<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2 to Form 10-K)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-22302
ILLINOIS SUPERCONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-3688459
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
451 KINGSTON COURT, MOUNT PROSPECT, ILLINOIS 60056
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (847) 391-9400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of
the registrant's Common Stock on March 27, 1998 was $15,888,263.
The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of March 27, 1998 was 11,392,543.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement in connection with the
registrant's 1998 Annual Meeting of Stockholders', held on June 11, 1998, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
This Amendment No.2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 is being provided to amend and restate the
Financial Statements and to include a new auditor's consent as Exhibit 23.
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<PAGE> 2
Financial Statements
Illinois Superconductor Corporation
Years ended December 31, 1997, 1996, and 1995
with Report of Independent Auditors
<PAGE> 3
Illinois Superconductor Corporation
Financial Statements
Years ended December 31, 1997, 1996, and 1995
CONTENTS
Report of Independent Auditors........................................... 1
Financial Statements
Balance Sheets as of December 31, 1997 and 1996.......................... 2
Statements of Operations for the Years Ended December
31, 1997, 1996, and 1995................................................ 4
Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995....................................... 5
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995 ...................................... 6
Notes to Financial Statements............................................ 7
<PAGE> 4
Report of Independent Auditors
The Board of Directors
Illinois Superconductor Corporation
We have audited the accompanying balance sheets of Illinois Superconductor
Corporation as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 27, 1998,
which report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern, the Company, as discussed in paragraph 2 of
Note 14, has completed the issuance and sale of $10,350,000 aggregate principal
amount of Senior Convertible Notes. Therefore, the conditions that raised
substantial doubt about whether the Company will continue as a going concern no
longer exist.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Illinois Superconductor
Corporation at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois
February 27, 1998,
except for paragraph 2 of Note 14, as to
which the date is May 15, 1998
1
<PAGE> 5
Illinois Superconductor Corporation
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,766,886 $5,188,047
Investments 500,313 500,3l3
Inventories 1,726,141 653,696
Accounts receivable, net of allowance
for doubtful accounts of $68,775 at
December 31, l997 586,501 130,752
Prepaid expenses and other 471,928 436,052
--------------------------
Total current assets 6,051,769 6,908,860
Property and equipment:
Leasehold improvements 4,215,011 4,172,694
Lab equipment 1,689,381 1,606,594
Manufacturing equipment 945,081 864,059
Office equipment 709,324 626,029
Furniture and fixtures 618,496 593,961
--------------------------
8,177,293 7,863,337
Less: Accumulated depreciation (3,654,239) (2,120,533)
--------------------------
4,523,054 5,742,804
Restricted certificates of deposit 380,000 350,000
Patents and trademarks, net 579,486 386,832
----------------------------
Total assets $11,534,309 $13,388,496
============================
</TABLE>
See notes to financial statements
2
<PAGE> 6
Illinois Superconductor Corporation
Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 717,425 $ 1,126,009
Accrued liabilities 587,285 494,507
Current portion of long-term debt 78,077 80,421
-----------------------------
Total current liabilities 1,382,787 1,700,937
Long-term debt, less current portion 13,541 91,618
Deferred occupancy costs 91,412 75,813
Stockholders' equity:
Capital stock:
Preferred stock:
Series B Convertible Preferred Stock at liquidation
value; 95 shares issued and outstanding at
December 31, 1997 (none at December 31, 1996) 488,534 --
Series C Convertible Preferred Stock at liquidation
value; 600 shares issued and outstanding at
December 31, 1997 (none at December 31, 1996) 3,038,424 --
Series G Convertible Preferred Stock at liquidation
value; 700 shares issued and outstanding at
December 31, 1997 (none at December 31, 1996) 3,530,206 --
Common stock ($.001 par value); 15,000,000 shares
authorized and 6,001,925 and 5,023,352 shares
issued and outstanding at December 31, 1997 and
1996, respectively 6,002 5,023
Additional paid-in capital 41,991,941 39,019,421
Notes receivable from stockholders (698,508) (1,142,754)
Accumulated deficit (38,310,030) (26,361,562)
-----------------------------
Total stockholders' equity 10,046,569 11,520,128
-----------------------------
Total liabilities and stockholders' equity $11,534,309 $13,388,496
=============================
</TABLE>
See notes to financial statements.
3
<PAGE> 7
Illinois Superconductor Corporation
Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Net product sales $ 1,038,134 $ 156,700 $ 5,998
Government contracts - 53,122 21,832
-------------------------------------------------------------
Total Net revenues 1,038,134 209,822 27,830
Costs and expenses:
Cost of product sales 4,401,077 - -
Cost of government contract revenue - 49,534 19,286
Research and development 4,132,019 6,422,921 4,554,946
Selling and marketing 1,918,044 1,834,640 469,600
General and administrative 2,772,274 3,290,810 2,763,615
-------------------------------------------------------------
Total costs and expenses 13,223,414 11,597,905 7,807,447
-------------------------------------------------------------
(12,185,280) (11,388,083) (7,779,617)
Other income and (expense):
Investment income 254,781 503,911 487,543
Interest expense (17,969) (29,602) (39,600)
-------------------------------------------------------------
236,812 474,309 447,943
-------------------------------------------------------------
Net loss $(11,948,468) $(10,913,774) $(7,331,674)
=============================================================
Preferred Stock dividends (143,302) - -
-------------------------------------------------------------
Net loss plus Preferred Stock dividends $(12,091,770) $(10,913,774) $(7,331,674)
=============================================================
Basic and diluted loss per common share $ ( 2.34) $ (2.41) $ (2.01)
=============================================================
Weighted average number of common
shares outstanding 5,156,663 4,536,034 3,641,196
=============================================================
</TABLE>
See notes to financial statements.
