inventory
Obsolescence Expense
|
|
|
165
|
|
|
-
|
|
|
57
|
|
Inventory
Written Off
|
|
|
-
|
|
|
58
|
|
|
697
|
|
Recoveries
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Ending
Balance
|
|
$
|
325
|
|
$
|
160
|
|
$
|
218
|
|
5.
Allowance for Doubtful Accounts
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands of dollars)
|
|
Beginning
Balance
|
|
$
|
0
|
|
$
|
0
|
|
$
|
4
|
|
Bad
Debt Expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Accounts
Written Off
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Recoveries
|
|
|
0
|
|
|
0
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
The
Company has an authorized class of undesignated preferred stock consisting
of
300,000 shares. Preferred stock may be issued in series from time to time
with
such designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed
in
the Company’s certificate of incorporation, as the Company’s Board of Directors
(“Board of Directors” or “Board”) determines.
On
February 9, 1996, the Board of Directors adopted a shareholder rights plan
(the “Rights Plan”). In conjunction with the adoption of the Rights Plan, the
Company created one series of preferred stock, consisting of 10,000 shares
of
Series A Junior Participating Preferred Stock (“Series A Preferred”). Each share
of Series A Preferred entitled the holder to receive dividends equal to 1,000
times the dividends per share declared with respect to the Company’s common
stock and, in the event of liquidation, such holders would have received
a
preference of 1,000 times the aggregate amount to be distributed per share
to
the holders of the Company’s common stock. Pursuant to the Rights Plan, a Series
A Right was associated with, and would have traded with, each share of common
stock outstanding. This Rights Plan expired during February 2006.
At
December 31, 2006, authorized but unissued shares of common stock have been
reserved for future issuance as follows:
Options
outstanding (Note 7)
|
|
|
4,912,000
|
|
At
December 31, 2006, 8.7 million shares of restricted stock had been issued
but
had not vested.
7.
Stock Options and Warrants
On
August 19, 1993, the Board of Directors adopted the 1993 Stock Option Plan
for employees, consultants, and directors who were not also employees of
the
Company (outside directors). This plan reached its ten-year expiration
during
2003. During the 2003 annual meeting of shareholders, the Company’s shareholders
approved a new 2003 Equity Incentive Plan to take the place of the expiring
1993
plan. Unissued options from the 1993 plan were used to fund the 2003 plan.
During the 2005 annual meeting of shareholders, the Company’s shareholders
approved 12 million additional shares of stock to be included in the 2003
Plan, and clarified the ability for the 2003 Plan to utilize up to
5 million unused shares originally allocated to the 1993 Plan. The maximum
number of shares issuable under these plans is 26,011,468. These Plans
are
collectively referred to as the “Plan”.
For
employees and consultants, the Plan provides for granting of restricted shares
of stock, Incentive Stock Options (ISOs) and Nonstatutory Stock Options (NSOs).
In the case of ISOs, the exercise price shall not be less than 100% (110%
in
certain cases) of the fair value of the Company’s common stock, as determined by
the Compensation Committee or full Board as appropriate (the “Committee”), on
the date of grant. In the case of NSOs, the exercise price shall be determined
by the Committee, on the date of grant. The term of options granted to employees
and consultants will be for a period not to exceed 10 years (five years in
certain cases). Options granted under the Plan default to vest over a four-year
period (one-fourth of options granted vest after one year from the grant
date
and the remaining options vest ratably each month thereafter), but the vesting
period is determined by the Committee and may differ from the default period.
In
addition, the Committee may authorize option and restricted stock grants
with
vesting provisions that are not based solely on employees’ rendering of
additional service to the Company.
For
outside directors, the Plan provides that each outside director will be
automatically granted NSOs on the date of their initial election to the Board
of
Directors. On the date of the annual meeting of the stockholders of the Company,
each outside director who is elected, reelected, or continues to serve as
a
director, shall be granted additional NSOs, except for those outside directors
who are first elected to the Board of Directors at the meeting or three months
prior. The options granted vest ratably over one or two years, based on the
date
of grant, and expire after ten years from the grant date. Beginning in 2006,
the
Compensation Committee of the Board approved grants of Restricted Stock to
be
used as compensation for outside directors in lieu of NSO’s.
During
2005, the Board elected to utilize a transition rule provided under FAS 123R,
and accelerated the vesting to December of 2005 a total of 364,198 options
that
were priced above the Company’s stock price (i.e., “out of the money” options)
and scheduled to vest after 2005. There was no compensation expense recognized
upon the acceleration of the options in 2005. The majority of these accelerated
options were scheduled to vest during the first quarter 2006. By employing
this
method, these options are excluded from the Company’s FAS 123R calculation in
2006, but are included in the FAS 148 pro forma disclosure presented in Note
2.
Beginning in 2006, the Board began providing restricted stock grants in lieu
of
stock options within both employee and non-employee compensation programs.
