<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1 to 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, 1998
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 May 13, 1998 there were outstanding 12,556,773 shares of common
stock, par value $.001, of the registrant.
This Amendment to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998 is being provided to amend and restate
Items 1 and 2.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 338,778 $ 2,766,886
Investments 500,313 500,313
Inventories 1,555,127 1,726,141
Accounts receivable, net 953,947 586,501
Prepaid expenses and other 290,828 471,928
------------- -------------
Total current assets 3,638,993 6,051,769
Property and equipment, net 4,306,126 4,523,054
Other assets:
Restricted certificates of deposit 380,000 380,000
Patents and trademarks, net 594,413 579,486
------------- -------------
974,413 959,486
------------- -------------
Total assets $ 8,919,532 $ 11,534,309
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 574,884 $ 717,425
Accrued liabilities 313,526 587,285
Current portion of long-term debt 65,389 78,077
------------- -------------
Total current liabilities 953,799 1,382,787
Long term debt, less current portion 5,028 13,541
Deferred occupancy costs 91,362 91,412
Stockholders' equity:
Series B Convertible Preferred Stock at liquidation value; 0 and 95 shares issued and
outstanding at March 31, 1998 and December 31, 1997, respectively --- 488,534
Series C Convertible Preferred Stock at liquidation value; 105 and 600 shares issued and
outstanding at March 31, 1998 and December 31, 1997, respectively 536,916 3,038,424
Series G Convertible Preferred Stock at liquidation value; 52 and 700 shares issued and
outstanding at March 31, 1998 and December 31, 1997, respectively 265,490 3,530,206
Common stock ($.001 par value); 15,000,000 shares authorized and 11,801,774 and
6,001,925 issued and outstanding at March 31, 1998 and December 31, 1997, respectively 11,802 6,002
Additional paid-in capital 48,208,361 41,991,941
Notes receivable from stockholders (698,508) (698,508)
Accumulated deficit (40,454,718) (38,310,030)
------------- -------------
Total stockholders' equity 7,869,343 10,046,569
------------- -------------
Total liabilities and stockholders' equity $ 8,919,532 $ 11,534,309
============= =============
</TABLE>
NOTE: The condensed balance sheet at December 31, 1997 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> 3
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Revenues $ 697,169 $ 450,000
Costs and expenses:
Cost of revenues 1,045,197 1,175,757
Research and development 751,040 1,264,534
Selling and marketing 367,754 566,502
General and administrative 681,217 658,559
------------ ------------
Total costs and expenses 2,845,208 3,665,352
------------ ------------
Operating income (loss) (2,148,039) (3,215,352)
Other income (expense):
Investment income 7,382 83,014
Interest expense (4,033) (6,428)
------------ ------------
3,349 76,586
------------ ------------
Net loss $(2,144,690) $(3,138,766)
============ ============
Preferred Stock dividends (61,740) -
------------ ------------
Net loss plus Preferred Stock dividends $(2,206,430) $(3,138,766)
============ ============
Basic and diluted loss per common share $(0.29) $(0.62)
============ ============
Weighted average number of common
shares outstanding 7,714,379 5,023,510
============ ============
</TABLE>
See Accompanying Notes to Condensed Financial Statements
4
<PAGE> 4
ILLINOIS SUPERCONDUCTOR CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,144,690) $(3,138,766)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 233,831 357,245
Changes in operating assets and liabilities (431,681) 90,884
----------- -----------
Net cash used in operating activities (2,342,540) (2,690,637)
INVESTING ACTIVITIES:
Payment of patent costs (17,387) (14,101)
Acquisitions of property and equipment (14,443) (28,372)
----------- -----------
Net cash used in investing activities (31,830) (42,473)
FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock (39,896) -
Net proceeds from issuance of common stock - (8,537)
Exercise of stock options 7,359 14,941
Collection of notes receivable from stockholders - 426,433
Payments on long-term debt (21,201) (19,497)
----------- -----------
Net cash provided by (used in) financing activities (53,738) 413,340
----------- -----------
Decrease in cash and cash equivalents (2,428,108) (2,319,770)
Cash and cash equivalents at beginning of period 2,766,886 5,188,047
----------- -----------
Cash and cash equivalents at end of period $ 338,778 $ 2,868,277
=========== ===========
</TABLE>
See Accompanying Notes to Condensed Financial Statements
5
<PAGE> 5
ILLINOIS SUPERCONDUCTOR CORPORATION
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, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. 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, 1997.
