-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jiamx6dH+c5v9m2q+pmm6YFB+fs5QnWob6Kws1baSvn0oug1Lq/fvNnllsCf2O93 k+zaA1htW1zQjTi+Kcruiw== 0000950137-97-003814.txt : 19971117 0000950137-97-003814.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950137-97-003814 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS SUPERCONDUCTOR CORPORATION CENTRAL INDEX KEY: 0000888693 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 363688459 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22302 FILM NUMBER: 97720196 BUSINESS ADDRESS: STREET 1: 451 KINGSTON CT CITY: MOUNT PROSPECT STATE: IL ZIP: 60056 BUSINESS PHONE: 8473919400 MAIL ADDRESS: STREET 1: 451 KINGSTON COURT CITY: MT PROSPECT STATE: IL ZIP: 60056 10-Q 1 QUARTERLY REPORT DATED 9/30/97 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 30, 1997 Commission File Number: 0-22303 ILLINOIS SUPERCONDUCTOR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-3688459 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 451 KINGSTON COURT, MOUNT PROSPECT, IL 60056 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (847) 391-9400 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 ____ ____ As of November 11, 1997 there were outstanding 5,179,993 shares of common stock, par value $.001, of the registrant. 2 ILLINOIS SUPERCONDUCTOR CORPORATION QUARTER ENDED SEPTEMBER 30, 1997 INDEX
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements ........................................................................... 3 Condensed Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 ......................3 Condensed Statements Of Operations (unaudited) for the three months ended September 30, 1997 and 1996, and the nine months ended September 30, 1997 and 1996 and the cumulative period from October 18, 1989 (date of inception) to September 30, 1997 ................................. 4 Condensed Statements Of Cash Flows (unaudited) for the nine months ended September 30, 1997 and 1996 and the cumulative period from October 18, 1989 (date of inception) to September 30, 1997. ................................................................................ 5 Notes To Condensed Financial Statements ................................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................... 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings .............................................................................. 10 Item 2. Changes in Securities .......................................................................... 11 Item 3. Default Upon Senior Securities ................................................................. 11 Item 4. Submission of Matters to a Vote of Security Holders ............................................ 11 Item 5. Other Information .............................................................................. 11 Item 6. Exhibits and Reports on Form 8-K .............................................................. 12 SIGNATURES ............................................................................................ 13 List of Exhibits: Exhibit 27 - Financial Data Schedule ......................................................... 14
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ILLINOIS SUPERCONDUCTOR CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
SEPTEMBER 30, 1997 DECEMBER 31, 1996 --------------------- ---------------------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 543,193 $5,188,047 Investments 500,313 500,313 Inventories 1,621,273 653,696 Accounts receivable 647,404 130,752 Prepaid expenses and other 88,220 436,052 ---------- ---------- Total current assets 3,400,402 6,908,860 Property and equipment Property and equipment 8,130,757 7,863,337 Less: accumulated depreciation 3,266,727 2,120,533 ---------- ---------- Net property and equipment 4,864,030 5,742,804 Other assets: Restricted certificates of deposit 350,000 350,000 Patents and trademarks, net 531,124 386,832 ---------- ---------- 881,124 736,832 ---------- ---------- Total assets $9,145,556 $13,388,496 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 721,643 $1,126,009 Accrued liabilities 570,423 494,507 Current portion of long-term debt 85,827 80,421 ---------- ---------- Total current liabilities 1,377,893 1,700,937 Long term debt, less current portion 26,574 91,618 Deferred occupancy costs 89,883 75,813 Stockholders' equity: Preferred stock ($.001 par value); 100,000 shares authorized, 600 shares of Series B convertible preferred stock issued and outstanding at September 30, 1997 ($3,000,000 aggregate liquidation preference) and none at December 31, 1996, 300 shares of Series C Convertible preferred stock issued and outstanding at September 30, 1997 ($1,500,000 aggregate liquidation preference) and none at December 31, 1996 1 - Common stock ($.001 par value); 15,000,000 shares authorized and 5,173,338 and 5,023,352 issued and outstanding at September 30, 1997 and December 31, 1996 5,173 5,023 Additional paid-in capital 43,929,187 39,019,421 Notes receivable from stockholders (698,508) (1,142,754) Deficit accumulated during the development stage (35,584,647) (26,361,562) ---------- ---------- Total stockholders' equity 7,651,206 11,520,128 ---------- ---------- Total liabilities and stockholders' equity $9,145,556 $13,388,496 ========== ===========
