<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: 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.
<PAGE> 2
ILLINOIS SUPERCONDUCTOR CORPORATION
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
<PAGE> 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
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
--------------------- ----------------------
(UNAUDITED)
<S> <C> <C>
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
========== ===========
</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 Notes to Condensed Financial Statements
3
<PAGE> 4
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 18, 1989
THREE MONTHS ENDED NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30,
----------------------- ----------------------- -------------------
1997 1996 1997 1996 1997
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
========== ========== ========= ==========
</TABLE>
See Notes to Condensed Financial Statements
4
<PAGE> 5
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 18, 1989
SEPTEMBER 30, (DATE OF INCEPTION)
-------------------------------- TO SEPTEMBER 30,
1997 1996 1997
------------- ------------ --------------------
<S> <C> <C> <C>
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
=========== ========== ===========
</TABLE>
See 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 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:
<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 September 30, 1997 consist of the following:
<TABLE>
<S> <C>
Raw materials... $ 436,196
Work in process. $ 810,077
Finished product $ 375,000
----------
$1,621,273
==========
</TABLE>
6
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 543,193
<SECURITIES> 500,313
<RECEIVABLES> 647,404
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<INVENTORY> 1,621,273
<CURRENT-ASSETS> 3,400,402
<PP&E> 8,130,757
<DEPRECIATION> 3,266,727
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<CURRENT-LIABILITIES> 1,377,893
<BONDS> 0
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<COMMON> 5,173
<OTHER-SE> 7,646,032
<TOTAL-LIABILITY-AND-EQUITY> 9,145,556
<SALES> 755,750
<TOTAL-REVENUES> 755,750
<CGS> 3,071,428
<TOTAL-COSTS> 3,071,428
<OTHER-EXPENSES> 7,081,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,605
<INCOME-PRETAX> (9,223,086)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,223,086)
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<EXTRAORDINARY> 0
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<NET-INCOME> (9,223,086)
<EPS-PRIMARY> ($1.83)
<EPS-DILUTED> ($1.83)
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