NOTE 2 - NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which replaced the calculation for primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
and diluted net loss per common share is computed based on the weighted average
number of common shares outstanding. Common shares issuable upon the exercise
of options and warrants are not included in the per share calculations since
the effect of their inclusion would be antidilutive. All the earnings per
share amounts for all periods have been presented and, where appropriate,
restated to conform to the Statement 128 requirements.
NOTE 3 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board's Statement No. 130, Reporting Comprehensive Income. Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity.
During the first quarter of 1998 and 1997, total comprehensive income
(loss) amounted to $(2,144,690) and $(3,138,766), respectively.
6
<PAGE> 6
NOTE 4 - CAPITAL STOCK
Through March 31, 1998, $3,000,000 (600 shares) of Series B Convertible
Preferred Stock were converted into 1,072,663 shares of Common Stock. Accrued
dividends of $74,932 were also converted into 27,800 shares of Common Stock.
Through March 31, 1998, $2,475,000 (495 shares) of Series C Convertible
Preferred Stock were converted into 2,133,331 shares of Common Stock. Accrued
dividends of $50,885 were also converted into 43,797 shares of Common Stock.
Through March 31, 1998, $3,240,000 (648 shares) of Series G Convertible
Preferred Stock were converted into 3,248,447 shares of Common Stock. Accrued
dividends of $61,913 were also converted into 62,075 shares of Common Stock.
Subsequent to March 31, 1998, $525,000 (105 shares) of Series C
Convertible Preferred Stock have been converted into 477,968 shares of Common
Stock. Accrued dividends of $11,916 have also been converted into 10,849
shares of Common Stock. Also subsequent to March 31, 1998, $260,000 (52
shares) of Series G Convertible Preferred Stock have been converted into
260,678 shares of Common Stock. Accrued dividends of $5,490 have also been
converted into 5,504 shares of Common Stock. Currently, no shares of Series B,
Series C or Series G Convertible Preferred Stock remain outstanding.
NOTE 5 - INVENTORIES
Inventories at March 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Raw materials.......................... $ 893,612
Work in process........................ 311,681
Finished product....................... 349,834
----------
Total Inventory........................ $1,555,127
==========
</TABLE>
NOTE 6 - LEGAL PROCEEDINGS
See a complete description of the Company's legal proceedings in "Part II
- - Other Information, Item 1. Legal Proceedings." The Company believes that the
resolution of the matters described therein will not have a material adverse
effect on the financial condition or results of operations of the Company.
7
<PAGE> 7
Because ILLINOIS SUPERCONDUCTOR ("the Company") wants to provide
investors with more meaningful and useful information, this Quarterly Report
on Form 10-Q contains certain "forward-looking statements"(as such term is
defined in Section 21E of the Securities and Exchange Act of 1934, as amended)
that reflect the Company's current expectations regarding the future results
of operations, performance and achievements of the Company. Such forward-
looking statements are made pursuant to the safe harbor provisions of 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 "anticipates", "believes", "estimates", "expects", "plans", "intends"
and similar expressions. These statements reflect the Company's current
beliefs and are based on information currently available to it Accordingly,
these statements are subject to certain risks, uncertainties and
contingencies, which could cause the Company's actual results, performance or
achievements for 1998 and beyond to differ materially from those expressed
in, or implied by, such statements. 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; the
Company's ability to obtain additional financing; changes in technology; the
Company's ability to attract and retain, key personnel; costs and other
effects of legal proceedings and claims; general business conditions of, and
growth in, the wireless telephony 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,
including those described under the heading "Risk Factors" in the Company's
Registration Statement on Form S-3, as amended, initially filed in June 1998.
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
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. The
Company uses its patented and proprietary high temperature superconducting
("HTS") materials technologies to develop and manufacture radio frequency
("RF") front-end products which are designed to enhance the quality, capacity,
coverage, and flexibility of cellular, personal communications services
("PCS"), and other wireless telephony services.
The Company began commercial sales of its RF filter products in 1996.
All product revenues during the first quarters of 1998 and 1997 were from
commercial sales of the Company's RF front-end products. The Company expects
sales of its RF front-end products to continue to increase during 1998 from
1997 levels.
RESULTS OF OPERATIONS
The Company's net revenues increased $247,169, or 54.9%, from $450,000
for the three months ended March 31, 1997, to $697,169 for the three months
ended March 31, 1998, as a result of increased sales of the Company's RF
front-end products. Net revenues from product sales during the 1998 period
represented gross product shipments less a reserve for potential returns.
Such reserves are based on the Company's historical product return rates.