The
impact of the new accounting standard, industry trends, and the ability to
use
fewer shares to achieve intended results are a few of the reasons behind
this
change in view. The Board has also expressed an intention to continue to
utilize
performance-based equity incentives for more cases of equity compensation
than
in years past.
The
fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for
the
years ended December 31, 2005 and 2004: risk-free interest rate of 4.1% and
2.7%, respectively; a dividend yield of 0%; annual volatility factor of the
expected market price of the Company’s common stock of 0.85 and 1.14,
respectively (the daily “volatility”, which is measured as the standard
deviation of the closing stock price for the same periods, would be 0.05
and
0.10); and expected life of the options of 4.0 years. No
options were issued during 2006.
The
Black-Scholes option valuation model was developed for use in estimating
the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The
table
below summarizes all option activity during the three year period ended
December 31, 2006:
|
|
|
Options
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercise
Price Per Share
|
|
Outstanding
at December 31, 2003
|
|
|
6,660,000
|
|
$
|
0.11 —21.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,540,000
|
|
$
|
0.14
— 0.89
|
|
Exercised
|
|
|
(1,046,000)
|
|
$
|
0.11
— 0.49
|
|
Forfeited
|
|
|
(1,095,000)
|
|
$
|
0.11
— 21.50
|
|
Outstanding
at December 31, 2004
|
|
|
9,059,000
|
|
$
|
0.11
— 18.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,815,000
|
|
$
|
0.25
— 0.43
|
|
Exercised
|
|
|
(2,038,000)
|
|
$
|
0.11
— 0.14
|
|
Forfeited
|
|
|
(1,690,000)
|
|
$
|
0.11
— 18.25
|
|
Outstanding
at December 31, 2005
|
|
|
8,146,000
|
|
$
|
0.11
— 18.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
(2,583,000)
|
|
$
|
0.11
- 0.39
|
|
Forfeited
|
|
|
(651,000)
|
|
$
|
0.25
- 18.25
|
|
Outstanding
at December 31, 2006
|
|
|
4,912,000
|
|
$
|
0.11
- 1.81
|
|
The
weighted-average exercise price of options outstanding at December 31,
2006, 2005 and 2004, was $0.41, $0.28, and $0.40, respectively. The
weighted-average exercise price of options granted, exercised, and forfeited
during 2006 was N/A, $0.35 and $0.95, respectively. The weighted-average
fair
value of options granted during 2006, 2005 and 2004 was N/A, $0.36, and $0.18,
respectively. No stock option grants were issued during 2006.
Following
is additional information with respect to options outstanding at
December 31, 2006:
|
|
|
$0.11
to
|
|
$0.24
to
|
|
$0.45
to
|
|
|
|
$0.22
|
|
$0.43
|
|
$1.81
|
OUTSTANDING
AT DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Number
of options
|
|
|
1,145,000
|
|
|
2,755,000
|
|
|
1,012,000
|
|
Weighted-average
exercise price
|
|
$
|
0.14
|
|
$
|
0.35
|
|
$
|
0.89
|
|
Weighted-average
remaining contractual life in years
|
|
|
7
|
|
|
7
|
|
|
4
|
|
EXERCISABLE
AT DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Number
of options
|
|
|
1,104,000
|
|
|
2,755,000
|
|
|
1,012,000
|
|
Weighted-average
exercise price
|
|
$
|
0.14
|
|
$
|
0.35
|
|
$
|
0.89
|
|
The
total
number of unvested options outstanding at December 31, 2006 was less than
0.1 million, which will vest based on employees’ continued service to the
Company.
8.
Long-Term Debt
Uncommitted
Line of Credit (2002 Credit Line)
As
of the
reporting date, we have drawn $8.5 million of debt financing under a credit
line, as described below. During October 2002, we entered into an uncommitted
line of credit with our two largest shareholders, an affiliate of Elliott
Associates, L.P. (Manchester Securities Corporation) and Alexander Finance,
L.P.
This line initially provided up to $4 million to us. This line was uncommitted,
such that each new borrowing under the facility would be subject to the approval
of the lenders. Borrowings on this line bore an initial interest rate of
9.5%
and were collateralized by all the assets of the Company. Outstanding loans
under this agreement would be required to be repaid on a priority basis should
we receive new funding from other sources. Additionally, the lenders were
entitled to receive warrants to the extent funds were drawn down on the line.
The warrants bore a strike price of $0.20 per share of common stock and were
to
expire on April15, 2004. The credit line was to mature and be due, including
accrued interest thereon, on March 31, 2004. Due to a subsequent agreement
between the parties no warrants were issued with subsequent
borrowings.
According
to existing accounting pronouncements and SEC guidelines, we allocated the
proceeds of these borrowings between their debt and equity components. As
a
result of these borrowings during 2002, we recorded a non-cash charge of
$1.2
million through the outstanding term of the warrants (April, 2004). $250,000
and
$862,000 of that amount were recorded during 2004 and 2003, respectively.
