-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GfjBpZuG/J+skIMZi8B+gz+E5ZfTDNWCSo1e2X6d2xgK1kVvJVGUgO5Pl/0OWFfo j36X5ud0Twbz4UrkRm9KuA== 0000950137-97-003137.txt : 19970923 0000950137-97-003137.hdr.sgml : 19970923 ACCESSION NUMBER: 0000950137-97-003137 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970922 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS SUPERCONDUCTOR CORPORATION CENTRAL INDEX KEY: 0000888693 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 363688459 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-36089 FILM NUMBER: 97683601 BUSINESS ADDRESS: STREET 1: 451 KINGSTON COURT CITY: MOUNT PROSPECT STATE: IL ZIP: 60056 BUSINESS PHONE: 8473919400 MAIL ADDRESS: STREET 1: 451 KINGSTON COURT CITY: MT PROSPECT STATE: IL ZIP: 60056 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1997 ================================================================================ REGISTRATION NO. 333-___________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------- 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, MT. PROSPECT, ILLINOIS 60056, (847) 391-9400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------------- EDWARD W. LAVES PRESIDENT AND CHIEF EXECUTIVE OFFICER ILLINOIS SUPERCONDUCTOR CORPORATION 451 KINGSTON COURT, MT. PROSPECT, ILLINOIS 60056, (847) 391-9400 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) WITH COPIES TO: LAWRENCE D. LEVIN, ESQ. BRUCE A. ZIVIAN, ESQ. Katten Muchin & Zavis Eilenberg & Zivian 525 West Monroe Street 20 North Wacker Drive, Suite 3230 Chicago, Illinois 60661 Chicago, Illinois 60606 (312) 902-5200 (312) 917-9900 ---------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: /x/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / _____ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / ____ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE COMBINED PROSPECTUS CONTAINED IN THIS REGISTRATION STATEMENT ALSO RELATES TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3 (REG. NO. 333-29797), WHICH REGISTERED 715,488 SHARES OF THE REGISTRANT'S COMMON STOCK AND WAS DECLARED EFFECTIVE BY THE COMMISSION ON JUNE 30, 1997. CALCULATION OF REGISTRATION FEE
================================================================================================================================ TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM PROPOSED MAXIMUM TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTERED REGISTERED PER SHARE OFFERING PRICE AMOUNT OF REGISTRATION FEE Common Stock, $.001 par value (including preferred stock purchase rights) 715,488 shares (1) $9.63 (2) $6,890,149 (2) $2,088 (3) Common Stock, $.001 par value (including preferred stock purchase rights) 468,572 shares $7.84 (4) $3,673,604 (4) $1,114 ---------------- ----- ---------- ------ Total 1,184,060 shares -- -- $3,202 ---------------- ----- ---------- ------ ================================================================================================================================
(1) REPRESENTS THE NUMBER OF SHARES OF COMMON STOCK WHICH WERE REGISTERED ON THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3 (REG. NO. 333-29797). (2) ESTIMATED SOLELY FOR PURPOSES OF CALCULATING THE REGISTRATION FEE PURSUANT TO RULE 457(c) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, ON THE BASIS OF THE AVERAGE OF THE HIGH AND LOW PRICES OF THE COMMON STOCK AS REPORTED BY THE NASDAQ NATIONAL MARKET ON JUNE 16, 1997. (3) THIS FEE HAS ALREADY BEEN PAID BY THE REGISTRANT. (4) SAME AS (2) ABOVE, EXCEPT CALCULATED ON THE BASIS OF THE AVERAGE OF THE HIGH AND LOW PRICES OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET ON SEPTEMBER 16, 1997. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. 2 INFORMATION CONTAINED HEREIN IS SUBJECTD TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOR CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOT SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion, Dated September 22, 1997 - -------------------------------------------------------------------------------- PROSPECTUS - -------------------------------------------------------------------------------- 1,184,060 SHARES [ILLINOIS SUPERCONDUCTOR CORPORATION LOGO] COMMON STOCK ------------ The shares (the "Shares") of Common Stock, $.001 par value (including preferred stock purchase rights) (the "Common Stock"), of Illinois Superconductor Corporation (the "Company") covered by this Prospectus may be sold from time to time by the stockholder specified in this Prospectus or its pledgees, donees, transferees or other successors in interest (the "Selling Stockholder"). See "Selling Stockholder." Of the Shares to which this Prospectus relates, (i) 637,061 are Shares which may in the future be issued to the Selling Stockholder upon the conversion of outstanding shares of the Company's Series B Convertible Preferred Stock held by the Selling Stockholder (the "Series B Stock"), (ii) 457,143 are Shares which may in the future be issued to the Selling Stockholder upon the conversion of shares of the Company's Series C Convertible Preferred Stock (the "Series C Stock"), (iii) 15,927 are Shares which may be issued to the Selling Stockholder as accrued dividends for one year on the Series B Stock, (iv) 11,429 are Shares which may be issued to the Selling Stockholder as accrued dividends for one year on the Series C Stock and (v) 62,500 are Shares which may in the future be issued to the Selling Stockholder upon the exercise of an outstanding warrant held by the Selling Stockholder (the "Warrant"). The Company will not receive any of the proceeds from the sale of the Shares by the Selling Stockholder, but the Company will receive the proceeds from the exercise of the Warrant by the Selling Stockholder. The Common Stock is traded on the Nasdaq National Market (the "NNM") under the symbol "ISCO." On September 19, 1997, the closing price of the Common Stock as reported on the NNM was $7.9375 per share. The Selling Stockholder may, from time to time during the effectiveness of this registration, sell the Shares on the NNM, in privately negotiated transactions or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such market prices or at negotiated prices. See "Plan of Distribution." AN INVESTMENT IN THE SHARES OFFERED HEREBY ENTAILS A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------ The date of this Prospectus is , 1997 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information concerning the Company may be inspected and copied at the public reference facilities maintained by the Commission at the Commission's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be obtained upon written request addressed to the Commission, Public Reference Section, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. Copies of reports, proxy statements and other information regarding registrants that file electronically are available on the Commission's Web site at http://www.sec.gov. The Common Stock is traded on the NNM, and such reports, proxy statements and other information concerning the Company can also be inspected at the offices of The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-3 (herein, together with all amendments, exhibits and schedules thereto, referred to as the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement which may be inspected and copied in the manner and at the sources described above. Any statements contained herein concerning the provisions of any document filed as an Exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete and, in each instance, reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. 2 4 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed by the Company with the Commission pursuant to the Exchange Act are incorporated herein by reference: 1. The Company's Annual Report on Form 10-K, for the fiscal year ended December 31, 1996; 2. The Company's Quarterly Reports on Form 10-Q, for the quarterly periods ended March 31, 1997 and June 30, 1997; 3. The Company's Current Reports on Form 8-K, dated April 14, 1997, May 1, 1997, June 10, 1997, July 8, 1997, July 16, 1997, August 4, 1997 and September 2, 1997; 4. The description of the Common Stock contained in the Company's Registration Statement on Form 8-A filed August 23, 1993 pursuant to Section 12 of the Exchange Act and all amendments thereto and reports filed for the purpose of updating such description; and 5. The description of the preferred stock purchase rights contained in the Company's Registration Statement on Form 8-A filed February 12, 1996 pursuant to Section 12 of the Exchange Act and all amendments thereto and reports filed for the purpose of updating such description. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering made hereby shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated herein by reference shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained in any subsequently filed document which is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide, without charge, to each person to whom a copy of this Prospectus is delivered, on the written or oral request of such person, a copy of any or all of the documents incorporated herein by reference (other than exhibits thereto, unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates). Written or telephone requests for such copies should be directed to the Company's principal executive office: Illinois Superconductor Corporation, 451 Kingston Court, Mt. Prospect, Illinois 60056, Attention: Secretary (telephone: (847) 391-9400). 3 5 RISK FACTORS Because the Company wants to provide investors with more meaningful and useful information, this Prospectus contains, and incorporates by reference, certain forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Act) 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. Accordingly, these statements are subject to certain risks, uncertainties and assumptions, including the factors set forth in the following Risk Factors, which could cause the Company's future results, performance or achievements to differ materially from those expressed in, or implied by, any of these statements. The Company undertakes no obligation to release publicly the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this Prospectus or to reflect the occurrence of unanticipated events. An investment in the Shares offered hereby entails a high degree of risk. In addition to the other information in this Prospectus, or incorporated by reference herein, prospective investors should carefully consider the following Risk Factors before purchasing any of the Shares offered hereby. UNCERTAIN MARKET ACCEPTANCE OF SUPERCONDUCTING TELECOMMUNICATIONS PRODUCTS The Company's radio frequency ("RF") filter products have not been sold in significant quantities and there is no assurance that a substantial market will develop for the Company's products. The Company's customers establish demanding specifications for performance and reliability. There can be no assurance that the Company's RF filter products will continue