NOTE: The condensed balance sheet at December 31, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See Notes to Condensed Financial Statements 3 4 ILLINOIS SUPERCONDUCTOR CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
OCTOBER 18, 1989 THREE MONTHS ENDED NINE MONTHS ENDED (DATE OF INCEPTION) SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30, ----------------------- ----------------------- ------------------- 1997 1996 1997 1996 1997 ---------- ---------- --------- ---------- ---------- Net revenues: Development stage product sales $ 216,750 $ 25,000 $ 755,750 $ 31,700 $ 950,162 Government contracts - - - $ 53,122 $ 800,215 ---------- --------- ---------- --------- ---------- Total revenues $ 216,750 $ 25,000 $ 755,750 $ 84,822 $1,750,377 Costs and expenses: Cost of revenues 996,668 25,000 3,071,428 76,625 3,746,654 Research and development 982,385 1,927,813 3,383,807 4,293,952 17,598,818 Selling and marketing 487,464 564,795 1,509,107 1,345,932 4,577,791 General and administrative 708,404 843,738 2,188,361 2,457,158 13,128,766 ---------- --------- ---------- --------- ---------- Total costs and expenses 3,174,921 3,361,346 10,152,703 8,173,667 39,052,029 ---------- --------- ---------- --------- ---------- 2,958,171 3,336,346 9,396,953 8,088,845 37,301,652 Other income (expense): Investment income 49,150 108,690 187,472 429,284 1,845,722 Interest expense (2,843) (4,422) (13,605) (23,342) (128,718) ---------- --------- ---------- --------- ---------- 46,307 104,268 173,867 405,942 1,717,004 ---------- --------- ---------- --------- ---------- Net loss $2,911,864 $3,232,078 $9,223,086 $7,682,903 $35,584,648 ========== ========== ========== ========== =========== Dividends attributable to preferred stock $ 55,625 - $ 55,625 - ========== ========== ========= ========== Net loss plus preferred stock dividend requirement $2,967,489 $3,232,078 $9,278,711 $7,682,903 ========== ========== ========= ========== Net loss per common share $ (0.58) $ (0.70) $ (1.83) $ (1.72) ========== ========== ========= ========== Weighted average number of common shares outstanding 5,133,953 4,621,358 5,069,634 4,465,630 ========== ========== ========= ==========
See Notes to Condensed Financial Statements 4 5 ILLINOIS SUPERCONDUCTOR CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED OCTOBER 18, 1989 SEPTEMBER 30, (DATE OF INCEPTION) -------------------------------- TO SEPTEMBER 30, 1997 1996 1997 ------------- ------------ -------------------- OPERATING ACTIVITIES: Net loss $(9,223,086) $(7,682,903) $(35,584,648) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,151,439 795,753 3,438,797 Loss on disposal of property and equipment - - 15,569 Loss (gain) on available-for-sale securities - (24,614) 26,764 Net amortization of bond (premiums) discounts - (19,418) (20,356) Payment of patent costs (149,536) (107,246) (554,292) Note receivable from officers - - 179,400 Provision for interest on notes payable - - 17,398 Stock compensation expense - 21,809 408,998 Cancellation of stock options - (5,440) (58,136) Changes in operating assets and liabilities (1,449,785) (55,801) (973,956) ----------- ---------- ----------- Net cash used in operating activities (9,670,968) (7,077,860) (33,104,462) INVESTING ACTIVITIES: Purchases of available-for-sale securities - (29,541,563) (54,697,200) Sales of available-for-sale securities - - 10,053,685 Maturities of available-for-sale securities - 29,350,083 44,136,794 (Increase) decrease in certificates of deposit, net - 462,500 (350,000) Acquisition of property and equipment (267,421) (3,448,795) (8,019,347) Decrease in notes receivable from officers - - (179,400) ----------- ---------- ----------- Net cash used in investing activities (267,421) (3,177,775) (9,055,468) FINANCING ACTIVITIES: Payments of organization costs - - (64,495) Proceeds from notes payable to stockholders - - 550,000 Proceeds from issuance of preferred stock - net of offering costs 