These
warrants were valued at $1.2 million of the $2 million debt instrument based
on
a Black-Scholes valuation that included the difference between the value
of our
common stock and the exercise price of the warrants on the date of each warrant
issuance and a 30% discounted face value of the notes, leaving the remaining
$0.8 million as the underlying value of the debt. This $1.2 million was
amortized over the vesting period of the warrants (six quarters from the
fourth
quarter 2002 through the first quarter 2004).
During
October 2003, we entered into an agreement with our lenders to supplement
the
credit line with an additional $2 million, $1 million of which was drawn
immediately and $1 million subsequently drawn upon our request and subject
to
the approval of the lenders. This supplemental facility bore a 14% rate of
interest and was due October 31, 2004. The term of the previous credit line
was
not affected by this supplement, and as such the $4 million borrowed under
that
line, plus accrued interest, remained due March 31, 2004.
During
February 2004, the credit line was extended to a due date of April 2005,
with
interest after the initial periods to be charged at 14%. No warrants or other
inducements were issued with respect to this extension. Additionally, lenders
exercised their 10 million warrants during February 2004, agreeing to let
us use
the funds for general purposes as opposed to repaying debt.
During
July 2004, we and our lenders agreed to increase the aggregate loan commitments
under the credit line from $6,000,000 to $6,500,000. Simultaneously, we drew
the
remaining $1,500,000 of the financing.
During
November 2004, we and our lenders agreed to increase the line of credit to
up to
an additional $2 million to an aggregate loan commitment of $8,500,000, $1
million of which was drawn immediately by us with the remaining $1 million
drawable upon our request and subject to the approval of the lenders, which
occurred during January 2005.
During
February 2005, the credit line was extended until April 2006. Interest during
the extension period was to be charged at 9%. No warrants or other inducements
were issued with respect to this extension.
On
August
2, 2005, we and our lenders agreed to extend the due date from April 2006
until
August 2007, and the lenders also agreed to waive the Company’s obligation to
repay its debt with proceeds from an equity financing transaction with its
lenders, including affiliates, in August 2005. No warrants or other inducements
were issued as a result of this transaction.
2006
Convertible Debt
During
June 2006 we entered into a Securities Purchase Agreement (the “Agreement”) and
convertible notes (the “Notes”) with Alexander Finance, L.P., and Manchester
Securities Corporation L.P. (together, the “Lenders”), pursuant to which the
Lenders have agreed, to each loan us $2,500,000, or an aggregate of $5,000,000,
in convertible debt. The Lenders, including affiliates, are our two largest
shareholders and the lenders of the 2002 Credit Line referenced above. The
transaction was structured as a private placement of securities pursuant
to
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”)
and Rule 506 promulgated thereunder.
The
Notes
will mature on June 22, 2010 and bear an interest rate of 5% due at maturity.
Both the principal amount and any accrued interest on the Notes are convertible
into our common stock at a rate of $0.33 per share, subject to certain
anti-dilution adjustments. The Lenders have the right to convert the Notes,
both
principal and accrued interest, into shares of common stock at the rate of
$0.33
per share at any time. We have the right to redeem the Notes in full in cash
at
any time beginning two years after the date of the Agreement. The conversion
rate of the Notes will be subject to customary anti-dilution protections,
provided that the number of additional shares of common stock issuable as
a
result of changes to the conversion rate will be capped so that the aggregate
number of shares of common stock issuable upon conversion of the Notes will
not
exceed 19.99% of the aggregate number of shares of common stock presently
issued
and outstanding.
The
Notes
are secured on a first priority basis by all of our intangible and tangible
property and assets. Payment of the Notes is guaranteed by our two inactive
subsidiaries, Spectral Solutions, Inc. and Illinois Superconductor Canada
Corporation. The Agreement contains customary representations, warranties
and
covenants. We filed a registration statement covering the resale of the shares
of common stock issuable upon conversion of the Notes with the Securities
and
Exchange Commission Concurrently with the execution of the Agreement, the
Lenders have waived their right under the 2002 Credit Line to receive the
financing proceeds from the issuance of the Notes, allowing us to use the
funds
for product development or general working capital purposes. No fees were
paid
to any financial advisor, placement agent, broker or finder in connection
with
the transactions contemplated by the Agreement and the Notes.
Assuming
the Notes are held for the full four year term, 18,505,719 shares of common
stock would be required upon settlement, for both principal and interest.
This
amount is approximately 10% of the then approximately 186 million shares
of
common stock currently issued and outstanding. As of December 31, 2006, the
Lenders, including their affiliates, owned approximately 43% of the Company’s
outstanding shares. As a result of this transaction, the combined holdings
of
the Lenders would be approximately 48% of the Company’s outstanding common
stock.
9.