4
<PAGE> 8
Illinois Superconductor Corporation
Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
SERIES B CONVERTIBLE SERIES C CONVERTIBLE SERIES G CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
===============================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 - $ - - $ - - $ - 3,578,724 $ 3,579
Exercise of stock options; $.184 - $11.25 per share - - - - - - 50,130 50
Exercise of warrants; $1.4679 per share - - - - - - 13,625 14
Forfeiture of stock options - - - - - - - -
Issuance of Common Stock - Private placement, net of - - - - - -
offering costs; $10.80 per share - - - - - - 356,473 356
Amortization of deferred compensation - - - - - - - -
Net loss - - - - - - - -
-------------------------------------------------------------------------------
Balance as of December 31, 1995 - - - - - - 3,998,952 3,999
Exercise of stock options; $.184 - $15.25 per share - - - - - - 49,881 50
Exercise of warrants; $1.4679-$13.50 per share - - - - - - 565,993 566
Forfeiture of stock options - - - - - - - -
Issuance of Common Stock - Private placement, net of - - - - - -
offering costs; $21.80 per share - - - - - - 408,526 408
Amortization of deferred compensation - - - - - - - -
Net loss - - - - - - - -
-------------------------------------------------------------------------------
Balance as of December 31, 1996 - - - - - - 5,023,352 5,023
Exercise of stock options; $.184 - $15.25 per share - - - - - - 17,821 18
Exercise of warrants; $1.4679 - $13.50 per share - - - - - - 138,820 139
Payment of stockholder notes receivable - - - - - - - -
Issuance of Preferred Stock - net of offering costs 600 3,000,000 600 3,000,000 700 3,500,000 - -
Preferred Stock dividends - 13,534 - 38,424 - 30,206 19,940 20
Conversion of Preferred Stock to Common Stock (505) (2,525,000) - - - - 801,992 802
Net loss - - - - - - - -
-------------------------------------------------------------------------------
Balance as of December 31, 1997 95 $ 488,534 600 $3,038,424 700 $3,530,206 6,001,925 $6,002
===============================================================================
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PAID-IN DEFERRED FROM ACCUMULATED
CAPITAL COMPENSATION SHAREHOLDERS DEFICIT TOTAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 $21,096,412 $(162,131) $ - $ (8,116,114) $ 12,821,746
Exercise of stock options; $.184 - $11.25 per share 105,536 - - - 105,586
Exercise of warrants; $1.4679 per share 19,986 - - - 20,000
Forfeiture of stock options (132,300) 74,164 - - (58,136)
Issuance of Common Stock - Private placement, net of
offering costs; $10.80 per share 3,580,926 - - - 3,581,282
Amortization of deferred compensation - 46,575 - - 46,575
Net loss - - - (7,331,674) (7,331,674)
-----------------------------------------------------------------------------
Balance as of December 31, 1995 24,670,560 41,392 - (15,447,788) 9,185,379
Exercise of stock options; $.184 - $15.25 per share 282,903 - - - 282,953
Exercise of warrants; $1.4679-$13.50 per share 5,738,150 - (1,142,754) - 4,595,962
Forfeiture of stock options (5,438) 5,438 - - -
Issuance of Common Stock - Private placement, net of
offering costs; $21.80 per share 8,333,246 - - - 8,333,654
Amortization of deferred compensation - 35,954 - - 35,954
Net loss - - - (10,913,774) (10,913,774)
-----------------------------------------------------------------------------
Balance as of December 31, 1996 39,019,421 - (1,142,754) (26,361,562) 11,520,128
Exercise of stock options; $.184 - $15.25 per share 70,170 - - - 70,188
Exercise of warrants; $1.4679 - $13.50 per share 796,908 - - - 797,047
Payment of stockholder notes receivable - - 444,246 - 444,246
Issuance of Preferred Stock - net of offering costs (336,572) - - - 9,163,428
Preferred Stock dividends (82,184) - - - -
Conversion of Preferred Stock to Common Stock 2,524,198 - - - -
Net loss - - - (11,948,468) (11,948,468)
-----------------------------------------------------------------------------
Balance as of December 31, 1997 $41,991,941 $ - $ (698,508) $(38,310,030) $ 10,046,569
=============================================================================
</TABLE>
See notes to financial statements
5
<PAGE> 9
Illinois Superconductor Corporation
Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(11,948,468) $(10,9l3,774) $(7,331,674)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,533,705 1,157,561 668,859
Amortization 6,994 6,639 7,541
Loss on disposal of property and equipment - - 499
Gain on sale of available-for-sale securities - (43,171) (54,065)
Net amortization of bond premiums - (939) (11,454)
Stock compensation expense - 35,954 46,575
Cancellation of stock options - - (58,136)
Changes in operating assets and liabilities:
Accounts receivable (455,749) 179,777 (28,936)
Inventories (1,072,445) (653,696) -
Prepaid expenses and other (35,876) 29,246 306,527
Accounts payable (411,584) 249,640 (818,844)
Accrued liabilities 92,778 113,201 252,159
Deferred occupancy costs 15,599 18,760 18,486
-------------------------------------------
Net cash used in operating activities (12,275,046) (9,820,802) (7,002,463)
INVESTING ACTIVITIES
Purchases of available-for-sale securities - (30,945,246) (8,060,495)
Sales of available-for-sale securities - 2,500,000 4,566,564
Maturities of available-for-sale securities - 33,072,852 9,002,364
(Increase) decrease in restricted certificates of deposit (30,000) 512,500 137,500
Payments of patent costs (199,647) (156,711) (97,005)
Acquisitions of property and equipment (310,956) (3,706,588) (1,888,694)