4,071,120 - 8,978,620 Proceeds from issuance of common stock - net of offering costs (8,537) 8,333,478 27,042,767 Exercise of stock options 66,361 217,946 455,025 Exercise of warrants 780,973 1,200,049 5,396,935 Collection of notes receivable from stockholders 444,246 - 444,246 Proceeds from bank loan - 92,182 742,700 Payments on long-term debt (60,628) (505,061) (631,289) Payments under capital lease obligations - - (211,386) ----------- ---------- ----------- Net cash provided by financing activities 5,293,535 9,338,594 42,703,123 ----------- ---------- ----------- Increase (decrease) in cash and cash equivalents (4,644,855) (917,041) 543,193 Cash and cash equivalents at beginning of period 5,188,047 953,093 - ----------- ---------- ----------- Cash and cash equivalents at end of period $ 543,193 $ 36,052 $ 543,193 =========== ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 13,605 $ 23,342 $ 109,974 =========== ========== =========== Equipment capitalized under lease agreements - - $ 211,386 =========== ========== =========== Conversion of notes payable and accrued interest to preferred and common stock - - $ 567,398 =========== ========== ===========
See Notes to Condensed Financial Statements 5 6 ILLINOIS SUPERCONDUCTOR CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the financial statements and footnotes thereto included in Illinois Superconductor Corporation's annual report on Form 10-K for the year ended December 31, 1996. NOTE 2 - NET LOSS PER COMMON SHARE Net loss per common share is computed based on the weighted average number of common shares outstanding as applied to the Company's net loss plus its preferred stock dividend requirement (see "Item. 2 -- Changes in Securities"). In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. However, Statement 128 has no impact on the Company's calculation because common equivalent shares are not included in the net loss per share calculations since the effect of their inclusion would be antidilutive. NOTE 3 - INVESTMENTS Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company's investments are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of income taxes, reported in a separate component of stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. The following is a summary of available-for-sale securities at September 30, 1997:
AVAILABLE-FOR-SALE SECURITIES ----------------------------------------------- AMORTIZED COST FAIR VALUE ------------------- ---------------- U. S. Treasury securities and obligations of U.S. government agencies $ 500,313 $ 500,313 ============= ==============
NOTE 4 - INVENTORIES Inventories at September 30, 1997 consist of the following: Raw materials... $ 436,196 Work in process. $ 810,077 Finished product $ 375,000 ---------- $1,621,273 ==========
6 7 NOTE 5 - CAPITAL STOCK On June 6, 1997, the Company issued 600 shares of Series B Convertible Preferred Stock for $5,000 per share, or a total of $3 million. In connection with this sale, the Company issued a warrant to purchase 62,500 shares of Common Stock at $14.8125 per share expiring on June 6, 2001. On each of August 29, 1997 and October 29, 1997, the Company issued 300 shares of Series C Convertible Preferred Stock for a total of $3 million. Also, on October 29, 1997, the Company issued 700 shares of Series G Convertible Preferred Stock for $5,000 per share, or a total of $3.5 million. In connection with this sale, the Company issued warrants to purchase an aggregate of 34,782 shares of Common Stock at $10.0625 per share expiring on October 29, 2001. Dividends on the Series B, Series C and Series G Convertible Preferred Stock are payable at the rate of 5% per annum, and are payable in cash or shares of Common Stock at the option of the Company. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BECAUSE THE COMPANY WANTS TO PROVIDE INVESTORS WITH MORE MEANINGFUL AND USEFUL INFORMATION, THIS QUARTERLY REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT REFLECT THE COMPANY'S CURRENT EXPECTATIONS REGARDING THE FUTURE RESULTS OF OPERATIONS AND PERFORMANCE AND ACHIEVEMENTS OF THE COMPANY. