<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: June 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 August 11, 1997 there were outstanding 5,163,338 shares of common
stock, par value $.001, of the registrant.
<PAGE> 2
ILLINOIS SUPERCONDUCTOR CORPORATION
QUARTER ENDED JUNE 30, 1997
INDEX
PAGE
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements .................................................................... 3
Condensed Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996 .................. 3
Condensed Statements Of Operations (unaudited) for the three months ended June 30,
1997 and 1996, and the six months ended June 30, 1997 and 1996 and the
cumulative period from October 18, 1989 (date of inception) to June 30, 1997................ 4
Condensed Statements Of Cash Flows (unaudited) for the six months ended June 30,
1997 and 1996 and the cumulative period from October
18, 1989 (date of inception) to June 30, 1997............................................... 5
Notes To Condensed Financial Statements ......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 7
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 ...................................... 10
Item 5.Other Information ........................................................................ 10
Item 6.Exhibits and Reports on Form 8-K ......................................................... 10
SIGNATURES ...................................................................................... 11
List of Exhibits:
Exhibit 27 - Financial Data Schedule ................................................... 12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,900,867 $ 5,188,047
Investments 500,313 500,313
Inventories 1,555,470 653,696
Accounts receivable 500,370 130,752
Prepaid expenses and other 106,104 436,052
----------- -----------
Total current assets 4,563,124 6,908,860
Property and equipment
Property and equipment 8,041,915 7,863,337
Less: accumulated depreciation 2,879,022 2,120,533
----------- -----------
Net property and equipment 5,162,893 5,742,804
Other assets:
Restricted certificates of deposit 350,000 350,000
Patents and trademarks, net 468,680 386,832
----------- -----------
818,680 736,832
----------- -----------
Total assets $ 10,544,697 $ 13,388,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,047,000 $ 1,126,009
Accrued liabilities 747,865 494,507
Current portion of long-term debt 84,677 80,421
----------- -----------
Total current liabilities 1,879,542 1,700,937
Long term debt, less current portion 48,705 91,618
Deferred occupancy costs 85,194 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 June 30, 1997 ($3,000,000 aggregate
liquidation preference) and none at
December 31, 1996 1 -
Common stock ($.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 5,054 5,023
Additional paid-in capital 41,891,493 39,019,421
Notes receivable from stockholders (698,508) (1,142,754)
Deficit accumulated during the development stage (32,672,784) (26,361,562)
----------- -----------
Total stockholders' equity 8,531,256 11,520,128
----------- -----------
Total liabilities and stockholders' equity $ 10,544,697 $ 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 (DATE OF
THREE MONTHS ENDED SIX MONTHS ENDED INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
--------------------------- --------------------------- ---------------
1997 1996 1997 1996 1997
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues:
Development stage product sales $ 89,000 $ 2,700 $ 539,000 $ 6,700 $ 733,412
Government contracts - - - $ 53,122 $ 800,215
---------- ---------- ---------- ---------- -----------
Total revenues $ 89,000 $ 2,700 $ 539,000 $ 59,822 $ 1,533,627
Costs and expenses:
Cost of revenues 899,003 844 2,074,760 51,625 2,749,986
Research and development 1,136,888 1,234,221 2,401,422 2,366,139 16,616,433
Selling and marketing 455,141 528,800 1,021,643 781,137 4,090,327
General and administrative 821,398 790,508 1,479,957 1,613,420 12,420,362
---------- ---------- ---------- ---------- -----------
Total costs and expenses 3,312,430 2,554,373 6,977,782 4,812,321 35,877,108
---------- ---------- ---------- ---------- -----------
3,223,430 2,551,673 6,438,782 4,752,499 34,343,481
Other income (expense):
Investment income 55,308 156,110 138,322 320,594 1,796,572
Interest expense (4,334) (8,921) (10,762) (18,920) (125,875)
---------- ---------- ---------- ---------- -----------
50,974 147,189 127,560 301,674 1,670,697
---------- ---------- ---------- ---------- -----------
Net loss $3,172,456 $2,404,484 $6,311,222 $4,450,825 $32,672,784
========== ========== ========== ========== ===========
Net loss per common share $(0.63) $(0.53) $(1.25) $(1.01)
========== ========== ========== ========== ===========
Weighted average number
of common shares
outstanding 5,050,227 4,544,557 5,036,942 4,386,911
========== ========== ========== ========== ===========
</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>
SIX MONTHS ENDED OCTOBER 18, 1989
JUNE 30, (DATE OF INCEPTION)
--------------------------------- TO JUNE 30,
1997 1996 1997
----------- ------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(6,311,222) $ (4,450,825) $ (32,672,784)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 761,986 425,186 3,049,344
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 (85,344) (79,304) (490,100)
Note receivable from officers - - 179,400
Provision for interest on notes payable - - 17,398
Stock compensation expense - 16,082 408,998
Cancellation of stock options - (5,440) (58,136)
Changes in operating assets and liabilities (756,366) (348,799) (280,537)
----------- ------------ -------------
Net cash used in operating activities (6,390,946) (4,487,132) (29,824,440)
INVESTING ACTIVITIES:
Purchases of available-for-sale securities - (29,604,489) (54,697,200)
