<PAGE> 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: March 31, 1997
Commission File Number: 0-22303
ILLINOIS SUPERCONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-3688459
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 May 13, 1997 there were outstanding 5,050,987 shares of common
stock, par value $.001, of the registrant.
<PAGE> 2
ILLINOIS SUPERCONDUCTOR CORPORATION
QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
INDEX
PAGE
PART I - FINANCIAL INFORMATION ----
<S> <C>
Item 1. Financial Statements .............................................................. 3
Condensed Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 ....... 3
Condensed Statements Of Operations (unaudited) for the three months ended March 31,
1997 and 1996 and the Cumulative Period from October 18, 1989 (date of inception)
to March 31, 1997 ................................................................ 4
Condensed Statements Of Cash Flows (unaudited) for the three months ended March 31,
1997 and 1996 and the Cumulative Period from October 18, 1989 (date of inception)
to March 31, 1997 ................................................................ 5
Notes To Condensed Financial Statements ................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................................. 9
Item 2. Changes in Securities ............................................................. 9
Item 3. Default Upon Senior Securities .................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ............................... 9
Item 5. Other Information ................................................................. 9
Item 6. Exhibits and Reports on Form 8-K .................................................. 9
SIGNATURES ................................................................................. 10
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,868,277 $ 5,188,047
Investments 500,313 500,313
Inventories 517,994 653,696
Accounts receivable 343,322 130,752
Prepaid expenses and other 459,081 436,052
-------------------- ---------------------
Total current assets 4,688,987 6,908,860
-------------------- ---------------------
Property and equipment, net 5,415,679 5,742,804
Other assets:
Restricted certificates of deposit 350,000 350,000
Patents and trademarks, net 399,185 386,832
-------------------- ---------------------
749,185 736,832
-------------------- ---------------------
Total assets $ 10,853,851 $ 13,388,496
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,105,559 $ 1,126,009
Accrued liabilities 701,048 494,507
Current portion of long-term debt 82,142 80,421
-------------------- ---------------------
Total current liabilities 1,888,749 1,700,937
Long term debt, less current portion 70,400 91,618
Deferred occupancy costs 80,503 75,813
Stockholders' equity:
Common stock ($.001 par value); 15,000,000
shares authorized and 5,024,766 and 5,023,352
issued and outstanding at March 31, 1997 and
December 31, 1996, respectively 5,025 5,023
Additional paid-in capital 39,025,823 39,019,421
Notes receivable from stockholders (716,321) (1,142,754)
Deficit accumulated during the development stage (29,500,328) (26,361,562)
-------------------- ---------------------
Total stockholders' equity 8,814,199 11,520,128
-------------------- ---------------------
Total liabilities and stockholders' equity $ 10,853,851 $ 13,388,496
==================== =====================
</TABLE>
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 accompanying notes to condensed financial statements
3
<PAGE> 4
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 18, 1989
MARCH 31, (DATE OF INCEPTION)
--------------------------------------- TO MARCH 31,
1997 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Development stage product sales $ 450,000 $ 4,000 $ 644,412
Government contracts 0 53,122 800,215
------------- ------------- -------------
Total revenues 450,000 57,122 1,444,627
Costs and expenses:
Cost of revenues 1,175,757 50,781 1,850,983
Research and development 1,264,534 1,131,918 15,479,545
Selling and marketing 566,502 252,337 3,635,186
General and administrative 658,559 822,912 11,598,964
------------- ------------- -------------
Total costs and expenses 3,665,352 2,257,948 32,564,678
------------- ------------- -------------
(3,215,352) (2,200,826) (31,120,051)
Other income (expense):
Investment income 83,014 164,484 1,741,264
Interest expense (6,428) (9,999) (121,541)
------------- ------------- -------------
76,586 154,485 1,619,723
------------- ------------- -------------
Net loss $ (3,138,766) $ (2,046,341) $ (29,500,328)
============= ============= =============
Net loss per common share $ (0.62) $ (0.48)
============= =============
Weighted average number of
common shares outstanding 5,023,510 4,229,264
============= =============
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE> 5
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 18, 1989
MARCH 31, (DATE OF INCEPTION)
------------------------------------ TO MARCH 31,
1997 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,138,766) $ (2,046,341) $ (29,500,328)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 357,245 203,640 2,644,603
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 (14,101) (26,934) (418,857)
Note receivable from officers - - 179,400
Provision for interest on notes payable - - 17,398
Stock compensation expense - 7,749 408,998
Cancellation of stock options - - (58,136)
Changes in operating assets and liabilities 90,884 (314,871) 566,713
--------------- --------------- ---------------
Net cash used in operating activities (2,704,738) (2,220,789) (26,138,232)
INVESTING ACTIVITIES:
Purchases of available-for-sale securities - (28,190,409) (54,697,200)
Sales of available-for-sale securities - - 10,053,685
Maturities of available-for-sale securities - 21,136,063 44,136,794
(Increase) decrease in certificates of deposit, net - 12,500 (350,000)
Acquisitions of property and equipment (28,372) (272,078) (7,780,298)
Decrease in notes receivable from officers - - (179,400)
--------------- --------------- ---------------