Income Taxes
The
Company has net operating loss carryforwards for tax purposes of approximately
$137,002,000 at December 31, 2006. The net operating loss carryforwards
expire in the following years:
Year
|
|
|
Amount
|
|
2007
|
|
|
974,000
|
|
2008
|
|
|
1,658,000
|
|
2009
|
|
|
3,973,000
|
|
2010
|
|
|
8,199,000
|
|
2011
|
|
|
11,953,000
|
|
2012
|
|
|
11,922,000
|
|
2018
|
|
|
11,146,000
|
|
2019
|
|
|
10,726,000
|
|
2020
|
|
|
15,501,000
|
|
2021
|
|
|
24,904,000
|
|
2022
|
|
|
13,982,000
|
|
2023
|
|
|
5,284,000
|
|
2024
|
|
|
9,758,000
|
|
2025
|
|
|
3,371,000
|
|
2026
|
|
|
3,651,000
|
|
Total
|
|
$
|
137,002,000
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Tax
benefit computed at the Federal statutory rate
|
34.00%
|
|
|
34.00%
|
|
|
34.00%
|
|
Increase
(decrease) in taxes due to:
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
-38.80%
|
|
|
-38.80%
|
|
|
-38.80%
|
|
State
taxes, net of Federal benefit
|
|
|
4.80%
|
|
|
4.80%
|
|
|
4.80%
|
|
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
52,061,000
|
|
$
|
50,490,000
|
|
Accrued
liabilities
|
|
|
1,223,000
|
|
|
840,000
|
|
Inventories
|
|
|
124,000
|
|
|
61,000
|
|
Property
and Equipment
|
|
|
893,000
|
|
|
893,000
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
54,301,000
|
|
|
52,284,000
|
|
Deferred
liabilities:
|
|
|
|
|
|
|
|
Patent
costs
|
|
|
(320,000)
|
|
|
(321,000)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
53,981,000
|
|
|
51,963,000
|
|
Valuation
allowance
|
|
|
(53,981,000)
|
|
|
(51,963,000)
|
|
Net
Deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
The
valuation allowance increased during 2006 and 2005 by $2,018,000 and $1,595,000,
respectively, due primarily to the increase in the net operating loss
carryforward. Based on the Internal Revenue Code and changes in the ownership
of
the Company, utilization of the net operating loss carryforwards will be
subject
to annual limitations.
10.
Leases
The
Company leases its manufacturing and office space, as well as some testing
and
office equipment. Under the terms of its two leases in Elk Grove Village,
IL,
which expire October 2014, the Company is responsible for proportionate real
estate taxes and operating expenses.
Future
minimum payments under the operating leases consist of the following at
December 31, 2006:
Year
|
|
|
Amount
|
|
2007
|
|
$
|
201,000
|
|
2008
|
|
|
205,000
|
|
2009
|
|
|
208,000
|
|
2010
|
|
|
211,000
|
|
2011
|
|
|
216,000
|
|
Rent
expense totaled $251,000, $151,000, and $260,000 for the years ended
December 31, 2006, 2005, and 2004, respectively.
11.
401(k) Plan
The
Company has a 401(k) plan covering all employees who meet prescribed service
requirements. The plan provides for deferred salary contributions by the
plan
participants and a Company contribution. Through 2005, Company contributions,
if
any, have been at the discretion of the Board of Directors and not to exceed
the
amount deductible under applicable income tax laws. No Company contribution
was
made for the years ended December 31, 2005 and 2004. Beginning in 2006, the
Company began providing a partial match of employee contributions, up to
a
maximum of 3% of employee salary.
12.
Litigation
There
was
no existing, pending, or threatened litigation at the time of this
filing.
13.
Segment Reporting
The
Company adopted SFAS No. 131 “Disclosures about Segments of an Enterprise
and Related Information”. SFAS No. 131 requires a business enterprise,
based upon a management approach, to disclose financial and descriptive
information about its operating segments. Operating segments are components
of
an enterprise about which separate financial information is available and
regularly evaluated by the chief operating decision maker(s) of an enterprise.
Under this definition, the Company operated as a single segment for all periods
presented.
14.
Selected Quarterly Financial Data (Unaudited)
A
summary
of selected quarterly information for 2006 and 2005 is as follows:
|
|
2006
Quarter Ended
|
|
|
|
March 31
|
|
June
30
|
|
|
September
30
|
|
December
31
|
|
|
|
(in thousands of U.S. dollars except per share amounts)
|
|
Net
Sales
|
|
$
|
1,326
|
|
$
|
3,446
|
|
$
|
6,433
|
|
$
|
3,792
|
|
Gross
Profit
|
|
|
495
|
|
|
1,387
|
|
|
2,583
|
|
|
1,464
|
|
Net
Loss
|
|
|
(1,700)
|
|
|
(1,231)
|
|
|
(167)
|
|
|
(1,267)
|
|
Loss
per Share
|
|
$
|
(0.01)
|
|
$
|
(0.01)
|
|
$
|
(0.00)
|
|
$
|
(0.01)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Quarter Ended
|
|
|
|
March 31
|
|
June
30
|
|
|
September
30
|
|
December
31
|
|
|
|
(in thousands of U.S. dollars except per share amounts)
|
|
Net
Sales
|
|
$
|
3,293
|
|
$
|
2,484
|
|
$
|
2,037
|
|
$
|
2,450
|
|
Gross
Profit
|
|
|
1,372
|
|
|
1,290
|
|
|
1,265
|
|
|
1,216
|
|
Net
Loss
|
|
|
(482)
|
|
|
(811)
|
|
|
(596)
|
|
|
(1,088)
|
|
Loss
per Share
|
|
$
|
0.00
|
|
$
|
(0.01)
|
|
$
|
0.00
|
|
$
|
(0.01)
|
|
As
an
after-market vendor, the Company’s revenue has fluctuated from quarter to
quarter, consistent with buying patterns of planning processes within wireless
telecommunications carriers. With the advent of significant projects such
as
data networks, funds are often reallocated between periods and thus diminish
the
pool of funds available for normal activities. The Company’s objective is to be
included in these projects, and thus realize a higher, more stable revenue
stream.