-------------------------------------------
Net cash provided by (used in) investing activities (540,603) 1,276,807 3,660,234
FINANCING ACTIVITIES
Net proceeds from issuances of preferred stock 9,163,428 - -
Net proceeds from issuances of common stock - 8,333,654 3,581,282
Exercise of stock options 70,188 282,953 105,586
Exercise of warrants 797,047 4,595,962 20,000
Payments on stockholder notes receivable 444,246 - -
Proceeds from issuance of long-term debt - 92,182 650,518
Payments on long-term debt (80,421) (525,802) (44,859)
Payments on capital lease obligations - - (107,567)
-------------------------------------------
Net cash provided by financing activities 10,394,488 12,778,949 4,204,960
-------------------------------------------
Increase (decrease) in cash and cash equivalents (2,421,161) 4,234,954 862,731
Cash and cash equivalents at beginning of period 5,188,047 953,093 90,362
-------------------------------------------
Cash and cash equivalents at end of period $ 2,766,886 $ 5,188,047 $ 953,093
===========================================
Supplemental cash flow information:
Cash paid for interest $ 17,969 $ 29,602 $ 39,600
===========================================
Capital leases $ - $ - $ 59,739
===========================================
</TABLE>
See notes to financial statements
6
<PAGE> 10
Illinois Superconductor Corporation
Notes to Financial Statements
1. DESCRIPTION OF BUSINESS
Illinois Superconductor Corporation (Company) was founded in 1989 by ARCH
Development Corporation ("ARCH"), an affiliate of The University of Chicago, to
commercialize superconducting technologies developed initially at Argonne
National Laboratory. The Company uses its patented and proprietary
high-temperature superconducting materials technologies to develop and
manufacture radio frequency front-end products designed to enhance the quality,
capacity, coverage and flexibility of cellular, PCS and other wireless
telephony services located primarily in the United States. In prior years, the
Company was in the developmental stage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents consist of demand deposits, time deposits, money
market funds, and commercial paper which have maturities of three months or
less from the date of purchase. Investments consist of U.S. corporate debt
securities, U.S. Treasury securities, and other U.S. government obligations.
Management believes that the financial institutions in which it maintains such
deposits are financially sound and, accordingly, minimal credit risk exists
with respect to these deposits.
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 tax, (if any) 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 and accretion 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.
7
<PAGE> 11
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first in, first
out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation, and
are depreciated over the estimated useful lives of the assets using accelerated
methods. Leasehold improvements are amortized using the straight-line method
over the shorter of the useful life of the asset or the term of the lease.
Amortization of leasehold improvements is included in depreciation expense. The
useful lives assigned to property and equipment for the purpose of computing
book depreciation are as follows:
<TABLE>
<S> <C>
Lab equipment 5 years
Manufacturing equipment 3 to 5 years
Office equipment 3 to 5 years
Furniture and fixtures 5 years
Leasehold improvements Life of lease
</TABLE>
PATENTS AND TRADEMARKS
Patents and trademarks represent costs, primarily legal fees and expenses,
incurred in order to prepare and file patent applications related to various
aspects of the Company's superconductor technology and to its current and
proposed products. Patents and trademarks are recorded at cost and are
amortized using the straight-line method over the shorter of their estimated
useful lives or 17 years. The recoverability of the carrying values of patents
and trademarks is evaluated on an ongoing basis. Patents and trademarks are net
of accumulated amortization of $91,230 and $98,223 at December 31, 1997 and
1996, respectively. Capitalized patent costs related to pending patents
are $471,933 and $270,779 at December 31, 1997 and 1996, respectively.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
8
<PAGE> 12
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenues from product sales are generally recognized at the time of
shipment and are recorded net of estimated returns and allowances. The Company
has, under certain conditions, granted customers the right to return product
during a specified time after shipment. In these situations, the Company
establishes a liability for estimated returns and allowances at the time of
shipment. The Company has established a program which, in certain situations,
allows customers or prospective customers to field test the Company's products
for a specified period of time. Revenues from field test arrangements is
recognized upon customer acceptance of the products. The Company warrants its
products against defects in materials and workmanship typically for a one year
period from the date of shipment, except for superconducting materials contained
in the products, which are warranted for ten years from the date of shipment. A
provision for estimated future costs related to warranty expenses is recorded
when revenues are recognized. Returns and allowances and warranty costs were
not significant in any period reported.