Net cash provided by (used in) investing activities (28,372) (7,313,924) (8,816,419)
FINANCING ACTIVITIES:
Payments of organization costs - - (64,495)
Proceeds from notes payable to stockholders - - 550,000
Proceeds from issuance of preferred stock - - 4,907,500
Proceeds from issuance of common stock - net of
offering costs (8,537) 8,435,493 27,042,767
Exercise of stock options 14,941 100,491 403,605
Exercise of warrants - 191,750 4,615,962
Collection of notes receivable from stockholders 426,433 - 426,433
Proceeds from issuance of long-term debt - - 742,700
Payments on long-term debt (19,497) (23,784) (590,158)
Payments under capital lease obligations - - (211,386)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 413,340 8,703,950 37,822,928
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents (2,319,770) (830,763) 2,868,277
Cash and cash equivalents at beginning of period 5,188,047 953,093 -
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 2,868,277 $ 122,330 $ 2,868,277
=============== =============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 6,428 $ 9,999 $ 102,797
=============== =============== ===============
Equipment capitalized under lease agreements - - $ 211,386
=============== =============== ===============
Conversion of notes payable and accrued interest
to preferred and common stock - - $ 567,398
=============== =============== ===============
</TABLE>
See accompanying notes to condensed financial statements
5
<PAGE> 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 three months
ended March 31, 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. 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 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 March 31,
1997:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------
AMORTIZED COST FAIR VALUE
---------------- ----------------
<S> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies $500,313 $500,313
================ ================
</TABLE>
NOTE 4 - INVENTORIES
Inventories at March 31, 1997 consist of the following:
Raw materials..................... $ 89,652
Work in process................... 203,342
Finished product.................. 225,000
--------------
$ 517,994
==============
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, primarily
engaging in research and product development activities, both internally
funded and under government-funded contracts and cooperative agreements,
recruiting technical and administrative personnel, and raising capital.
Throughout its development stage, the Company's primary focus has been to use
its 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. To date, the Company
has received a majority of its revenue from government research contracts.
While these government contracts have historically provided the Company's
primary source of revenue, the Company believes that they will not be a
significant source of revenue in the future. The Company has incurred
cumulative losses of $29,500,328 from inception to March 31, 1997.
During the second half of 1996, the Company recorded the first commercial
sales of its RF filter products. In the first quarter of 1997, the Company
generated revenues of $450,000 resulting from sales and delivery of its
SpectrumMasterTM and RangeMasterTM RF products to the cellular telephone
market. The Company expects sales of its RF filter products to continue to
increase.
RESULTS OF OPERATIONS
The Company's revenues increased to $450,000 for the three months ended
March 31, 1997, from $57,122 for the same period in 1996. All of the revenues
for the three months ended March 31, 1997 were derived from sales of the
Company's RF filter products, while 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 $1,175,757 for the three months ended March
31, 1997, from $50,781 for the same period in 1996. Cost of revenues for the
three months ended March 31, 1997 consisted of direct materials and labor costs
associated with the products sold during the period, along with manufacturing
overhead costs incurred during the period. Since the manufacturing facility
operated at a low level of capacity during the period, cost of revenues was
in excess of the revenues recorded during the period. The Company expects the
cost of revenue to exceed the revenues realized until it manufactures and ships
a more significant amount of its commercial products. Cost of revenues for the
three months ended March 31, 1996 consisted primarily of research and
development expenses associated with government contracts, including
engineering personnel, engineering materials and other overhead costs.
The Company's internally funded net research and development expenses for
the three months ended March 31, 1997 were $1,264,534, compared to $1,131,918
for the same period in 1996. The Company continued to incur additional
expenditures to expand its SpectrumMasterTM and RangeMasterTM product lines,
develop and implement its manufacturing processes and also to conduct advanced
research and development activities. These expenditures consisted primarily of
increased personnel costs and increases in materials and supplies expenses.
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 increased to $566,502 for the three months
ended March 31, 1997, from $252,337 for the same period in 1996. This increase
was attributable to the addition of sales, marketing and field service
personnel, increased expenditures to conduct customer field trials and expanded
product marketing and advertising efforts. The Company anticipates that its
selling and marketing expenses will continue to increase during 1997 as it
broadens product sales efforts with respect to its RF filter products.
General and administrative expenses decreased to $658,559 for the three
months ended March 31,1997, from $822,912 for the same period in 1996. The
decrease was primarily attributable to reallocation of occupancy and
administrative costs, and decreased legal and other financial services
expenses.
7
<PAGE> 8
Investment income, net of interest expense, decreased to $76,586 for the
three months ended March 31, 1997 from $154,485 for the same period in 1996.