(a)
An
evaluation was performed under the supervision and with the participation
of the
Company’s management, including its Chief Executive Officer, or CEO, and Chief
Financial Officer, or CFO, of the effectiveness of the Company’s disclosure
controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) as of December 31, 2006. Based on that evaluation, the Company’s
management, including the CEO and CFO, concluded that the Company’s disclosure
controls and procedures are effective to ensure that information required
to be
disclosed by the Company in reports that it files or submits under the Exchange
Act, is recorded, processed, summarized and reported as specified in Securities
and Exchange Commission rules and forms.
(b)
There
were no significant changes in the Company’s internal control over financial
reporting identified in connection with the evaluation of such controls that
occurred during the Company’s most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
None.
The
information required by this item is incorporated herein by reference to
the
similarly named sections in our definitive proxy statement for the 2007 annual
meeting of shareholders.
Code
of Conduct
We
adopted a Code of Business Conduct and Ethics (“Code of
Ethics”) applicable to our principal executive officer and principal financial
and accounting officer and any persons performing similar functions. In
addition, the Code of Ethics applies to our employees, officers, directors,
agents and representatives. The Code of Ethics requires, among other things,
that our employees avoid conflicts of interest, comply with all laws and
other
legal requirements, conduct business in an honest and ethical manner, and
otherwise act with integrity and in our best interest.
The
Code of Ethics includes procedures for reporting violations of the Code of
Ethics. In addition, the Sarbanes-Oxley Act of 2002 requires companies to
have
procedures to receive, retain and treat complaints received regarding
accounting, internal accounting controls or auditing matters and to allow
for
the confidential and anonymous submission by employees of concerns regarding
questionable accounting or auditing matters. The Code of Ethics is intended
to
comply with the rules of the SEC and AMEX and includes these required
procedures. The Code of Ethics is available on our website at www.iscointl.com
(under “Investors”). We have also filed the Code of Ethics as Exhibit 14 to this
Annual Report on Form 10-K for the year ended December 31, 2006.
Item 11. Executive
Compensation
The
information required by this item is incorporated herein by reference to
the
similarly named sections in our definitive proxy statement for the 2007 annual
meeting of shareholders.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information required by this item is incorporated herein by reference to
the
similarly named sections in our definitive proxy statement for the 2007 annual
meeting of shareholders.
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
The
information required by this item is incorporated herein by reference to
the
similarly named sections in our definitive proxy statement for the 2007
annual
meeting of shareholders.
Item 14. Principal
Accountant Fees and Services
The
information required by this item is incorporated herein by reference to
the
similarly named sections in our definitive proxy statement for the 2007
annual
meeting of shareholders.
|
(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:
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2006,
2005, and
2004
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity (Net Capital Deficiency) for the Years
Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006,
2005, and
2004
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
2.
The following financial statement schedules of the Company are
filed as
part of this Form 10-K:
|
|
|
|
|
All
financial schedules are omitted because such schedules are not
required or
the information required has been presented in the aforementioned
financial statements.
|
|
|
|
|
3.
Exhibits are listed in the Exhibit Index to this Form
10-K.
|
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 28th day of
March,
2007.
ISCO
INTERNATIONAL
|
|
|
By:
|
|
/s/
JOHN THODE
|
|
|
John
Thode
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Amendment
has
been signed below by the following persons on behalf of the registrant and
in
the capacities indicated on the 28th day of March, 2007.