Sales of available-for-sale securities - - 10,053,685
Maturities of available-for-sale securities - 25,437,086 44,136,794
(Increase) decrease in certificates of deposit, net - 462,500 (350,000)
Acquisition of property and equipment (178,578) (1,291,300) (7,930,504)
Decrease in notes receivable from officers - - (179,400)
----------- ------------ -------------
Net cash provided by (used in) investing activities (178,578) (4,996,203) (8,966,625)
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 2,762,682 - 7,670,182
Proceeds from issuance of common stock - net of
offering costs (8,537) 8,344,744 27,042,767
Exercise of stock options 56,594 130,454 445,258
Exercise of warrants 67,364 756,750 4,683,326
Collection of notes receivable from stockholders 444,246 - 444,246
Proceeds from bank loan - 92,182 742,700
Payments on long-term debt (40,005) (497,041) (610,666)
Payments under capital lease obligations - - (211,386)
----------- ------------ -------------
Net cash provided by (used in) financing activities 3,282,344 8,827,089 40,691,932
----------- ------------ -------------
Increase (decrease) in cash and cash equivalents (3,287,180) (656,246) 1,900,867
Cash and cash equivalents at beginning of period 5,188,047 953,093 -
----------- ------------ -------------
Cash and cash equivalents at end of period $ 1,900,867 $ 296,847 $ 1,900,867
=========== ============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 10,762 $ 18,920 $ 107,131
=========== ============ =============
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 six months
ended June 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. 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 June 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 June 30, 1997 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials............ $ 477,915
Work in process.......... $ 887,555
Finished product......... $ 190,000
----------
$1,555,470
==========
</TABLE>
6
<PAGE> 7
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 $32,672,784 from inception to
June 30, 1997.
RESULTS OF OPERATIONS
The Company's net revenues increased to $89,000 and $539,000 for the three
and six month periods ended June 30, 1997, from $2,700 and $59,822 for the same
periods in 1996. Net revenues for the periods are gross product shipments less
product returns, which during the second quarter of 1997 totaled $115,000.
These returns were associated with the termination, by a customer, of one of
its projects, against which shipments were made during the first quarter. All
of the net revenues for 1997 were derived from sales of the Company's RF filter
products, while net revenues for the same periods 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 $899,003 and $2,074,760 for the three and
six month periods ended June 30, 1997, from $844 and $51,625 for the same
periods in 1996. Cost of revenues for the three and six month periods ended
June 30, 1997 consisted of direct materials and labor costs associated with the
products sold along with manufacturing overhead costs incurred during the
periods. Due to low utilization levels and excess capacity within its
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 an increased amount of its commercial
products. Cost of revenues for the three and six month periods ended June 30,
1996 consisted primarily of research and development expenses associated with a
government contract, and included engineering personnel, material and overhead
costs.
The Company's internally funded research and development expenses for the
three and six month periods ended June 30, 1997 were $1,136,888 and $2,401,422,
respectively, compared to $1,234,221 and $2,366,139 for the same periods in
1996. The Company incurred expenditures to expand its SpectrumMaster(R) and
RangeMaster(TM) product lines, develop transmitter filter products, develop and
implement its manufacturing processes and also to conduct advanced research and
development activities. During the three month and six month periods in 1996
and 1997, the Company incurred increased personnel costs and depreciation
expenses, while decreases in engineering materials and supplies costs led to an
overall decrease in research and development expenses during the second quarter
of 1997 compared to the same period in 1996. The Company's expenditures in the
three and six month periods ended June 30, 1996 consisted of costs attributable
to the development of the SpectrumMaster(R) product line and expenses for
personnel, materials and services to support this product development and the
field trial program that was ongoing during these periods. 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 six month periods ended
June 30, 1997 were $455,141 and $1,021,643, respectively, compared to $528,800
and $781,137 for the same periods in 1996. The increase in selling and
marketing expenses for the six month period ended June 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
a decrease in field trial and outside consultant expenses. The decrease in the
second quarter of 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 product marketing and sales costs.
7
<PAGE> 8
General and administrative expenses for the three and six month periods
ended June 30, 1997 were $821,398 and $1,479,957, respectively, compared to
$790,508 and $1,613,420 for the same periods in 1996. The decrease in general
and administrative expenses for the six month period ended June 30, 1997 was
due primarily to decreases in administrative personnel costs and legal
expenses, partially offset by increases in expenses resulting from the
termination of a public stock offering in May 1997. The increase in the three
month period ended June 30, 1997 was attributable to the incurring of these
public offering expenses during the period.
