-----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, WPiABF+vcSl+qmMsnFl/5ERyRvcMM84iu6qEof2SFmmr2yl3EHVVDtWSHvH3saAb aqcRjhWDyeZqA58iwjh1MA== 0000950137-99-002104.txt : 19990617 0000950137-99-002104.hdr.sgml : 19990617 ACCESSION NUMBER: 0000950137-99-002104 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990616 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS SUPERCONDUCTOR CORPORATION CENTRAL INDEX KEY: 0000888693 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 363688459 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-22302 FILM NUMBER: 99647114 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-K/A 1 FORM 10-K AMENDMENT #1 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 _________ FORM 10-K/A (AMENDMENT NO. 1 TO FORM 10-K) (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ COMMISSION FILE NUMBER 0-22302 ILLINOIS SUPERCONDUCTOR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-3688459 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 451 KINGSTON COURT MT. PROSPECT, ILLINOIS 60056 (847) 391-9400 (Address and telephone number of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Common Stock, par value $0.001 per share Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] On March 25, 1999, 12,557,344 shares of the registrant's Common Stock were outstanding. The aggregate market value on March 25, 1999 of the registrant's Common Stock held by non-affiliates of the registrant was $14,127,012. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's definitive proxy statement for the annual meeting of stockholders held on June 9, 1999 are incorporated by reference in Part III of this Form 10-K. This Amendment to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 is being provided to amend and restate Item 7 and to include a new auditor's consent as Exhibit 23. ================================================================================ 2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in this Form 10-K contains forward-looking statements which involve certain risks, uncertainties and contingencies which could cause the Company's actual results, performance or achievements to differ materially from those expressed, or implied, by such statements. See the italicized language on the introductory page of this Form 10-K. RESULTS OF OPERATIONS Years Ended December 31, 1998 and 1997 The Company's net revenues increased $2,204,796 from $1,038,134 in 1997 to $3,242,930 in 1998, as a result of increased sales of the Company's radio frequency ("RF") front-end products. An increase in units sold contributed $2,400,000 to the increase in net revenues. This positive variance was partially offset by $195,000 in lower revenues as a result of price reductions. The increase in units sold was in the Company's RangeMaster(R) product line. Price decreases occurred in both the SpectrumMaster(R) and RangeMaster(R) product lines. Sales of the Company's transmit products were not material. Net revenues in the fourth quarter of 1998 were $1,504,497, as compared to $282,384 for the fourth quarter of 1997. This revenue growth was the result of the increased acceptance of the Company's products by operators, price reductions that the Company implemented in October 1998 and a large scale deployment of the Company's products by one of the largest cellular operators in the U.S. However, due to a decrease in customer orders and shipments, the Company's revenues in the first quarter of 1999 were significantly lower than revenues for the fourth quarter of 1998. Management is unable to predict whether this decline in revenues will continue in each of the remaining fiscal quarters of 1999. Historically, the Company has experienced quarterly fluctuations in revenues as its products attempt to gain market acceptance while being subject to the lengthy purchase processes of its customers. Net revenues from product sales represent gross product shipments less reserves for potential returns. Such reserves are based on the Company's historical product return rates. All of the net revenues in 1997 and 1998 were from commercial product sales and leases. The Company has concentrated its efforts on its commercial product development programs and does not expect revenues to increase dramatically unless and until it ships a significantly larger amount of its commercial products. Net revenues derived from international sales of the Company's products in 1997 and 1998 were in U.S. Dollars and were not material. Net revenues derived from leased products in 1997 and 1998 were in U.S. Dollars and were not material. Such products were leased to certain of the Company's customers for testing purposes, and such products were returned to the Company after completion of the tests. Cost of product sales was $7,047,347 for the year ended December 31, 1998, as compared to $4,401,077 for the year ended December 31, 1997. The cost of net product sales for 1998 and 1997 consisted of direct material, labor and overhead costs associated with the products that were shipped during the year, plus approximately $375,000 and $529,000, respectively, of costs, which consisted primarily of allocated overhead costs, incurred to produce units in ending finished goods inventory that exceed net realizable value. Due to low utilization levels and excess capacity in the Company's manufacturing facility, cost of net product sales exceeded net revenues for the years ended December 31, 1998 and 1997. The Company expects the cost of net product sales to exceed net revenues until it manufactures and ships a significantly higher amount of its commercial products. The Company's internally funded research and development expenses decreased $1,197,235 from $4,132,019 in 1997 to $2,934,784 in 1998. Research and development costs were reduced during 1998, as compared to 1997, primarily due to a reduction in personnel and operating costs during 1998 resulting from the successful development of the Company's core products, the abandonment of certain commercially unfeasible products, and the greater efficiency of the Company's employees as they became more experienced. The Company expects to continue reducing its research and development expenses during 1999. 