form8k.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934.
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Date
of Report (Date of Earliest
Event Reported):
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November
13, 2007
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ISCO
INTERNATIONAL, INC.
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(Exact
Name of Registrant as Specified in
Charter)
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DELAWARE
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001-22302
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36-3688459
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(State
or Other Jurisdiction of Incorporation or Organization)
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(Commission
File Number)
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(I.R.S.
Employer Identification Number)
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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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847-391-9400
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(Registrant’s
Telephone Number, Including Area
Code)
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Not
Applicable
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(Former
Name or Former Address, if changed since last
report)
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Check
the
appropriate box below if the Form 8-K is intended to simultaneously satisfy
the
filing obligation of the registrant under any of the following
provisions:
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¨
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Written
communications pursuant to Rule 425 under the Securities
Act
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x
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Soliciting
material pursuant to Rule 14a-12 under the Exchange
Act
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¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange
Act
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¨
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange
Act
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Item 1.01
Entry into a Material Definitive Agreement
On
November 13, 2007, ISCO International, Inc. (“ISCO”), ISCO Illinois, Inc. (“ISCO
Illinois”), Clarity Communication Systems Inc. (“Clarity”) and James Fuentes
(for himself and as Representative of Clarity’s Rightsholders (as defined
below)) entered into an Agreement and Plan of Merger (the “Merger Agreement”),
pursuant to which ISCO would acquire Clarity (the “Merger”). The
following description of the Merger Agreement does not purport to be a complete
description and is qualified in its entirety by reference to the full text
of
the Merger Agreement, which is attached hereto as Exhibit 2.1 and is
incorporated herein by reference.
A
special
committee of disinterested members of our Board of Directors reviewed and
negotiated the terms of the Merger, received a fairness opinion by an
independent financial advisor with respect to the financial terms of the Merger,
and recommended to the full Board of Directors (excluding Mr. Fuentes) that
it
approve the Merger. In addition, in accordance with the rules of the
American Stock Exchange (“AMEX”), the Audit Committee of ISCO’s Board of
Directors reviewed the terms of the Merger and recommended to the full Board
of
Directors that it approve the Merger. The full Board of Directors
(excluding Mr. Fuentes) has approved the Merger on the terms and subject to
the
conditions of the Merger Agreement.
In
addition, the board of directors and the sole stockholder of Clarity have
approved the Merger on the terms and subject to the conditions of the Merger
Agreement.
Under
the
terms and subject to the conditions set forth in the Merger Agreement, ISCO
Illinois, Inc., a newly formed subsidiary, would merge with and into Clarity,
with Clarity being the surviving corporation, in accordance with the applicable
provisions of Illinois law. The Merger is intended to qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code
of 1986, as amended, and be tax-free to the ISCO stockholders.
Clarity
is owned by a single stockholder, Mr. Fuentes. However, certain
employees, former employees, advisors and consultants (collectively, the
“Rightsholders”) hold rights to receive either cash or the same consideration
Mr. Fuentes or Clarity receives in the event of a change in control of Clarity
pursuant to Clarity’s Non-Qualified Phantom Stock Plan, as amended (the “Phantom
Plan”). In addition, pursuant to separate At-Risk Compensation Plans
(collectively, the “At-Risk Plan”), Mr. Fuentes and certain employees each
agreed to suspend receipt of his or her salary for employment with Clarity
in
exchange for an amount in cash equal to his or her accrued suspended salary
(the
“Suspended Salary”) plus an equal amount to be paid in equity securities (the
“Enhanced Benefits”) received in an acquisition of Clarity. The
Suspended Salary would be paid by Clarity through its line of credit prior
to
closing of the Merger.
Pursuant
to the Merger Agreement, ISCO would issue up to an aggregate of 40 million
shares (the “Shares”) of ISCO common stock in exchange for all of Clarity’s
stock, which is held entirely by Mr. Fuentes, and satisfaction of the rights
under the Phantom Plan and the Enhanced Benefits under the At-Risk
Plan. Of the total number of Shares ISCO may issue in the Merger, 20
million Shares would be issuable upon closing (subject to adjustment if the
amount of total liabilities on Clarity’s closing balance sheet, subject to
certain exceptions, exceeds $1.5 million), 2.5 million Shares would be issuable
on each of the first and second anniversaries of closing (the “Time-Based
Shares”) (subject any indemnification claims pursuant to the Merger Agreement),
and 3.75 million Shares would be issuable on each of the first dates on which
ISCO’s equity market capitalization first equals or exceeds $125,000,000,
$175,000,000, $225,000,000 and $275,000,000 within the three year period after
closing of the Merger for at least 40 of the 45 consecutive trading days ISCO’s
market capitalization equals such thresholds (the “Market-Based
Shares”). The exact number of Shares issuable to Mr. Fuentes and the
Rightsholders would depend on, among other things, whether any of the Time-Based
Shares are used to satisfy indemnification claims or whether one or more
Rightsholders forfeit their shares because their employment with ISCO following
the closing of the Merger is terminated. In the event, one or more
Rightsholders forfeit their Shares prior to the closing of the Merger, the
Shares allocated to Mr. Fuentes and the remaining Rightsholders will be adjusted
upward on a pro-rata basis. Mr. Fuentes would be allocated
approximately 65% of the Shares. No single Rightsholder would be
allocated more than 2.75% of the Shares. Assuming Mr. Fuentes is
issued all of the shares he would be eligible to receive in connection with
the
Merger, Mr. Fuentes would beneficially own approximately 11% of ISCO’s
outstanding common stock on a fully-diluted basis. ISCO will pay off
the amount of Clarity’s outstanding line of credit at closing.