ADVERTISING COSTS
Advertising costs are charged to expense in the period incurred. Advertising
expense for the years ended December 31, 1997, 1996, and 1995 was approximately
$176,000, $135,000, and $87,000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs related to both present and future products are
charged to expense in the period incurred.
NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. Basic and diluted net loss per common share are computed based upon 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
earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the Statement 128 requirements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
9
<PAGE> 13
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DESCRIPTION OF CERTAIN CONCENTRATIONS AND RISKS
The Company operates in a highly competitive and rapidly changing industry.
Product revenues are currently concentrated with a limited number of customers
and the supply of certain materials is concentrated among a few providers. The
development and commercialization of new technologies by any competitor could
adversely affect the Company's results of operations.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of ((FASB 121), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. FASB 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted FASB 121 in the first quarter of 1996. The effect of adoption
was not material.
10
<PAGE> 14
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------
<S> <C> <C>
Raw materials $ 704,626 $ 64,524
Work-in-process 345,956 214,172
Finished product 675,559 375,000
----------------------
$1,726,141 $653,696
======================
</TABLE>
Cost of product sales for the year ending December 31, 1997, includes
approximately $529,000 of costs in excess of the net realizable value of
finished goods inventory.
4. INVESTMENTS
Investments at December 31, 1997 and 1996 consist of a U.S. government
security, due in March 2001, with a cost and fair value of $500,313. During the
year ended December 31, 1996, available-for sale debt securities with a fair
value at the date of sale of $2,500,000 were sold. The gross realized gains on
such sales were $43,171.
5. CAPITAL STOCK
The Company has an authorized class of undesignated preferred stock consisting
of 100,000 shares. Preferred stock may be issued in series from time to time
with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof, to the extent that such
are not fixed in the Company's certificate of incorporation, as the board of
directors determines.
On February 9, 1996, the board of directors adopted a rights plan (Rights Plan).
In conjunction with the adoption of the Rights Plan, the Company has created one
series of preferred stock, consisting of 10,000 shares of Series A Junior
Participating Preferred Stock (Series A Preferred). Each share of Series A
Preferred would entitle the holder to receive dividends equal to 1,000 times
the dividends per share declared with respect to the Company's common stock and
, in the event of liquidation, such holders would receive a preference of
1,000 times the aggregate amount to be distributed per share to the holders of
the Company's common stock. Pursuant to the Rights Plan, a Series A Right is
associated with, and trades with, each share of common stock outstanding.
11
<PAGE> 15
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
5. CAPITAL STOCK (CONTINUED)
The record date for distribution of such Series A Rights was February 22, 1996,
and for so long as the Series A Rights are associated with the common stock,
each new share of common stock issued by the Company will include a Series A
Right.
Each Series A Right will entitle its holder to purchase one one-thousandth of a
share of Series A Preferred for $200, subject to adjustment as defined in the
Rights Plan. The Series A Rights are not exercisable until the earlier of (i)
10 days after any person or group becomes the beneficial owner of 15% or more
of the Company's outstanding common stock, or (ii) 10 business days (unless
extended by the board of directors) after the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 15%
or more of the Company's outstanding common stock.
If any person or group (Acquiring Party) acquires 15% or more of the Company's
outstanding common stock (Shares Acquisition Date), each holder of a Series A
Right, except the Acquiring Party, has the right to receive upon exercise (i)
shares of the Company's common stock having a market value equal to two times
the exercise price of the Series A Right, and (ii) one Series B Right (Series A
Rights and Series B Rights are hereinafter collectively referred to as the
Rights). The board of directors has the option, after the Shares Acquisition
Date but before there has been a 50% acquisition of the Company, to exchange one
share of common stock (or one one-thousandth of a share of preferred stock) and
one Series B Right for each Series A Right (other than Series A Rights held by
the Acquiring Party).
If, after the Series A Rights become exercisable, the Company is involved in a
merger or other business combination, or if the Company sells or transfers more
than 50% of its assets or earning power, or if an acquiring party engages in
certain "self-dealing" transactions with the Company, as defined in the Rights
Plan, each Right then outstanding (other than Rights held by the Acquiring
Party) will be exercisable for common stock of the other party to such
transaction having a market value of two times the exercise price of the Right.
The Company has the right to redeem each Series A Right for $0.01 prior to the
Shares Acquisition Date. The Series B Rights, once issued, are not redeemable.
The Rights expire on February 9, 2006.
On November 14, 1995, the Company completed the private placement and issuance
of 356,473 Units, which raised $3,581,282, net of related expenses. Each Unit
consists of one share of common stock and one detachable common stock purchase
warrant. Each warrant had a term of two years and was exercisable for the
purchase of one share of common stock at $13.00 per share. Warrants for 15,700
of these shares were exercised prior to December 23, 1996. The remaining 340,773
of warrants were redeemed by the Company on December 23, 1996. In conjunction
with the redemption, the Company
12
<PAGE> 16
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
5. CAPITAL STOCK (CONTINUED)
issued 340,773 shares of its common stock in exchange for $3,287,304 in cash
plus $1,142,754 of notes. The notes bear interest at 8.25% per annum, were due
on April 30, 1997, and are guaranteed by an affiliate of a stockholder.