Cost of revenues decreased to $1,045,197 for the three months ended March
31, 1998, from $1,175,757 for the same period in 1997. Cost of revenues for
the three months ended March 31, 1998 consisted of direct materials, labor,
and overhead costs associated with the products shipped during the period,
plus approximately $200,000 of costs, consisting primarily of manufacturing
overhead costs which were incurred to produce units in ending finished goods
inventory in excess of net realizable value. The reduction in cost of
revenues was due to improvements in direct materials costs per unit, greater
labor efficiencies, and reduced manufacturing overhead costs. The Company
expects those improvements to continue during 1998. The Company, however,
expects the cost of revenues to exceed the revenues realized until it
manufactures and ships a more significant amount of its commercial products.
8
<PAGE> 8
The Company's net research and development expenses decreased 40.6% from
$1,264,534 for the period ended March 31, 1997, to $751,040 for the same
period in 1998. Research and development costs were reduced in the 1998
period due to a reduction in personnel, engineering material, and other
operating costs. The Company expects that its research and development
expenses during 1998 will continue to be reduced from 1997 levels.
Selling and marketing expenses decreased 35.1% from $566,502 for the
three months ended March 31, 1997, to $367,754 for the same period in 1998.
The decrease in expenses was due to reduced marketing personnel costs and
related expenses, reductions in field trial consulting services, and lower
advertising costs.
General and administrative expenses increased 3.4% from $658,559 for the
three months ended March 31,1997, to $681,217 for the same period in 1998.
The increase was primarily attributable to increased legal expenses, and was
partially offset by reduced financial services expense and personnel costs.
Investment income, net of interest expense, decreased to $3,349 for the
three months ended March 31, 1998 from $76,586 for the same period in 1997.
The decrease was primarily due to a reduced average investment portfolio
during the three months ended March 31, 1998 as compared to the same period in
1997.
IMPACT OF YEAR 2000
Based on a recent assessment, the Company has determined that it will
require very little modification to its software to comply with Year 2000
transition requirements. Most of the software used by the Company in
operational applications has been acquired within the past 18 months and such
software already addresses Year 2000 issues. The Company expects to complete
any other modifications that may be necessary by December 31, 1998, which is
prior to any anticipated impact to the Company's operating systems. The
Company realizes, however, that the failure by it or those with which it
transacts business to address the Year 2000 issue could adversely affect the
Company.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash, cash equivalents and investments,
including certain restricted investments, were $1,219,000, reflecting a
decrease of $2,428,000 from $3,647,000 at December 31, 1997.
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 $70,000 was outstanding at March 31, 1998.
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, plus approximately $106,000 of accrued interest thereon,
from certain stockholders was outstanding as of June 30, 1998. 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 "Part II - Item 1. Legal
Proceedings").
9
<PAGE> 9
The Company to date has generated limited revenues from product sales. The
continuing development of and expansion in sales of the Company's RF filter
product lines will require continued commitment of substantial funds to
undertake continued product development and manufacturing activities and to
market and sell its RF front-end products. The actual amount of the Company's
future funding requirements will depend on many factors, including: the amount
and timing of future revenues, the level of product marketing and sales efforts
to support the Company's commercialization plans, the magnitude of its research
and product development programs, the 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 factors and the Company's
recent funding requirements, on May 15, 1998, the Company entered into a
Securities Purchase Agreement with a group of investors whereby the Company
issued $10.35 million principal amount of Senior Convertible Notes which accrue
interest, payable in cash or Common Stock, at 2% per annum. In connection with
the Securities Purchase Agreement, the Company also issued warrants to purchase
4,140,000 shares of the Company's Common Stock at an exercise price of $3.75
per share.
Without consideration of proceeds from additional 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 December 31, 1998. The Company's strategy to generate sufficient
working capital to fund its operations and cash requirements in the future
includes advancing market penetration with OEMs and customers in overseas
markets, building strong and enduring relationships with existing customers,
expanding product offerings to meet varying customer needs, and reducing
product costs through economies of scale in material purchases, refinement
of the manufacturing processes, and the implementation of an overhead reduction
program. In addition, the Company has strengthened its Board of Directors and
management team by adding several industry veterans and experienced businessmen
to assist in implementing the Company's plans.
While continuously evaluating its needs for capital, the Company may in
the future pursue additional sources of capital it considers appropriate based
upon Company requirements and market conditions. If the Company is unable to
successfully implement its business plan on a timely basis or cannot obtain
adequate funds when needed in the future, the Company may be required to delay,
scale-back or eliminate the manufacturing, marketing or sales of one or more of
its products or some or all of its research and development programs. This
could substantially impair the Company's ability to compete in the marketplace.
10
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOIS SUPERCONDUCTOR CORPORATION
Date: July 31, 1998 By: /s/ Edward W. Laves
-------------------------------------
Edward W. Laves
President and Chief Executive Officer