In
addition, ISCO would agreed to reimburse certain professional advisors of
Clarity up to an aggregate of $375,000 for fees and expenses related to the
Merger.
Completion
of the Merger is subject to various customary closing conditions, including,
among others, (i) receiving the approval of ISCO stockholders to approve
the Merger and the issuance of the Shares as well as certain related proposals
(the “Stockholder Proposals”), including amending ISCO’s certificate of
incorporation to increase the number of shares authorized for issuance and
amending ISCO’s 2003 Equity Incentive Plan to allow Rightsholders who would
become employees of ISCO following the closing to receive registered shares,
(ii) the Shares will have been approved for listing on AMEX, (iii)
execution of definitive loan documents and receipt of funds in the aggregate
amount of $1,500,000, which ISCO expects to receive from one of its existing
lenders, (iv) there will not have been a material adverse event affecting
Clarity, (v) the accuracy of the parties’ respective representations and
warranties, (vi) the parties will have in all material respects performed or
complied with all agreements and covenants required by the Merger Agreement,
and
(vii) the absence of any governmental action challenging or seeking to
prohibit the Merger.
The
Merger Agreement contains customary representations, warranties and covenants
of
ISCO and Clarity, including, among others, covenants (i) regarding the
conduct Clarity’s business in the ordinary course during the interim period
between the execution of the Merger Agreement and completion of the Merger,
(ii) prohibition of certain kinds of transactions during this interim
period, (iii) requiring ISCO to hold a stockholder meeting to approve the
Stockholder Proposals and (iv) to obtain agreements from the Clarity
Rightsholders. Clarity would also subject to a “no shop” restriction
on its ability to solicit alternative acquisition proposals, provide information
and engage in discussion with third parties, except under limited
circumstances.
ISCO,
its
officers, directors, employees, stockholders, advisers, agents, affiliates
(including the surviving corporation), successors, heirs, permitted assigns
and
representatives (each, an “ISCO Indemnified Party”) would be entitled to
indemnification in the event of losses resulting from, among other things,
breaches of Clarity’s representations and warranties, failure to perform
covenants under the Merger Agreement and Clarity tax obligations solely and
exclusively as provided in the Merger Agreement, other than for
fraud. The ISCO Indemnified Parties would not be entitled to
indemnification until the cumulative amount of all losses pursuant to
indemnification claims exceed $150,000, after which the ISCO Indemnified Parties
would only be entitled to any amounts that exceed $150,000.
The
length of time in which to bring an indemnification claim and the amount by
which an ISCO Indemnified Party may be indemnified would be subject to certain
caps as follows:
(i)
for
breaches of representations (the “General Representations”) other than Two-Year
Representations or Three Year Representations (as those terms are defined
below), any losses entitling an ISCO Indemnified Party to indemnification would
be satisfied out of up to an aggregate of 2,000,000 Time-Based
Shares. After the Time-Based Shares that vest one year after Closing
(the “First Time-Based Shares”) are distributed, the ISCO Indemnified Parties
would have no further right to receive indemnification with respect to General
Representations;
(ii)
ISCO
Indemnified Parties’ right to receive indemnification for breaches of
representations relating to due organization, no conflict with law, no conflict
with agreements, necessary consents and brokers (collectively, the “Two-Year
Representations”) would be satisfied out of the Time-Based Shares; provided that
(x) a portion of the First Time-Based Shares will also be available to satisfy
other indemnification rights of the ISCO Indemnified Parties, (y) once the
First
Time-Based Shares are distributed, the ISCO Indemnified Parties would have
no
further right to use such First Time-Based Shares to satisfy indemnification
claims with respect to the Two-Year Representations, and (z) once the Time-Based
Shares are fully distributed, the ISCO Indemnified Parties would have no further
right to receive indemnification with respect to the Two-Year Representations;
and
(iii)
ISCO Indemnified Parties’ right to receive indemnification for (x) breaches of
representations relating to Clarity’s capitalization, authority, no conflict
with charter documents, and taxes, (y) claims by current and former security
holders, and (z) tax obligations would be satisfied first out of the Time-Based
Shares. If the Time-Based Shares are not sufficient to satisfy these
claims, Mr. Fuentes would be obligated to satisfy the remaining amounts of
any
such claims (A) brought in the first year after closing of the Merger up to
an
aggregate liability equal to the lesser of $3,000,000 and 75% of Mr. Fuentes’
Share Value (as defined in the Merger Agreement) less the aggregate value of
Time-Based Shares already used to satisfy prior indemnification claims (the
“First Year Cap”), (B) brought in the second year after closing of the Merger up
to an aggregate liability equal to the lesser of $2,000,000 and 50% of Mr.