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO THE SAFE HARBOR CREATED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE COMPANY HAS TRIED, WHEREVER POSSIBLE, TO IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT" AND SIMILAR EXPRESSIONS. THESE STATEMENTS REFLECT THE COMPANY'S CURRENT BELIEFS AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO IT. A NUMBER OF IMPORTANT FACTORS COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR 1997 AND BEYOND TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THIS QUARTERLY REPORT. THESE IMPORTANT FACTORS INCLUDE, WITHOUT LIMITATION, THE COMPANY'S ABILITY TO OBTAIN ADDITIONAL FINANCING; DEMAND FOR, AND ACCEPTANCE OF, THE COMPANY'S PRODUCTS; THE COMPANY'S ABILITY TO MANUFACTURE COMMERCIAL QUANTITIES OF THE COMPANY'S PRODUCTS ON AN EFFICIENT AND COST-EFFECTIVE BASIS; COMPETITION BY RIVAL MANUFACTURERS OF FILTERS FOR THE WIRELESS TELECOMMUNICATIONS MARKET; CHANGES IN TECHNOLOGY; COSTS AND OTHER EFFECTS OF LEGAL PROCEEDINGS AND CLAIMS; CHANGES IN, AND THE COMPANY'S ABILITY TO ATTRACT AND RETAIN, KEY PERSONNEL; GENERAL BUSINESS CONDITIONS OF, AND GROWTH IN, THE WIRELESS TELECOMMUNICATIONS INDUSTRY; AND GENERAL ECONOMIC CONDITIONS. A MORE COMPLETE DESCRIPTION OF THESE RISKS, UNCERTAINTIES AND ASSUMPTIONS, ARE INCLUDED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW EVENTS OR UNCERTAINTIES. Illinois Superconductor Corporation (the "Company") was founded in 1989 by ARCH Development Corporation, an affiliate of the University of Chicago, to commercialize superconducting technologies primarily for the wireless telecommunications industry. Since its inception, the Company has been in the development stage, engaging in research and product development activities, both internally funded and under government-funded contracts and cooperative agreements, recruiting technical and administrative personnel, and raising capital. Throughout its development stage, the Company's primary focus has been to use its proprietary high temperature superconductor (HTS) materials technologies to develop radio frequency (RF) filter products designed to enhance the quality, capacity, coverage and flexibility of cellular and personal communications services (PCS) wireless telecommunications services. During the second half of 1996, the Company made the first commercial sales of its RF filter products. The Company expects that government research contracts will not be a significant source of revenue in the future. The Company has incurred cumulative losses of $35,584,648 from inception to September 30, 1997. RESULTS OF OPERATIONS The Company's net revenues increased to $216,750 and $755,750 for the three and nine month periods ended September 30, 1997, from $25,000 and $84,822 for the same periods in 1996. Net revenues for the periods represent gross product shipments less reserves for potential product returns. Such reserves are based on the Company's historical product return rates. All of the net revenues for the nine month period ended September 30, 1997 were derived from sales of the Company's RF filter products, while net revenues for the same period in 1996 consisted primarily of work performed under a government research and development contract which was completed in March 1996. Cost of revenues increased to $996,668 and $3,071,428 for the three and nine month periods ended September 30, 1997, from $25,000 and $76,625 for the same periods in 1996. Cost of revenues for the three and nine month periods ended September 30, 1997 consisted of direct materials and labor costs associated with the products sold during the periods, along with manufacturing overhead costs incurred during the periods. Due to low utilization levels and excess capacity within the Company's manufacturing facility, cost of revenues were in excess of the revenue recorded during these periods. The Company expects the cost of revenues to exceed net revenues until it manufactures and ships a significantly higher amount of its commercial products. Cost of revenues for the three month period ended September 30, 1996 consisted primarily of material and labor costs associated with the products sold. Cost of revenues for the nine month period ended September 30, 1996 consisted primarily of research and development expenses associated with a government contract, and included engineering personnel, material and overhead costs. 8 9 The Company's internally funded research and development expenses for the three and nine month periods ended September 30, 1997 were $982,385 and $3,383,807, respectively, compared to $1,927,813 and $4,293,952 for the same periods in 1996. In the three and nine month periods ended September 30, 1997, the Company incurred research and development expenditures to expand its SpecTrumMaster(R) and RangeMaster(TM) product lines, develop its transmit filter/duplexer products and improve its manufacturing processes. The Company's expenditures in the three and nine month periods ended September 30, 1996 consisted of costs attributable to the development of the SpectrumMaster(R) product line, including expenses for personnel, materials and services, support to the