Other income, which consists of investment income net of interest expense,
for the three and six month periods ended June 30, 1997 decreased to $50,974
and $147,189 from $127,560 and $301,674 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 $41.9 million,
net of related expenses. At June 30, 1997, the Company's cash, cash
equivalents and investments, including certain restricted investments, was
approximately $2,751,000, reflecting a decrease of approximately $3,287,000
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 $133,000 was outstanding at June 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").
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 whereby
the Company issued 600 shares of Series B Convertible Preferred Stock for $3
million. (See "Changes in 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 is
sufficient to finance the Company's current operating plans through at least
the end of September 1997. Pursuant to the Preferred Stock Purchase Agreement,
the Company has the option to issue up to $12 million of additional convertible
preferred stock in up to four additional tranches, if certain conditions are
satisfied by the Company. The Company expects to issue additional preferred
stock pursuant to the Preferred Stock Purchase Agreement during the third
quarter of 1997. As a result, the Company believes it will have access to the
funding required for at least the next 12 months of operations, although there
can be no assurance that the Company will receive any or all of the remaining
$12 million. If remaining funds under the 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.
8
<PAGE> 9
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 $698,507 and the guarantee by the
Guarantor of the Borrowers' obligations under these promissory notes. The
Borrowers and the Guarantor have not yet filed answers to the complaint.
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
On June 6, 1997, the Company issued 600 shares of Series B Convertible
Preferred Stock (the "Series B Stock") to Southbrook International Investments,
Ltd. ("Southbrook") for $5,000 per Share, or a total of $3,000,000. In
connection with this sale, the Company issued to Southbrook a warrant to
purchase 62,500 shares of Common Stock at $14.8125 per share expiring on June
6, 2001. Dividends on the Series B 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 sale of these securities is exempt from the registration
requirements of the Securities Act of 1933 (the "Act") under Section 4(2) of
the Act and/or Regulation D because the sale of these securities did not
involve a public offering. The Series B Stock is convertible into Common Stock
at a conversion price equal to the lesser of (a) $11.85 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 B Stock conversion ratio and the number of shares of Common Stock
exercisable pursuant to the warrant are subject to adjustment. The Company
registered for resale under the Act the shares of Common Stock into which the
Series B Stock is convertible and the shares of the Common Stock into which the
warrant is exercisable, which registration statement was declared effective by
the Securities and Exchange Commisson on June 30, 1997.
ITEM 3. DEFAULT UPON SENIOR SECURITIES - Not Applicable
9
<PAGE> 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Stockholders of the Company was held on
June 11, 1997.
b) The stockholders voted to re-elect two Class I directors to the
Company's Board of Directors. Results of the voting were as follows:
AUTHORITY BROKER
DIRECTORS FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- --------- --------- ---------- --------- ----------- ------------
Michael J. Friduss 4,185,442 ---------- 190,040 ---------- ------------
Ora E. Smith 4,182,652 ---------- 192,830 ---------- ------------
c) The stockholders also voted to approve the third amendment to
the Illinois Superconductor Corporation 1993 Amended and Restated
Stock Option Plan. Results of the voting were as follows:
AUTHORITY BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
--------- ------- ------------ ----------- ---------
2,292,266 401,308 ------------ 46,525 1,635,383
d) The stockholders also voted to ratify the selection by the Board of
Directors of Ernst & Young LLP as the independent auditors of the
Company's financial statements for the year ended December 31, 1997.
Results of the voting were as follows:
AUTHORITY BROKER
FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
--------- ------- ------------- ----------- -------------
4,166,660 194,092 ------------- 14,730 -------------
ITEM 5. OTHER INFORMATION
On July 8, 1997, the Company announced that its Board of
Directors elected Ora E. Smith, the then President and Chief Executive
Officer, as Chairman of the Board, succeeding Steven Lazarus, who
remmains on the Board and was appointed as Chairman of its Executive
Committee. At that time, Edward W. (Ted) Laves, Ph.D. was also
appointed by the Board of Directors to succeed Smith as President and
Chief Executive Officer and was also elected to the Board of Directors
to replace Leonard A. Batterson who resigned. Michael J. Friduss
resigned from the Board of Directors effective July 12, 1997.
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
June 30, 1997 were filed by the Company on the following dates:
April 14, 1997, reporting Items 5 and 7
May 1, 1997, reporting Items 5 and 7
June 12, 1997, reporting Items 5 and 7
10
<PAGE> 11
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: August 14, 1997 By: /s/ Edward W. Laves, Ph. D.
-----------------------------------------------
Edward W. Laves, Ph.D.
President and Chief Executive Officer
Date: August 14, 1997 By: /s/ Stephen G. Wasko
-----------------------------------------------
Stephen G. Wasko
Senior Vice President Corporate Development and
Chief Financial Officer
11
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<PERIOD-START> JAN-01-1997
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