Payments made during 1997 on the notes receivable totaled $444,246. The
remaining balance due of $698,508, plus accrued interest of $70,470 at December
31, 1997, is currently being disputed by the issuers and is in litigation
(Note 13).
On February 23, 1996, the Company completed the private placement and issuance
of 408,526 shares of its common stock at $21.80 per share. Proceeds, net of
related expenses, were $8,333,654.
On June 6, 1997, the Company issued 600 shares of Series B Convertible
Preferred Stock(Series B Stock) for $5,000 per share, or $3,000,000. 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 (Series C Stock) for $5,000 per share, or
$3,000,000 in aggregate. In addition, on October 29, 1997 the Company issued
700 shares of Series G Convertible Preferred Stock (Series G Stock) for $5,000
per share, or $3,500,000. In connection with the sale of Series G Stock, 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. Total proceeds from
the above issuances, net of related expenses, was $9,163,428. None of the
Preferred Stock has voting rights. The Series B Stock is convertible into
Common Stock at a conversion price equal to the lessor 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 C Stock and Series G Stock are convertible into
Common Stock at the conversion price equal to the lesser of (a) $8.05 or (b)
101% of the average of the lowest per share market value for the five
consecutive tradings days during the 60 trading days immediately preceding the
date of conversion. The conversion ratio is subject to adjustment. 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. Accrued Preferred Stock dividends at December 31,
1997 totaled $81,164.
13
<PAGE> 17
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
5. CAPITAL STOCK (CONTINUED)
On November 19, 1997, $1,200,000 (240 shares) of Series B Stock was converted
into 259,347 shares of Common Stock. Accrued dividends of $26,958 were also
converted into 5,826 shares of Common Stock. On December 2, 1997, $700,000 (140
shares) of Series B Stock was converted into 251,446 shares of Common Stock.
Accrued dividends of $16,972 were also converted into 6,096 shares of Common
Stock. On December 23, 1997, $625,000 (125 shares) of Series B Stock was
converted into 291,199 shares of Common Stock. Accrued dividends of $17,208 were
also converted into 8,018 shares of Common Stock.
At December 31, 1997, authorized but unissued shares of common stock have been
reserved for future issuance as follows:
<TABLE>
<S> <C>
Warrants outstanding (Note 6) 628,687
Options outstanding (Note 6) 683,333
Conversion of Preferred Stock to Common
Stock 4,021,462
Options reserved for future issuance under the
1993 Stock Option Plan (Note 6) 1,034,636
-----------
6,368,118
===========
</TABLE>
6. STOCK OPTIONS AND WARRANTS
On August 19, 1993, the Board of Directors adopted the 1993 Stock Option Plan
(the Plan) for employees, consultants, and directors who are not also employees
of the Company (outside directors). The maximum number of shares issuable under
the Plan, as amended in 1997, is 1,705,000, of which 80,000 are reserved for
issuance to outside directors. The Plan is administered by a committee (the
"Committee") consisting of two or more outside directors appointed by the board
of directors of the Company.
For employees and consultants, the Plan provides for granting of Incentive Stock
Options (ISOs) and Nonstatutory Stock Options (NSOs). In the case of ISOs,
the exercise price shall not be less than 100% (110% in certain cases) of the
fair value of the common stock, as determined by the Committee, on the date of
grant. In the case of NSOs, the exercise price shall not be less than 85%
(110% in certain cases) of the fair value of the common stock, as determined by
the Committee, on the date of grant. The term of options granted to employees
and consultants will be for a period not to exceed 10 years (five years in
certain cases). Options granted under the Plan on or before May 31, 1995
generally vest over a five year period (One-fifth of options granted vest after
one year from the grant date and the remaining options vest ratably each month
thereafter).
14
<PAGE> 18
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
Options granted under the Plan subsequent to May 31, 1995 generally vest over a
four year period (One-fourth of options granted vest after one year from the
grant date and the remaining options vest ratably each month thereafter). In
addition, the Committee may authorize option grants with vesting provisions that
are not based solely on employees' rendering of additional service to the
Company.
For outside directors, NSOs only will be granted with an exercise price of
100% of the fair value of the common stock, as determined by the Committee, on
the date of grant.
The Plan provides that each outside director will be automatically granted
10,000 NSOs on the date of their initial election to the board of directors. On
the date of the annual meeting of the stockholders of the Company each outside
director who is elected, reelected, or continues to serve as a director, shall
be granted 3,000 NSOs, except for those outside directors who are first
elected to the Board of Directors at the meeting or three months prior. The
options granted vest ratably over three years and expire after seven years from
the grant date.
The Company entered into stock option agreements with certain employees and a
consultant prior to the adoption of the Plan. These stock options generally
become exercisable over a five-year period, commencing from the date of grant,
and expire 10 years from the date of grant. Exercise prices were determined
by the Board of Directors and, for options granted through December 31, 1992,
represented estimated fair values of the Company's common stock at the grant
date.
The Company has elected to follow Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board No. 123, "Accounting for Stock-Based
Compensation," (FASB 123) requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, since
the exercise price of the Company's employee stock option grants has equaled
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required
under FASB 123, and has been determined as if the Company had accounted for its
stock options granted subsequent to December 31, 1994, under the fair value
method of that Statement.