commercial field trial programs ongoing during these periods, and development and implementation of the Company's manufacturing processes and facilities. The Company's reduced research and development expenditures in the three and nine month periods ended September 30, 1997, compared to the same periods in 1996, are due to the initiation of manufacturing activities, with the costs associated with these activities recorded as manufacturing overhead costs as part of cost of revenues, and are due to reduced personnel, material and other operating costs compared to the same periods in 1996. Also, funding under a government contract of $200,445, which was completed in the first quarter of 1996 was offset against the related research and development costs. All research and development costs expended to date for development of new products and enhancements to existing products have been expensed as incurred. Selling and marketing expenses for the three and nine month periods ended September 30, 1997 were $487,464 and $1,509,107, respectively, compared to $564,795 and $1,345,932 for the same periods in 1996. The increase in selling and marketing expenses for the nine month period ended September 30, 1997 was attributable to the addition of sales personnel and related costs, as well as expanded product marketing and advertising efforts, and was partially offset by decreases in field trial and outside consultant expenses. The decrease in selling and marketing expenses in the three month period ended September 30, 1997, compared to the same period in 1996, was primarily attributable to the lower field trial and outside consultant expenses and was partially offset by an increase in sales personnel and related costs. General and administrative expenses for the three and nine month periods ended September 30, 1997 were $708,404 and $2,188,361, respectively, compared to $843,738 and $2,457,158 for the same periods in 1996. The decrease in general and administrative expenses for the nine month period ended September 30, 1997 was due primarily to decreases in administrative personnel costs, consultant and legal expenses, and was partially offset by increases in expenses resulting from the termination of a public stock offering in May 1997. The decrease in general and administrative expenses for the three month period ended September 30, 1997, compared to the same period in 1996 was primarily attributable to reductions in consultant, occupancy and other administrative costs. Other income, which consists of investment income net of interest expense, for the three and nine month periods ended September 30, 1997 decreased to $46,307 and $173,867 from $104,268 and $405,942 for the same periods in 1996. This decrease was primarily due to a reduced average investment portfolio during the periods. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has financed its operations primarily through public and private equity financings which have raised approximately $48.9 million, net of related expenses. At September 30, 1997, the Company's cash, cash equivalents and investments, including certain restricted investments, was approximately $1,394,000, reflecting a decrease of approximately $4,644,000 from $6,038,000 at December 31, 1996. During 1995 and 1996, the Company financed a portion of its leasehold improvements and capital equipment additions through various borrowings approximating $743,000, of which $112,000 was outstanding at September 30, 1997. This remaining balance is due in monthly installments through May 1999 and bears interest at 8.5% per annum. Approximately $699,000 in principal amount of promissory notes from certain stockholders is currently outstanding. This receivable was due on April 30, 1997. The Company has filed a lawsuit to collect on the outstanding balance, but there can be no assurance when and if such promissory notes will be repaid. (See "Legal Proceedings"). 9 10 The Company to date has generated limited revenues from product sales. The development and expansion of the Company's RF filter product lines will require continued commitment of substantial funds to conduct product development and field trial activities, to expand manufacturing activities and to market its RF filter products. The actual amount of the Company's future funding requirements will depend on many factors, including: the amount and timing of future revenues, the level of product marketing and sales efforts to support the Company's commercialization plans, the magnitude of its research and product development programs, the cost of additional plant and equipment for manufacturing and the costs