Fuentes’ Share Value less the aggregate value of Time-Based Shares already used
to satisfy prior indemnification claims (the “Second Year Cap”) and (C) brought
in the third year after closing of the Merger up to an aggregate liability
equal
to the lesser of $1,000,000 and 25% of Mr. Fuentes’ Share Value less the
aggregate value of Time-Based Shares already used to satisfy prior
indemnification claims (the “Third Year Cap”). If and to the extent
that any of the First Year Cap, the Second Year Cap or the Third Year Cap were
met, then ISCO Indemnified Parties would not be entitled to any further
indemnification.
The
Merger Agreement, which has been included to provide investors with information
regarding its terms, contains representations and warranties of each of ISCO
and
Clarity. The assertions embodied in those representations and warranties were
made for purposes of the Merger Agreement and are subject to qualifications
and
limitations agreed by the respective parties in connection with negotiating
the
terms of the Merger Agreement. In addition, certain representations and
warranties were made as of a specific date, may be subject to a contractual
standard of materiality different from what might be viewed as material to
stockholders, or may have been used for purposes of allocating risk between
the
respective parties rather than establishing matters as facts. Investors should
read the Merger Agreement together with the other information concerning ISCO
that ISCO publicly files in reports and statements with the Securities and
Exchange Commission.
Related
Agreements
In
connection with the Merger, ISCO intends to enter into certain other transaction
documents, including employment and registration rights agreements with Mr.
Fuentes. Pursuant to the proposed employment agreement, Mr. Fuentes
would report to ISCO’s Chief Executive Officer (“CEO”) to assist the CEO in the
coordination and integration of the surviving corporation’s operations with the
combined entity and perform such other duties as the CEO may assign to Mr.
Fuentes. During the term of the employment agreement, Mr. Fuentes’
base salary would be $240,000 per year. The term of the employment
agreement would be for two years; provided, however, that upon the
eighteen-month anniversary of the start of his employment and each day
thereafter the term could be extended for one additional day unless and until
ISCO provides written notice to Mr. Fuentes that such extension would not
occur. If Mr. Fuentes’ employment were to cease due to a termination
by ISCO other than for Cause or by Mr. Fuentes for Good Reason (as those terms
are defined in the employment agreement), then subject to Mr. Fuentes’
compliance with certain covenants, Mr. Fuentes would receive (i) monthly
severance payments equal to 1/12th of his base salary for the lesser of: (x)
three months or (y) the number of whole months remaining in the term as of
the
date of his termination and (ii) any accrued but unpaid base salary and any
accrued but unused vacation as of the date of Mr. Fuentes’
termination. Mr. Fuentes intends to continue to serve on ISCO’s Board
at least for the remainder of his term, though he will not be considered
independent under AMEX rules and no longer serve on any Board
committees.
In
addition, ISCO intends to enter into a registration rights agreement with Mr.
Fuentes and certain Clarity Rightsholders pursuant to which ISCO would agree
to
register the Shares they receive in connection with the Merger for resale under
the Securities Act of 1933, as amended (the “Securities Act”), on a Registration
Statement on Form S-3, or other available form for resale by those individuals,
to be filed by ISCO within 30 days after the closing of the Merger, subject
to
certain conditions.
Item
3.02. Unregistered Sales of Equity Securities.
If
the
Merger is consummated, the issuance of Shares in the Merger to Mr. Fuentes
and
to certain Rightsholders will be a sale of unregistered securities under the
Securities Act. The information set forth in Item 1.01 above is incorporated
herein by reference.
Item
9.01. Financial Statements, Pro Forma Financial Information and
Exhibits
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(d)
Exhibit No.
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Description
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2.1
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Agreement
and Plan of Merger dated November 13, 2007, by and among ISCO
International, Inc., ISCO Illinois, Inc., Clarity Communication Systems
Inc. and James Fuentes (for himself and as Representative of the
Clarity
Rightsholders).*
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*
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Except
for Exhibits B and C to the Merger Agreement, all other exhibits
and
schedules have been omitted pursuant to Item 601(b)(2) of Regulation
S-K. ISCO will furnish the omitted exhibits to the Securities and
Exchange
Commission upon request by the
Commission.