Signature
|
|
Title
|
|
|
/s/
JOHN THODE
|
|
Chief
Executive Officer and Director
(Principal
Executive Officer and Director)
|
John
Thode
|
|
|
|
|
/s/
FRANK CESARIO
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
Frank
Cesario
|
|
|
|
|
/s/
JAMES FUENTES
|
|
Director
and Chairman of the Board
|
James
Fuentes
|
|
|
|
|
/s/
AMR ABDELMONEM
|
|
Director
and Chief Technology Officer
|
Amr
Abdelmonem
|
|
|
|
|
/s/
GEORGE CALHOUN
|
|
Director
|
George
Calhoun
|
|
|
|
|
/s/
MICHAEL FENGER
|
|
Director
|
Michael
Fenger
|
|
|
|
|
/s/
RALPH PINI
|
|
Director
|
Ralph
Pini
|
|
|
|
|
/s/
TOM POWERS
|
|
Director
|
Tom
Powers
|
|
|
|
|
|
/s/
MARTY SINGER
|
|
Director
|
Marty
Singer
|
|
|
|
|
|
EXHIBIT
INDEX
Exhibit
Number
|
|
Description
of Exhibits
|
3.1
|
|
Certificate
of Incorporation of the Company, incorporated by reference to Exhibit
3.1
to the Company’s Registration Statement on Form S-3/A, filed with the
Securities and Exchange Commission (“SEC”) on August 13, 1998,
Registration No. 333-56601 (the “August 1998 S-3”).
|
|
|
3.2
|
|
By-Laws
of the Company, incorporated by reference to Exhibit 3.2 to Amendment
No.
3 to the Company’s Registration Statement on Form S-1, filed with the SEC
on October 26, 1993, Registration No. 33-67756 (the “IPO Registration
Statement”).
|
|
|
3.3
|
|
Certificate
of Amendment of Certificate of Incorporation of the Company, incorporated
by reference to Exhibit 3.3 to the IPO Registration
Statement.
|
|
|
3.4
|
|
Certificate
of Amendment of Certificate of Incorporation of the Company, incorporated
by reference to Exhibit 4.3 to the Company’s Registration Statement on
Form S-3/A, filed with the SEC on July 1, 1999, Registration No.
333-77337.
|
|
|
3.5
|
|
Certificate
of Amendment of Certificate of Incorporation of the Company filed
July 18,
2000, incorporated by reference to the Company’s registration statement on
Form S-8 filed August 7, 2000 (the August 2000 S-8”).
|
|
|
3.6
|
|
Certificate
of Amendment to Certificate of Incorporation filed with the Secretary
of
State of the State of Delaware on June 25, 2001, incorporated by
reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June
27, 2001.
|
|
|
3.7
|
|
Certificate
of Amendment to Certificate of Incorporation filed with the Secretary
of
State of the State of Delaware on December 16, 2004, incorporated
by
reference to Exhibit 3.7 to the Company’s Annual Report on Form 10-K filed
on March 31, 2005 (the “2004 10-K”).
|
|
|
4.1
|
|
Specimen
stock certificate representing common stock, incorporated by reference
to
Exhibit 4.1 to the IPO Registration Statement.
|
|
|
4.2
|
|
Rights
Agreement dated as of February 9, 1996 between the Company and
LaSalle
National Trust, N.A., incorporated by reference to the Exhibit
to the
Company’s Registration Statement on Form 8-A, filed with the SEC on
February 12, 1996.
|
|
|
4.3
|
|
The
SSI Replacement Nonqualified Stock Option Plan, incorporated by
reference
to Exhibit 4.1 to the Company’s Registration Statement on Form S-8, filed
with the SEC on November 3, 2000, Registration No.
333-49268.*
|
|
|
4.4
|
|
Amendment
No. 1 to the Rights Agreement between ISCO International, Inc.
(formerly
Illinois Superconductor Corporation) and LaSalle National Trust
Association (formerly known as LaSalle National Trust Company)
dated as of
February 9, 1996, incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the SEC on February 22,
2002.
|
|
|
10.1 *
|
|
Form
of Amended and Restated Director Indemnification Agreement, incorporated
by reference to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998.
|
|
|
10.2
|
|
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.
|
|
|
10.3
|
|
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.
|
|
|
10.4
|
|
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.
|
|
|
10.5
|
|
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.
|
|
|
10.6
|
|
License
Agreement dated January 31, 1990 between the Company and Northwestern
University, incorporated by reference to Exhibit 10.13 to the IPO
Registration Statement.
|
|
|
10.7
|
|
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.
|
|
|
10.8
|
|
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.
|
|
|
10.9
|
|
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.
|
|
|
10.10
|
|
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.
|
|
|
10.11 *
|
|
Form
of Officer Indemnification Agreement incorporated by reference
to Exhibit
10.17 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 1998.
|
|
|
10.12
|
|
Escrow
Agreement dated August 8, 2000 among the Company, Russell Scott,
III, as
stockholder representative, and American National Bank and Trust
Company,
as escrow agent, incorporated by reference to Exhibit 10.25 to
the
Company’s registration statement on Form S-2 filed September 7, 2000,
Registration No. 333-45406 (the “September S-2”).