1 3 Selling and marketing expenses decreased to $1,847,680 in 1998 from $1,918,044 in 1997. This decrease was due to lower advertising, recruiting and consulting expenses during 1998 as compared to 1997. The decrease was partially offset by increased salary and freight expenses in 1998. General and administrative expenses increased $597,784 from $2,772,274 in 1997 to $3,370,058 in 1998. The increase in general and administrative expenses was due primarily to higher consultant, legal and office expenses during 1998 as compared to 1997. Investment income increased $99,957 from $254,781 in 1997 to $354,738 in 1998. This increase was due to a higher average cash, cash equivalent and investment balance during 1998. Interest expense increased $10,229,950 from $17,969 in 1997 to $10,247,919 in 1998. This increase was primarily due to $10,101,401 of non-cash interest charges related to the Company's Senior Convertible Notes due May 15, 2002 (the "Notes") issued in May 1998. See "Liquidity and Capital Resources." The Notes were issued with a non-detachable conversion feature that was "in-the-money" on the date of issuance, and a portion of the proceeds equal to the intrinsic value of the conversion feature (equal to $9,918,750, and calculated as the difference between the conversion price and the quoted market price of the Company's Common Stock on the date of issuance multiplied by the number of shares into which the Notes are convertible) was allocated to additional paid-in capital, thus creating a discount to the debt. This discount was recognized as a charge to interest expense using the effective interest method over the period from the date of issuance to the date the Notes first became convertible (August 15, 1998 for up to one-half of the original principal amount and November 15, 1998 for the remaining principal amount). In addition, a portion of the proceeds equal to the fair value of the warrants issued in conjunction with the Notes (equal to $1,230,000, and calculated using the Black-Scholes Approximation Formula) was allocated to additional paid-in capital, thus creating an additional discount to the debt. This discount will be recognized as a charge to interest expense using the effective interest method over the four year term of the Notes. Years Ended December 31, 1997 and 1996 The Company's net revenues increased $828,312 from $209,822 in 1996 to $1,038,134 in 1997, as a result of increased sales of the Company's RF front-end products. Sales volumes increased in both the RangeMaster(R) and SpectrumMaster(R) product lines. Sales of the Company's transmit products were not material. Pricing variance had no material impact on net revenues. Net revenues from product sales represent gross product shipments less reserves for potential returns. Such reserves are based on the Company's historical product return rates. A government contract accounted for $53,122 of the Company's net revenues in 1996, while all of the net revenues in 1997 were from commercial product sales and leases. Cost of net product sales was $4,401,077 for the year ended 1997, as compared to $0 for the year ended 1996. The cost of net product sales for 1997 consisted of direct material, labor and overhead costs associated with the products that were shipped during the year, plus approximately $529,000 of costs, which consist primarily of allocated overhead costs, incurred to produce units in ending finished goods inventory that exceed net realizable value. With the introduction of the SpectrumMaster(R) Ultra product into the Company's product line, management determined that there was little marketability for an early SpectrumMaster(R) filter product model. Management decided, therefore, to write down the costs associated with this early SpectrumMaster(R) inventory. Consequently, a total of $309,000 was charged to cost of net product sales in the fourth quarter of 1997. Due to low utilization levels and excess capacity in the Company's manufacturing facility, cost of net product sales exceeded net revenues for the year ended December 31, 1997. The Company's internally funded research and development expenses decreased $2,290,902 from $6,422,921 in 1996 to $4,132,019 in 1997. Research and development costs were reduced during 1997, as compared to 1996, primarily due to the initiation of full-scale manufacturing activities during 1997. Costs associated with manufacturing activities during 1997 were recorded as manufacturing overhead expenses and were charged as cost 2 4 of product sales. Costs associated with the development of manufacturing activities and processes during 1996 were recorded as research and development expenses during that period. Additional reductions of research and development costs in 1997 as compared to 1996 are due to reductions in personnel, materials and other operating costs. Selling and marketing expenses increased to $1,918,044 in 1997 from $1,834,640 in 1996. This increase was due to the addition of sales personnel and expanded product marketing and advertising efforts during 1997 as compared to 1996. The increase was partially offset by reduced consulting costs during 1997. General and administrative expenses decreased $518,536 