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Forward-Looking
Statements
This
Current Report on Form 8-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements involve a number of risks and
uncertainties. Because ISCO wants to provide investors with
meaningful and useful information, this news release contains, and incorporates
by reference, certain "forward-looking statements" that reflect the ISCO's
current expectations regarding the future results of operations, performance
and
achievements of the ISCO. ISCO has tried, wherever possible, to identify these
forward-looking statements by using words such as "anticipates," "believes,"
"estimates," “looks,” "expects," "plans," "intends" and similar
expressions. These statements reflect ISCO’s current beliefs and are
based on information currently available to it. Accordingly, these statements
are subject to certain risks, uncertainties and contingencies, which could
cause
ISCO's actual results, performance or achievements to differ materially from
those expressed in, or implied by, such statements. These factors include,
among
others, the following: market acceptance of ISCO’s technology; the spending
patterns of wireless network operators in connection with the build out of
2.5G
and 3G wireless systems; ISCO’s ability to complete the proposed Merger and
successfully integrate the combined entity as well as ISCO’s ability to retain
key customers, suppliers and employees of Clarity after the Merger; ISCO’s
ability to obtain financing in the future if necessary; ISCO's history of net
losses and the lack of assurance that ISCO's earnings will be sufficient to
cover fixed charges in the future; uncertainty about ISCO’s ability to compete
effectively against better capitalized competitors and to withstand downturns
in
its business or the economy generally; continued downward pressure on the prices
charged for ISCO’s products due to the competition of rival manufacturers of
front-end systems for the wireless telecommunications market; the timing and
receipt of customer orders; ISCO's ability to attract and retain key personnel;
ISCO’s ability to protect its intellectual property; the risks of foreign
operations; and the risks of legal proceedings.. A more complete description
of
these risks, uncertainties and assumptions is included in ISCO's filings with
the Securities and Exchange Commission, including those described under the
heading "Risk Factors" ISCO’s Annual Report on Form 10-K filed by ISCO with the
Securities and Exchange Commission. You should not place undue
reliance on any forward-looking statements. ISCO undertakes no
obligation to release publicly the results of any revisions to any such
forward-looking statements that may be made to reflect events or circumstances
after the date of this Report or to reflect the occurrence of unanticipated
events.
Additional
Information and Where to Find It
In
connection with the proposed Merger between ISCO and Clarity, ISCO intends
to
file with the SEC a proxy statement and other relevant materials. The
final proxy statement will be mailed to the stockholders of
ISCO. INVESTORS AND SECURITY HOLDERS OF ISCO ARE URGED TO READ THE
PROXY STATEMENT AND THE OTHER RELEVANT MATERIALS WHEN THEY BECOME AVAILABLE
BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT ISCO AND THE
MERGER. The proxy statement and other relevant materials (when they
become available), and any other documents filed by ISCO with the SEC, may
be
obtained free of charge at the SEC’s web site at www.sec.gov. In
addition, investors and security holders may obtain free copies of the documents
(when they are available) filed with the SEC by ISCO by contacting ISCO
International, Inc., 1001 Cambridge Drive, Elk Grove Village, IL.
Participants
in the Proposed Merger Solicitation
ISCO
and
its executive officers and directors may be deemed to be participants in the
solicitation of proxies from its stockholders in favor of the Proposed Merger.
Information regarding ISCO’s directors and executive officers and their
ownership of ISCO common stock is set forth in ISCO’s Annual Report on Form 10-K
for the year ended December 31, 2006, which was filed with the SEC on March
30,
2007. Investors and security holders may obtain more detailed
information regarding the direct and indirect interests of ISCO and its
executive officers and directors in the proposed Merger by reading the proxy
statement regarding the proposed Merger when it becomes available.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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ISCO
INTERNATIONAL,
INC.
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Date: November
19, 2007
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By:
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/s/ Frank
Cesario
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Frank
Cesario
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Chief
Financial Officer
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Index
of Exhibits
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(d)
Exhibit No.
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Description
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Agreement
and Plan of Merger dated November 13, 2007, by and among ISCO
International, Inc., ISCO Illinois, Inc., Clarity Communication Systems
Inc. and James Fuentes (for himself and as Representative of the
Clarity
Rightsholders)
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______________
*
Except
for Exhibits B and C to the Merger Agreement, all other exhibits and schedules
have been omitted pursuant to Item 601(b)(2) of Regulation S-K. ISCO will
furnish the omitted exhibits to the Securities and Exchange Commission upon
request by the Commission.