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|
|
10.13
*
|
|
Employment
Agreement with Amr Abdelmonem dated January 1, 2001, incorporated
by
reference to Exhibit 10.5 to the Company’s Registration Statement on Form
S-3 filed on April 20, 2001.
|
|
|
10.14
|
|
ISCO
International, Inc. Amended and Restated 1993 Stock Option Plan,
incorporated by reference to Appendix C and D of the Company’s Definitive
Proxy materials filed on May 22, 2001.
|
|
|
10.15
|
|
Secured
9 1
/
2
%
Grid Note dated October 23, 2002 between ISCO International, Inc.
and
Alexander Finance L.P. in the principal amount of $1,752,400, incorporated
by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on October 24, 2002.
|
|
|
10.16
|
|
Secured
9 1
/
2
%
Grid Note dated October 23, 2002 between ISCO International, Inc.
and
Manchester Securities Corporation in the principal amount of $2,247,600,
incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed on October 24, 2002.
|
|
|
10.17
|
|
Registration
Rights Agreement dated October 23, 2002 between ISCO International,
Inc.
Manchester Securities Corporation, and Alexander Finance L.P.,
incorporated by reference to Exhibit 10.7 to the Company’s Current Report
on Form 8-K filed on October 24, 2002.
|
|
|
10.18
|
|
ISCO
International, Inc. 2003 Equity Incentive Plan, incorporated by
reference
to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on June
20, 2006.
|
|
|
10.19
|
|
Secured
14% Grid Note dated October 24, 2003 between ISCO International,
Inc. and
Alexander Finance, L.P. in the principal amount of $876,200, incorporated
by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K
filed on October 27, 2003.
|
|
|
10.20
|
|
Secured
14% Grid Note dated October 24, 2003 between ISCO International,
Inc. and
Manchester Securities Corporation in the principal amount of $1,123,800,
incorporated by reference to Exhibit 10.11 to the Company’s Current Report
on Form 8-K filed on October 27, 2003.
|
|
|
10.21
|
|
Secured
14% Grid Note dated July 23, 2004 between ISCO International, Inc.
and
Alexander Finance, L.P. in the principal amount of $386,900, incorporated
by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on July 28, 2004.
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|
|
10.22
|
|
Secured
14% Grid Note dated July 23, 2004 between ISCO International, Inc.
and
Manchester Securities Corporation in the principal amount of $113,100,
incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed on July 28, 2004.
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|
|
10.23
|
|
Stock
Purchase Agreement dated December 15, 2003 between ISCO International,
Inc. and Morgan & Finnegan, L.L.P., incorporated by reference to
Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on December
16, 2003.
|
|
|
10.24
|
|
Office/Service
Center Lease Agreement dated July 20, 2004 between ISCO International,
Inc. and D&K Elk Grove Industrial II, LLC, incorporated by reference
to Exhibit 10.24 to the 2004 10-K.
|
|
|
10.25
|
|
Third
Amended and Restated Loan Agreement dated November 10, 2004 between
ISCO
International, Inc., Manchester Securities Corporation, and Alexander
Finance L.P., incorporated by reference to Exhibit 10.1 to the
Company’s
Current Report on Form 8-K filed on November 12, 2004.
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|
|
10.26
|
|
Third
Amended and Restated Security Agreement dated November 10, 2004
between
ISCO International, Inc., Spectral Solutions, Inc., Illinois
Superconductor Canada Corporation, Manchester Securities Corporation,
and
Alexander Finance L.P., incorporated by reference to Exhibit 10.2
to the
Company’s Current Report on Form 8-K filed on November 12,
2004.
|
|
|
10.27
|
|
Secured
14% Grid Note dated November 10, 2004 between ISCO International,
Inc. and
Alexander Finance, L.P. in the principal amount of $1,100,000,
incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed on November 12, 2004.
|
|
|
10.28
|
|
Secured
14% Grid Note dated November 10, 2004 between ISCO International,
Inc. and
Manchester Securities Corporation in the principal amount of $900,000,
incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed on November 12, 2004.
|
|
|
10.29
|
|
Third
Amended and Restated Guaranty of Spectral Solutions, Inc. dated
November
10, 2004, incorporated by reference to Exhibit 10.5 to the Company’s
Current Report on Form 8-K filed on November 12, 2004.
|
|
|
10.30
|
|
Third
Amended and Restated Guaranty of Illinois Superconductor Canada
Corporation dated November 10, 2004, incorporated by reference
to Exhibit
10.6 to the Company’s Current Report on Form 8-K filed on November 12,
2004.
|
|
|
10.31*
|
|
Letter
Agreement dated January 6, 2005 between ISCO International, Inc.
and John
Thode (including Non-Qualified Stock Option Agreement) incorporated
by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed on January 12, 2005.
|
|
|
10.32
|
|
Amendment
to Loan Documents dated February 10, 2005 between ISCO International,
Inc., Manchester Securities Corporation, Alexander Finance, L.P.,
Spectral
Solutions, Inc. and Illinois Superconductor Corporation, incorporated
by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on February 15, 2005.