from $3,290,810 in 1996, to $2,772,274 in 1997. The decrease in general and administrative expenses was due primarily to lower administrative personnel, consultant and legal expenses during 1997 as compared to 1996. Investment income decreased $249,130 from $503,911 in 1996 to $254,781 in 1997. This decrease was due to a lower average cash equivalent and investment balance during 1997. Interest expense decreased $11,633 from $29,602 in 1996, to $17,969 in 1997. The decrease is primarily due to a lower average outstanding debt balance during 1997. IMPACT OF YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has established a task force comprised of several employees to evaluate the Company's status with respect to the Year 2000 Issue. The task force has identified the following areas as possibly being affected by the Year 2000 issue: (1) IT and non-IT systems, (2) manufacturing applications and (3) third-party relationships. For each of these areas, the Company is in the process of identifying and assessing specific software, equipment and systems which are potentially susceptible to the Year 2000 Issue. The Company expects to develop and implement corrective actions to ensure that by September 30, 1999 its software, equipment and systems will function properly with respect to dates in the year 2000 and thereafter. The Company believes the total cost of such year 2000 compliance activities will not be material. The Company believes that it has no material exposure to contingencies related to the Year 2000 Issue for the products that it has sold to date. The Company processes its transactions and applications utilizing a network of personal computers. In addition, the Company's telephone system, fax machines, payroll, alarm systems and other miscellaneous systems utilize computer equipment and software. The Company is identifying which software and equipment needs to be upgraded. Based on its assessment to date, the Company does not believe that significant modifications or replacement of its software systems will be required to be year 2000 compliant. Most of the software used by the Company in operational applications has been acquired within the past 18 months and is year 2000 compliant. The Company's manufacturing activities rely on machine tools and test stations, each of which contain embedded technology. The Company has identified the particular hardware and software systems used in such manufacturing applications. The Company is communicating orally and in writing with suppliers of these systems and based on such conversations believes the manufacturing applications are year 2000 compliant. The Company relies on third party suppliers for raw materials, utilities and other key supplies and services. The Company, therefore, recognizes that it is vulnerable to third party suppliers that fail to remediate their own Year 3 5 2000 Issues. The Company is communicating orally and in writing with its significant suppliers to determine their year 2000 compliance status. The Company is also dependent upon its customers for sales and cash flow. The Company does not currently have any formal information concerning the year 2000 compliance status of its customers, but has received indications that most of the Company's customers are working on year 2000 compliance. The Company's most reasonably likely worst case scenario with respect to the Year 2000 Issue is that (1) its manufacturing applications may malfunction and (2) third party suppliers of raw materials and utilities and customers may be unable to remediate their own Year 2000 Issues. In such scenario, the Company could experience manufacturing interruptions, delays in distribution of its products and reduced sales. This would have a material adverse effect on the Company's operations. The Company currently has no contingency plan in event such reasonably likely worst case scenario occurs. The Company currently believes that the Year 2000 Issue will not pose significant operational problems for the Company. However, if all Year 2000 Issues are not properly identified or remediated on a timely basis, the Company's results of operations or relationships with customers and suppliers may be materially adversely affected. There can be no guarantee that the systems of other companies on which the Company relies will be timely converted or that their failure to do so would not have a material adverse effect on the Company's operations. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company's cash, cash equivalents and investments, including certain restricted investments, were $2,489,942, reflecting a decrease of $1,157,257 from $3,647,199 at December 31, 1997. $680,696 in principal amount of promissory notes, plus $138,355 of accrued interest thereon, from certain stockholders is outstanding as of December 31, 1998. These notes were due on April 30, 1997. The Company has filed a lawsuit to collect on the outstanding balance, but there can be no assurance when and if such promissory notes will be repaid. See "Item 3. Legal Proceedings." The continuing development of and expansion in sales of the Company's RF filter product lines will require continued commitment of substantial funds to undertake continued product development and manufacturing activities and to market and sell its RF front-end products. The actual amount of the Company's future funding requirements will depend on many factors, including: the amount and timing of future revenues, the level of product marketing and sales efforts to support the Company's commercialization plans, the magnitude of its research and product development programs, the ability of the Company to improve product margins, the cost of