involved in protecting the Company's patents or other intellectual property. As a result of its funding requirements, on June 6, 1997, the Company entered into a Preferred Stock Purchase Agreement for up to an aggregate of $15 million, which is available in up to five tranches (two of which have been received to date). Under this Preferred Stock Purchase Agreement, on June 6, 1997, the Company issued 600 shares of Series B Convertible Preferred Stock for $3 million. Subsequently, on each of August 29, 1997 and October 29, 1997, under the terms of the Preferred Stock Purchase Agreement, the Company issued 300 shares of Series C Convertible Preferred Stock for a total of $3 million. (See "Changes in Securities".) Cumulative dividends accrued on the Series B and Series C Convertible Preferred Stock from the respective dates of issuance through September 30, 1997 at the rate of 5% per annum were $55,625. Also, on October 29, 1997, the Company entered into another Preferred Stock Purchase Agreement whereby it issued 700 shares of Series G Convertible Preferred Stock for $3.5 million. The Series G Convertible Preferred Stock also accrues dividends at the rate of 5% per annum. Without consideration of any funds under government contracts or cooperative agreements, revenues from sales of its products, or further proceeds from financings, the Company believes that its available cash, cash equivalents and investments are sufficient to finance the Company's current operating plans through at least the end of May 1998. Pursuant to the June 6, 1997 Preferred Stock Purchase Agreement, the Company has the option to issue up to $9 million of additional convertible preferred stock in up to three additional tranches, if certain conditions are satisfied by the Company or waived by the purchaser. As a result, there can be no assurance that the Company will receive any or all of the remaining $9 million. If remaining funds under the June 6, 1997 Preferred Stock Purchase Agreement or other funds are not available on acceptable terms, the Company may be required to dramatically alter its operating plans and delay, scale-back or eliminate the manufacturing, marketing or sales of one or more of its products or one or more of its research and development programs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not Applicable PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 10, 1997, the Company filed a complaint against Sheldon Drobny; Howard L. "Buzz" Simons, joint tenant with Aric and Corey Simons; Aaron Fischer; Stewart Shiman; Sharon D. Gonsky, d/b/a SDG Associates; Gregg Rosenberg; Stacey Rosenberg; Merrill Weber & Co., Inc.; Drobny/Fischer Partnership, an Illinois general partnership; and Rueben Rosenberg (collectively, the "Borrowers") and Paradigm Venture Investors, L.L.C. (the "Guarantor") in the Circuit Court of Cook County, Illinois, County Department, Law Division. The Complaint seeks to enforce the terms of loans made to the Borrowers by the Company and evidenced by promissory notes dated December 12, 1996, in the aggregate principal amount of $698,508 and the guarantee by the Guarantor of the Borrowers' obligations under these promissory notes. The Borrowers' notes were issued to the Company in connection with the Borrowers' exercise of warrants to purchase shares of the Company's common stock (the "Common Stock") in December 1996. On september 30, 1997, the borrowers and the guarantor responded to the company's complaint and filed a counterclaim alleging that they exercised the warrants in reliance on the Company's alleged fraudulent representations to one of the Borrowers concerning a third-party's future underwriting of a secondary public offering of the Common Stock. The counterclaim seeks an amount of damages which the Borrowers allege "cannot currently be determined." The Company regards the fraud claim as without factual or legal merit and the Company intends to vigorously pursue this litigation. Accordingly, on October 21, 1997, the Company filed a motion to dismiss the Borrowers' counterclaim. Following completion of the submission of briefs, the motion will be heard and decided at a date to be scheduled by the court. 