15
<PAGE> 19
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 1997, 1996 and 1995: risk-free
interest rate of 6.3%, 6.2% and 6.3%, respectively; a dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
.74, .75 and .75, respectively; and expected life of the options of 4.0, 4.1
and 4.1 years, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
Pro forma net loss $(13,063,962) $(11,590,957) $(7,428,018)
Pro forma net loss per common share $ (2.53) $ (2.56) $ (2.04)
Because FASB 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1999.
16
<PAGE> 20
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
The table below summarizes option activity during the three year period ended
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
<S> <C> <C>
Outstanding at December 31, 1994 457,013 $ .184 - 16.25
Granted 190,360 6.75 - 19.25
Exercised (50,130) .184 - 11.25
Forfeited (71,975) .184 - 15.25
-------
Outstanding at December 31, 1995 525,268 .184 - 19.25
Granted 346,907 17.00 - 27.00
Exercised (49,881) .184 - 15.25
Forfeited (26,036) .229 - 26.50
-------
Outstanding at December 31, 1996 796,258 .184 - 27.00
Granted 121,000 2.00 - 19.00
Exercised (17,821) .184 - 18.25
Forfeited (216,104) 6.75 - 27.00
-------
Outstanding at December 31, 1997 683,333 $ .184 - 26.50
=======
</TABLE>
The weighted-average exercise price of options outstanding at December 31, 1997
and 1996, was $12.92 and $13.40, respectively. The weighted-average exercise
price of options granted, exercised, and forfeited during 1997 was $ 13.18,
$3.94, and $15.32, respectively. The weighted-average fair value of options
granted during 1997, 1996 and 1995, was $7.94, $ 11.35, and $7.08, respectively.
Following is additional information with respect to options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
PRICE FROM PRICE FROM PRICE FROM PRICE FROM PRICE FROM
$0.18 TO $2.00 TO $10.125 TO $15.50 TO $19.00 TO
$0.23 $9.75 $14.75 $18.50 $26.50
Outstanding at December 31, 1997:
<S> <C> <C> <C> <C> <C>
Number of options 57,822 142,674 143,129 279,628 60,080
Weighted-average exercise price $0.22 $7.49 $10.92 $17.51 $22.35
Weighted-average remaining
contractual life in years $4.98 7.72 6.56 8.51 8.25
Exercisable at December 31, 1997:
Number of options 46,650 60,983 101,048 102,136 25,567
Weighted-average exercise price $ 0.22 $7.32 $10.97 $17.31 $22.33
</TABLE>
17
<PAGE> 21
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
The total number of unvested options outstanding at December 31, 1997 was
346,949, all of which vest based on employees' continued service to the Company.
On January 7, 1998, the Company granted an additional 355,000 options to
certain executive officers of the company.
In December 1991 and January 1992, the Company issued common stock purchase
warrants for 34,063 and 74,938 shares, respectively, to preferred stockholders
in conjunction with short-term loans from the stockholders. These warrants have
an exercise price of $1.4679 per share and expire 10 years from the date of
issue. Warrants for 19,869, 34,063 and 13,625 of these shares were exercised in
1997, 1996 and 1995, respectively.
In connection with the July 1992 issuance of Series B convertible preferred
stock, the Company issued common stock purchase warrants for 213,780 shares to
the Series B convertible preferred stockholders. These warrants have an exercise
price of $2.29 (71,260 shares), $2.75 (71,260 shares), and $3.21 (71,260 shares)
per share and expire upon the seventh anniversary of issuance. Warrants for
96,437 of these shares (36,107 shares at $2.29 per share, 36,107 shares at $2.75
per share and 24,223 shares at $3.21 per share) were exercised during 1996.
Warrants for 54,337 of these shares (17,779 shares at $2.29 per share, 17,779
shares at $2.75 per share, and 18,779 shares at $3.21 per share) were exercised
during 1997.
The Company also issued warrants to purchase 470,589 shares of common stock in
connection with the July 1993 issuance of Series C preferred stock. The warrants
are exercisable at $9.56 per share and expire in November 2000. Warrants for
64,614 and 69,020 of these shares were exercised during 1997 and 1996,
respectively.
In conjunction with the Company's initial public offering in October 1993,
warrants to purchase an aggregate of 100,000 shares of common stock at an
exercise price of $13.50 (120% of the initial public offering price) per share
were issued for $100 to the managing underwriter of the initial public offering.
The warrants are exercisable through October 26, 1998. Warrants for 10,000 of
these shares were exercised during 1996.
As discussed in Note 5, the Company issued warrants to purchase 62,500 shares of
common stock on June 6, 1997 in connection with the issuance of Series B
Convertible Preferred Stock and warrants to purchase 34,782 shares of common
stock on October 29, 1997 in connection with the issuance of Series
G Convertible Preferred Stock.
18
<PAGE> 22
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
7. LONG-TERM DEBT
The Company's long-term debt consists of two equipment financing notes with a
bank that mature in October 1998 and May 1999, respectively. The notes bear
interest at 8.5% per annum. Payments of principal plus accrued interest are due
monthly in arrears. Borrowings are collateralized by the related equipment
purchased, which has a carrying value of approximately $110,000 at December
31, 1997. The notes require the Company to maintain a minimum net worth and
leverage ratio, as defined. The Company's outstanding obligations under these
notes was $91,618 at December 31, 1997, with aggregate debt maturities of
$78,077 in 1998, and $13,541 in 1999.