additional plant and equipment for manufacturing and the costs involved in protecting the Company's patents or other intellectual property. On May 15, 1998, the Company entered into a Securities Purchase Agreement (the "Agreement") with various parties. Under the terms of the Agreement, the Company issued and sold $10,350,000 in aggregate principal amount of the Notes and issued warrants to purchase 4,140,000 shares of the Company's Common Stock (the "Warrants"). The Notes bear interest at 2% per annum, payable in cash or in shares of the Company's Common Stock at the Company's option, and mature on May 15, 2002. Holders of the Notes may convert the principal amount, plus accrued and unpaid interest, if any, into shares of the Company's Common Stock at a fixed conversion price of $1.50 per share. Conversions were not permitted during the first 90 days following the issuance of the Notes and were limited to one-half of the original principal amount during the period from 91 to 180 days after the issuance of the Notes. On and after May 15, 2000, the Company may redeem all or a portion of the Notes at a redemption price equal to the principal amount plus accrued interest thereon, if any, under certain conditions. The Warrants have an exercise price of $3.75 per share and expire on May 15, 2001. The Agreement contains several covenants which limit the Company's ability to incur additional indebtedness and to create any lien, pledge, or encumbrance on any assets of the Company. 4 6 On March 31, 1999, the Company privately issued an aggregate of $3.3 million initial principal amount of Senior Convertible Notes due May 15, 2002 (the "New Notes") and issued warrants to purchase 1,320,000 shares of the Company's Common Stock (the "New Warrants"). The New Notes bear interest at the rate of 6% per annum, payable in cash or shares of Common Stock at the Company's option, and mature on May 15, 2002. Holders of the New Notes may convert the principal amount, plus accrued and unpaid interest, if any, into shares of the Company's Common Stock at a fixed conversion price of $1.125 per share. On and after May 15, 2000, the Company may redeem all or a portion of the New Notes at a redemption price equal to the principal amount plus accrued interest thereon, if any, under certain conditions. The New Warrants have an exercise price of $1.4625 per share and expire on March 31, 2002. In the event that the Company fails to achieve break-even or positive operating income during the second quarter of 2000, the New Notes, together with the Notes, may become immediately due and payable unless the holders thereof agree to modify or waive such provision. Concurrently with the issuance of the New Notes, the Company amended certain terms of $5.5 million in aggregate principal amount of the Notes (the "Amended Notes") and the Warrants exercisable for an aggregate of 2,200,000 shares of the Company's Common Stock (the "Amended Warrants") issued in connection therewith. The Amended Notes were amended to bear interest at the rate of 6% per annum, payable in cash or shares of the Company's Common Stock at the Company's option, and the fixed conversion price for the Amended Notes was reduced from $1.50 to $1.125 per share. The exercise price of the Amended Warrants was reduced from $3.75 to $1.4625 per share. Despite the recently completed issuance and sale of New Notes, the Company believes that during the fourth quarter of 1999 it will require substantial additional funds to finance its product development, manufacturing and marketing activities. The Company's strategy to generate sufficient working capital to fund its operations and cash requirements in the future includes advancing market penetration with OEMs and customers in overseas markets, building strong and enduring relationships with existing customers and expanding product offerings to meet varying customer needs, reducing product costs through economies of scale in material purchases, refinement of the manufacturing processes, and the further implementation of an overhead reduction program. The Company is actively seeking financing in order to obtain working capital to continue its operations according to its current operating plan through the fourth quarter of 1999 and beyond. If the Company is unable to obtain adequate funds when needed in the future, the Company would be required to substantially delay, scale-back or eliminate the manufacturing, marketing or sales of one or more of its products or research and development programs, or may be required to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or potential products that the Company would not otherwise relinquish. 5 7 SIGNATURE 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. ILLINOIS SUPERCONDUCTOR CORPORATION By: /s/ EDWARD W. LAVES ---------------------------------------- Edward W. Laves, Ph.D. President and Chief Executive Officer Dated: June 15, 1999 6 8 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 23. Consent of Ernst & Young LLP. 7 EX-23 2 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements Form S-8 No. 33-88716, Form S-8 No. 333-06003, Form S-3 No. 333-02846, Form S-3 No. 333-29797, Form S-3 No. 333-36089, Form S-3 No. 333-41731, Form S-3 No. 333-56601 and Form S-3 No. 333-77337 of our report dated February 26, 1999 (except Note 3, as to which the date is March 31, 1999), with respect to the financial statements and schedule of Illinois Superconductor Corporation included in the Annual Report on Form 10-K for the year ended December 31, 1998, as amended by the Form 10-K/A. /s/ Ernst & Young LLP ---------------------- Ernst & Young LLP Chicago, Illinois June 15, 1999 -----END PRIVACY-ENHANCED MESSAGE-----