10 11 On June 5, 1996, Craig M. Siegler filed a complaint against the Company in the Circuit Court of Cook County, Illinois, County Department, Chancery Division. The complaint alleged that, in connection with the Company's private placement of securities in November 1995, the Company breached and repudiated an oral contract with Mr. Siegler for the issuance and sale by the Company to Mr. Siegler of 370,370.37 shares of Common Stock, plus warrants (immediately exercisable at $12.96 per share) to purchase an additional 370,370.37 shares of Common Stock, for a total price of $4,000,000. The remedy sought by Mr. Siegler was a sale to him of such securities on the terms of the November 1995 private placement. On August 16, 1996, the Company's motion to dismiss Mr. Siegler's complaint was granted with leave to amend. On September 19, 1996, Mr. Siegler's motion for reconsideration was denied. On October 9, 1996, Mr. Siegler filed his First Amended Verified Complaint and Jury Demand, seeking a jury trial and money damages equal to the difference between $8,800,000 (370,370.37 shares at $10.80 per share and 370,370.37 shares at $12.96 per share) and 740,740.74 multiplied by the highest price at which the Common Stock traded on The Nasdaq Stock Market between November 20, 1995 and the date of judgment. Mr. Siegler also preserved his claim for specific performance for purposes of appeal. On November 1, 1996, the case was transferred to the Circuit Court of Cook County, Illinois, County Department, Law Division. The Company's Answer was filed on November 21, 1996 and discovery has commenced. The Company believes that the suit is without merit and intends to continue to defend itself vigorously in this litigation. However, if Mr. Siegler prevails in this litigation and is awarded damages in accordance with the formula described above, such judgment would have a material adverse effect on the Company's operating results and financial condition. ITEM 2. CHANGES IN SECURITIES On August 29, 1997, the Company issued 300 shares of Series C Convertible Preferred Stock (the "Series C Stock") to Southbrook International Investments, Ltd. ("Southbrook") for $5,000 per share, or a total of $1.5 million. Dividends on the Series C Stock are payable at the rate of 5% per annum and are payable in cash or shares of Common Stock at the option of the Company. The Series C Stock is convertible into Common Stock at a conversion price equal to the lesser of (a) $6.5625 or (b) 101% of the average of the lowest per share market value for the five consecutive trading days during the 60 trading days immediately preceding the date of conversion. The Series C Stock conversion ratio is subject to adjustment. The sale of the Series C stock was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering, in that the transaction involved the issuance and sale by the Company of its securities to a financially sophisticated institution which represented that it was aware of the Company's activities and business and financial condition, and which represented that it acquired such securities for investment purposes for its own account and not for distribution. All certificates representing the Series C Stock have been legended. The Company registered for resale under the Act the shares of Common Stock into which the Series C Stock issued on August 29, 1997 is convertible, which registration statement was declared effective by the Securities and Exchange Commission on September 26, 1997. ITEM 3. DEFAULT UPON SENIOR SECURITIES - Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable ITEM 5. OTHER INFORMATION Ora E. Smith, former Chief Executive Officer and current Chairman of the Board of Directors of the Company, has assumed responsibility for the Company's sales activities until a successor is named. Robert A. Riccitelli, formerly vice president, sales and marketing has left the Company. 11 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS Exhibit 27 - Financial Data Schedule B. REPORTS ON FORM 8-K Reports on Form 8-K filed by the Company during the quarter ended September 30, 1997 were filed by the Company on the following dates: July 8, 1997, reporting Items 5 and 7 July 16, 1997, reporting Items 5 and 7 August 4, 1997, reporting Items 5 and 7 September 3, 1997, reporting Items 5 and 7 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ILLINOIS SUPERCONDUCTOR CORPORATION Registrant Date: November 13, 1997 By: /s/ Edward W. Laves, Ph.D. ----------------------------------------- Edward W. Laves, Ph.D. President and Chief Executive Officer Date: November 13, 1997 By: /s/ Stephen G. Wasko ----------------------------------------- Stephen G. Wasko Senior Vice President Corporate Development and Chief Financial Officer 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 543,193 500,313 647,404 0 1,621,273 3,400,402 8,130,757 3,266,727 9,145,556 1,377,893 0 1 0 5,173 7,646,032 9,145,556 755,750 755,750 3,071,428 3,071,428 7,081,275 0 13,605 (9,223,086) 0 (9,223,086) 0 0 0 (9,223,086) ($1.83) ($1.83)
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