8. INCOME TAXES
The Company has net operating loss and research and development credit
carryforwards for tax purposes of approximately $40,027,000 and $881,000,
respectively, at December 31, 1997. The net operating loss carryforwards
expire in the following years:
<TABLE>
<CAPTION>
Year Amount
- ------------------------------------------
<S> <C>
2005 $ 7,000
2006 638,000
2007 974,000
2008 1,659,000
2009 3,973,000
2010 8,199,000
2011 12,186,000
2012 12,391,000
- ------------------------------------------
$40,027,000
===========
</TABLE>
19
<PAGE> 23
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $15,210,000 $10,502,000
Research and development tax credit 881,000 624,000
carryforwards
Deferred compensation 79,000 94,000
--------------------------
Total deferred tax assets 16,171,000 11,220,000
Deferred tax liabilities:
Patent costs (215,000) (142,000)
Property and equipment (130,000) (68,000)
--------------------------
(345,000) (210,000)
--------------------------
Net deferred tax assets 15,825,000 11,010,000
Valuation allowance (15,825,000) (11,010,000)
--------------------------
Net deferred tax assets $ - $ -
==========================
</TABLE>
The valuation allowance increased during 1997 and 1996 by $4,815,000 and
$4,479,000, respectfully, due primarily to the increase in the net operating
loss carryforward. Based on the Internal Revenue Code and changes in the
ownership of the Company, utilization of the net operating loss carryforwards
will be subject to annual limitations.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, the restricted certificates of deposit,
and the stockholder notes receivable approximates fair value due to the short
maturity of those instruments. The fair value of the Company's investments
approximates the carrying value based on quoted market prices for those or
similar investments. The fair value of the Company's long-term debt approximates
the carrying value based on current rates available to the Company for debt with
similar remaining maturities.
20
<PAGE> 24
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
10. RESEARCH AND DEVELOPMENT AGREEMENTS
In March 1993, the Company entered into a three-year cost-sharing cooperative
agreement with the U.S. government under the Department of Commerce Advanced
Technology Program. Funding totaling $200,000 and $650,000 for the years ended
December 31, 1996 and 1995, respectively, has been offset against the related
research and development expenses.
11. COMMITMENTS
OPERATING LEASES
The Company leases its manufacturing and office space. Under the terms of the
lease, which expires October 2004, the Company is responsible for all real
estate taxes and operating expenses. The lease provides for a security deposit
($300,000 at December 31, 1997) that is secured by a certificate of deposit
owned by the Company.
Future minimum payments under the operating lease consist of the following at
December 31, 1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1998 227,500
1999 227,500
2000 231,300
2001 249,900
2002 249,900
Thereafter 453,700
----------
$1,639,800
==========
</TABLE>
Rent expense totaled $226,938, $227,334, and $267,991 for the years ended
December 3l, 1997, 1996, and 1995, respectively.
21
<PAGE> 25
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
11. COMMITMENTS (CONTINUED)
CONSULTING AND RESEARCH AGREEMENTS
During 1994, the Company entered into consulting and research agreements related
to the development of certain technology. The consulting agreement requires an
annual payment of $50,000 in 1998, while the research agreement provides for
annual payments of $140,000 through 1998 with the right to renew for one
additional year at the Company's option. The research agreement was amended in
1997 and again in 1998 and expires at the end of 1998, unless renewed at the
Company's option.
12. 401(K) PLAN
The Company has a 401(k) plan covering all employees who meet prescribed service
requirements. The plan provides for deferred salary contributions by the plan
participants and a Company contribution. Company contributions, if any, are at
the discretion of the Board of Directors and are not to exceed the amount
deductible under applicable income tax laws. No Company contribution was made
for the years ended December 31, 1997, 1996, and 1995.
13. LEGAL PROCEEDINGS
In 1996, a stockholder filed a complaint against the Company alleging that, in
connection with the Company's private placement of securities in November 1995,
the Company breached and repudiated an oral contract with the stockholder for
the issuance and sale by the Company of 370,370 shares of the Company's common
stock at $10.80 per share, plus warrants (immediately exercisable at $12.96 per
share) to purchase an additional 370,370 shares of the Company's common stock.
The stockholder is seeking a jury trial and money damages equal to the
difference between $8,800,000 (370,370 shares at $10.80 per share and 370,370
shares at $12.96 per share) and 740,740 shares multiplied by the highest price
at which the Company's stock traded on the NASDAQ Stock Market between November
20, 1995 and the date of judgment. The Company believes that the suit is
without merit and intends to continue to defend itself vigorously in this
litigation.
22
<PAGE> 26
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
13. LEGAL PROCEEDINGS (CONTINUED)
In July 1997, the Company filed a complaint against a group of Borrowers and a
Guarantor to enforce the terms of loans made by the Company to the Borrowers and
guaranteed by the Guarantor in the aggregate principal amount of $698,508. 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 in
December 1996.
In September 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 sought 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.