The decrease was primarily due to a reduced average investment portfolio during
the three months ended March 31, 1997 as compared to the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through public
and private equity financings which have raised approximately $39 million, net
of related expenses. At March 31, 1997, the Company's cash, cash equivalents
and investments, including certain restricted investments, was approximately
$3,719,000, reflecting a decrease of approximately $2,319,000 from $6,038,000 at
December 31, 1996. Approximately $716,000 in principal amount of promissory
notes from certain stockholders resulting from the exercise of warrants issued
in the Company's November 1995 private placement was due on April 30, 1997, of
which approximately $699,000 is currently outstanding. The Company had
provided notice of its intent to redeem the warrants in November 1996.
During 1995 and 1996, the Company financed a portion of its leasehold
improvements and capital equipment additions through various borrowings
approximating $743,000, of which $153,000 was outstanding at March 31, 1997.
This remaining balance is due in monthly installments through May 1999 and
bears interest at 8.5% per annum.
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 activity and to market its RF
filter products. The Company currently estimates that additional investments
aggregating approximately $500,000 for machinery, equipment and improvements
associated with expansion of its manufacturing operations will be made over the
next nine months. The actual amount of the Company's future funding
requirements will depend on many factors, including: the amount and timing of
future revenues, the level of product marketing and sales efforts to support
the Company's commercialization efforts, the magnitude of its research and
product development programs, the cost of additional plant and equipment for
manufacturing and the costs involved in protecting the Company's patents or
other intellectual property. As a result of these requirements, in March 1997,
the Company filed a registration statement for a public offering of its common
stock. On May 9, 1997, as a result of unfavorable conditions in the small
capitalization sector of the public equity markets, the Company withdrew the
registration statement and is pursuing alternate sources of financing, which
may include the issuance of equity securities. Without consideration of any
funds under government contracts or cooperative agreements, sale of its
products, or proceeds from financings, the Company believes that its available
cash, cash equivalents and investments will not provide sufficient funds to
meet the Company's current operating plans beyond July 1997.
Although the Company believes it will have access to the funding required
for at least the next 12 months of operations, there can be no assurance that
such funding will be available on acceptable terms, or at all. If adequate
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 research
and development programs.
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, 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; the Company's ability to obtain additional
financing; 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.
8
<PAGE> 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not
Applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 5, 1996, Craig M. Siegler filed a complaint against the Company in
the Circuit Court of Cook County, Illinois, County Department, Chancery
Division. The complaint alleged that, in connection with the Company's private
placement of securities in November 1995, the Company breached and repudiated
an oral contract with Mr. Siegler for the issuance and sale by the Company to
Mr. Siegler of 370,370.37 shares of the Company's common stock, $.001 par value
per share (the "Common Stock"), plus warrants (immediately exercisable at
$12.96 per share) to purchase an additional 370,370.37 shares of the Common
Stock, for a total price of $4,000,000. The remedy sought by Mr. Siegler was a
sale to him of such securities on the terms of the November 1995 private
placement.
On August 16, 1996, the Company's motion to dismiss Mr. Siegler's
complaint was granted with leave to amend. On September 19, 1996, Mr.
Siegler's motion for reconsideration was denied. On October 9, 1996, Mr.
Siegler filed his First Amended Verified Complaint and Jury Demand, seeking a
jury trial and money damages equal to the difference between $8,800,000
(370,370.37 shares at $10.80 per share and 370,370.37 shares at $12.96 per
share) and 740,740.74 multiplied by the highest price at which the Common Stock
traded on The Nasdaq Stock Market between November 20, 1995 and the date of
judgment. Mr. Siegler also preserved his claim for specific performance for
purposes of appeal. On November 1, 1996, the case was transferred to the
Circuit Court of Cook County, Illinois, County Department, Law Division. The
Company's Answer was filed on November 21, 1996 and discovery has commenced.
The Company believes that the suit is without merit and intends to continue to
defend itself vigorously in this litigation. However, if Mr. Siegler prevails
in this litigation and is awarded damages in accordance with the formula
described above, such judgment would have a material adverse effect on the
Company's operating results and financial condition.
ITEM 2. CHANGES IN SECURITIES - Not Applicable
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 - Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS - Not Applicable
B. REPORTS ON FORM 8-K - Not Applicable
9
<PAGE> 10
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: May 13, 1997 By: /s/ Ora E. Smith
------------------------------------------
Ora E. Smith
President and Chief Executive Officer
Date: May 13, 1997 By: /s/ Stephen G. Wasko
------------------------------------------
Stephen G. Wasko
Vice President and Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,868,277
<SECURITIES> 500,313
<RECEIVABLES> 343,322
<ALLOWANCES> 0
<INVENTORY> 517,994
<CURRENT-ASSETS> 4,688,987
<PP&E> 7,891,708
<DEPRECIATION> 2,476,029
<TOTAL-ASSETS> 10,853,851
<CURRENT-LIABILITIES> 1,888,749
<BONDS> 0
0
0
<COMMON> 5,025
<OTHER-SE> 8,809,174
<TOTAL-LIABILITY-AND-EQUITY> 10,853,851
<SALES> 450,000
<TOTAL-REVENUES> 450,000
<CGS> 1,175,757
<TOTAL-COSTS> 1,175,757
<OTHER-EXPENSES> 2,489,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,428
<INCOME-PRETAX> (3,138,766)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,138,766)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,138,766)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