|
|
|
10.33
|
|
Securities
Purchase Agreement dated July 25, 2005 by and among ISCO International,
Inc. Alexander Finance, L.P., Grace Brothers LTD, Elliott Associates,
L.P., and Elliott International, L.P., .incorporated by reference
to
Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on July 26,
2005
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|
|
10.34
|
|
Amendment
to and Waiver Under Loan Documents dated July 25, 2005 by and among
ISCO
International, Inc., Manchester Securities Corporation and Alexander
Finance, L.P., incorporated by reference to Exhibit 10.2 to the
Company’s
Current Report of Form 8-K filed on July 26, 2005
|
|
|
10.35
|
|
Letter
Agreement dated August 5, 2005 by and among ISCO International,
Inc.,
Elliott Associates, L.P., and Elliott International, L.P., incorporated
by
reference to Exhibit 10.1 to the Company’s Current Report of Form 8-K
filed on August 9, 2005.
|
|
|
10.36*
|
|
Thode
Employment Agreement dated January 10, 2006 between ISCO International,
Inc. and John S. Thode, incorporated by reference to Exhibit 10.1
to the
Company’s Current Report of Form 8-K filed on January 17,
2006.
|
|
|
10.37*
|
|
Abdelmonem
Employment Agreement dated January 12, 2006 between ISCO International,
Inc. and Dr. Amr Abdelmonem, incorporated by reference to Exhibit
10.2 to
the Company’s Current Report of Form 8-K filed on January 17,
2006.
|
|
|
10.38*
|
|
Restricted
Stock Agreement dated January 12, 2006 by and between ISCO International,
Inc. and Dr. Amr Abdelmonem, incorporated by reference to Exhibit
10.3 to
the Company’s Current Report of Form 8-K filed on January 17,
2006.
|
|
|
10.39*
|
|
Employment
Agreement dated February 6, 2006 between ISCO International, Inc.
and
Frank J. Cesario, incorporated by reference to Exhibit 10.1 to
the
Company’s Current Report of Form 8-K filed on February 9,
2006.
|
|
|
10.40*
|
|
Summary
of Non-Employee Director Compensation Policy, incorporated by reference
to
Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on February
24, 2006.
|
|
|
|
10.41
|
|
Securities
Purchase Agreement by and among ISCO International, Inc., Manchester
Securities Corporation and Alexander Finance, L.P. dated June 22,
2006,
incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on June 28, 2006.
|
|
|
|
10.42
|
|
5%
Senior Secured Convertible Note by and between ISCO International,
Inc.
and Manchester Securities Corporation, incorporated by reference
to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 28,
2006.
|
|
|
|
10.43
|
|
5%
Senior Secured Convertible Note by and between ISCO International,
Inc.
and Alexander Finance, L.P., incorporated by reference to Exhibit
10.3 to
the Company’s Current Report on Form 8-K filed on June 28,
2006.
|
|
|
|
10.44
|
|
Registration
Rights Agreement by and among ISCO International, Inc., Manchester
Securities Corporation and Alexander Finance, L.P. dated June 22,
2006,
incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed on June 28, 2006.
|
|
|
|
10.45
|
|
Fourth
Amended and Restated Security Agreement by and among ISCO International,
Inc., Spectral Solutions, Inc., Illinois Superconductor Canada
Corporation, Manchester Securities Corporation and Alexander Finance,
L.P.
dated June 22, 2006, incorporated by reference to Exhibit 10.5
to the
Company’s Current Report on Form 8-K filed on June 28,
2006.
|
|
|
|
10.46
|
|
Fourth
Amended and Restated Guaranty of Spectral Solutions, Inc., incorporated
by
reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K
filed on June 28, 2006.
|
|
|
|
10.47
|
|
Fourth
Amended and Restated Guaranty of Illinois Superconductor Canada
Corporation, incorporated by reference to Exhibit 10.7 to the Company’s
Current Report on Form 8-K filed on June 28, 2006.
|
|
|
|
10.48
|
|
Amendment
to and Waiver Under the Third Amended and Restated Loan Agreement
by and
among ISCO International, Inc., Spectral Solutions, Inc., Illinois
Superconductor Canada Corporation, Manchester Securities Corporation
and
Alexander Finance, L.P. dated June 22, 2006, incorporated by reference
to
Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on June 28,
2006.
|
|
|
|
|
|
14
|
|
Code
of Ethics incorporated by reference to Exhibit 14 to the Company’s Annual
Report on Form 10-K filed on March 30, 2004.
|
|
|
21**
|
|
List
of subsidiaries: Spectral Solutions, Inc. and Illinois Superconductor
Canada Corporation
|
|
|
|
23.1**
|
|
Consent
of Grant Thornton LLP
|
|
|
31.1**
|
|
Certification
by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
|
|
31.2**
|
|
Certification
by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a)
as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
|
|
32**
|
|
Certification
Pursuant To 18 U.S.C Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
*
|
Management
contract or compensatory plan or arrangement required to be filed
as an
exhibit on this Form 10-K.
|
**
|
Filed
herewith.
|