In November 1997, a Stockholder sued the Company and seven of its former or
current Directors for breaching their duties of loyalty and due care to the
Stockholder by selecting financing for the Company in June 1997 which allegedly
entrenched the Directors, eroded the Company's stock price and diluted the
Stockholder's equity in the Company. The Stockholder's complaint sought an
unspecified amount of compensatory damages in excess of $50,000 . The Company
and the Directors regard the suit as without factual or legal merit and intends
to defend itself vigorously in this litigation.
In January 1998, a Stockholder, individually and on behalf of all other
Stockholders similarly situated, filed a complaint against the Company and
eight of its former or current directors. The complaint alleged that the
Directors breached their duties of loyalty and due care to the putative class
of stockholders by selecting financing for the Company in June 1997 which
supposedly entrenched the Directors and reduced the Company's stock price. The
complaint also alleged that the Directors breached their duty of disclosure by
not informing the stockholders that the selected financing would erode the
Company's stock price. The Stockholder's complaint sought certification of a
class consisting of all owners of the Company's common stock during the period
from June 6, 1997 through November 21, 1997, excluding the Directors and a
Stockholder.
23
<PAGE> 27
Illinois Superconductor Corporation
Notes to Financial Statements (continued)
13. LEGAL PROCEEDINGS (CONTINUED)
The complaint also seeks an unspecified amount of compensatory and punitive
damages, and attorneys' fees. The Company and the Directors regard the suit as
without factual or legal merit and intends to continue to defend itself
vigorously in this litigation.
The Company believes that the resolution of the matters described above will not
have a material adverse effect on the financial condition, results of
operations, or cash flows of the Company.
14. SUBSEQUENT EVENTS
During the period from January 1, 1998 to March 23, 1998, the following
conversions of Preferred stock have taken place. Series B Convertible Preferred
Stock of $475,000 (95 shares) has been converted into 270,671 shares of common
stock. Accrued dividends of $13,794 were also converted into 7,860 shares of
common stock. Series C Convertible Preferred Stock of $2,475,000 (495 shares)
has been converted into 2,133,331 shares of common stock. Accrued dividends of
$50,885 were also converted into 43,797 shares of common stock. Series G
Convertible Preferred Stock of $2,840,000 (568 shares) has been converted into
2,847,404 shares of common stock. Accrued dividends of $53,747 were also
converted into 53,888 shares of common stock.
On May 15, 1998, the Company entered into a Securities Purchase Agreement
("Agreement") with various parties. Under the terms of the Agreement, the
Company issued and sold $10,350,000 aggregate principal amount of Senior
Convertible Notes ("Notes") and issued warrants to purchase 4,140,000 shares of
the Company's Common Stock ("Warrants"). The Notes bear interest at 2% per
annum, payable in cash or, at the Company's option, in shares of the Company's
Common Stock, and are due on May 15, 2002. Holders of the Notes may convert the
principal amount into shares of the Company's Common Stock at a conversion
price of $1.50 per share. Conversions are not permitted during the first 90 days
following the issuance of the Notes and are limited to one-half of the original
principal amount during the period from 91 to 180 days after issuance of the
Notes. The Company may redeem all or a portion of the Notes at a redemption
price equal to the principal amount plus accrued interest thereon, if any, under
certain conditions. The Warrants have an exercise price of $3.75 per share and
expire on May 15, 2001. The Agreement contains several covenants which limit the
Company's ability to incur additional indebtedness and to create any lien,
pledge, or encumbrance on any assets of the Company.
Since the Notes were issued with a non-detachable conversion feature that was
"in-the-money" at the date of issuance, a portion of the proceeds equal to the
intrinsic value of the conversion feature (equal to $9,918,750 and calculated
as the difference between the conversion price and the quoted market price of
the Company's Common Stock on the date of issuance multiplied by the number of
shares into which the Notes are convertible) was allocated to additional
paid-in capital, thus creating a discount to the debt. This discount will be
recognized as a charge to interest expense using the effective interest method
over the period from the date of issuance to the date that the Notes first
become convertible.
In addition, a portion of the proceeds equal to the fair value of the Warrant
issued in conjunction with the Notes (equal to $1,230,000 and calculated using
the Black-Scholes Approximation Formula) was allocated to additional paid-in
capital, thus creating a discount to the debt. This discount will be recognized
as a charge to interest expense using the effective interest method over the
four year term of the Notes.
As a result of additional interest expense from amortization of the debt
discount described above, the effective interest rate on the Notes is
approximately 73.9%.
24
<PAGE> 28
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
By:/s/ EDWARD W. LAVES
----------------------------------
Edward W. Laves, Ph.D.
President and Chief Executive Officer
Dated: August 11, 1998
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
23 Consent of Ernst & Young LLP
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-88716, Form S-8 No. 333-06003, Form S-3 No.
333-02846, Form S-3 No. 333-29797, Form S-3 No. 333-36089, Form S-3 No.
333-41731 and Form S-3 No. 333-56601) of our report, dated February 27, 1998,
except for paragraph 2 of Note 14, as to which the date is May 15, 1998,
included in the Annual Report on Form 10-K of Illinois Superconductor
Corporation for the year ended December 31, 1997, with respect to the
financial statements, as amended, included in this Form 10-K/A.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Chicago, Illinois
August 11, 1998