to pass product performance and reliability tests by cellular and Personal Communications Services ("PCS") service providers. There can also be no assurance that the Company's products will operate reliably on a long-term basis, that the Company will be able to manufacture adequate quantities of any products it develops at commercially acceptable costs or on a timely basis or that any of the Company's current or future products will achieve market acceptance. The Company has experienced, and may continue to experience, quarterly fluctuations in its results of operations as its RF filter products attempt to gain market acceptance while being subject to the lengthy approval and purchase processes of customers. Failure to successfully develop, manufacture and commercialize products on a timely and cost-effective basis will have a material adverse effect on the Company's business, operating results and financial condition. LIMITED OPERATING HISTORY; HISTORY OF LOSSES; AND UNCERTAINTY OF FINANCIAL RESULTS The Company was founded in October 1989 and to date has been engaged principally in research and development ("R&D"), product testing, manufacturing and marketing activities. The Company has only recently begun to generate limited revenues from the sale of its RF filter products. Prior to the commencement of these sales, the majority of the Company's revenues were derived from R&D contracts, primarily from the U.S. government. The Company does not expect revenues to increase dramatically until it ships a significant amount of its RF products. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. The Company must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development. The Company has incurred substantial net losses in each year since its inception and as of June 30, 1997 had an accumulated deficit of approximately $32.7 million. The Company expects to continue to incur operating losses through at least early 1998 as it continues to devote significant financial resources to its product development, manufacturing, marketing and sales efforts. Even if the Company is able to overcome the significant remaining manufacturing and marketing hurdles necessary to sell 4 6 significant quantities of its RF filter products, there can be no assurance that the Company will ever achieve a profitable level of operations or, if profitability is achieved, that it can be sustained. FUTURE CAPITAL NEEDS To date, the Company has financed its operations primarily through public and private equity financings that have raised approximately $43.4 million, net of related expenses. Although the Company believes that its current funds, including the $1.5 million of proceeds from its sale of the Series C Stock to the Selling Stockholder on August 29, 1997, are sufficient to finance the Company's operations as planned through at least the middle of November 1997, the Company will require additional funds to finance its product development, manufacturing and marketing activities thereafter. Pursuant to the Convertible Preferred Stock Purchase Agreement dated as of June 6, 1997, by and between the Company and the Selling Stockholder (the "Purchase Agreement"), the Company has the option to issue up to $10.5 million of additional convertible preferred stock (the "Additional Preferred Stock") to the Selling Stockholder in up to three additional tranches, if certain conditions, including, without limitation, maintaining certain price levels for the Common Stock, no material adverse change in the Company's business and no significant changes in the Company's senior management, are satisfied by the Company or waived by the Selling Stockholder. Notwithstanding the foregoing, the Company and the Selling Stockholder have agreed that of the remaining $10.5 million of Additional Preferred Stock, the Company may issue $1.5 million of additional Series C Stock at such time or times as the parties may agree, which issuance would not be considered one of the three additional tranches. There can be no assurance, however, that the Company will receive any or all of the remaining $10.5 million, or when such funds will be received, because there can be no assurance that or when the conditions will be satisfied by the Company or waived by the Selling Stockholder. If the conditions are not satisfied or waived, there can be no assurance that additional funds will be available on acceptable terms to the Company, or at all. In addition, the Company has granted a right of first refusal to Brown Simpson, LLC to participate in any future private placement of equity securities, which is exercisable within six months of the closing of any tranche of financing under the Purchase Agreement. This right of first refusal could adversely impair the Company's ability to obtain additional equity financings. If any of the Additional Preferred Stock is issued, or if additional funds are raised by issuing other equity securities, further dilution to existing or future stockholders is likely to result. If adequate funds are not available on acceptable terms when needed, the Company may be required to delay, scale-back or eliminate the manufacturing, marketing or sales of one or more of its products or research and development programs, or to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or potential products that the Company would not otherwise relinquish. Inadequate funding also could impair the Company's ability to compete in the marketplace. In particular, if during the fourth quarter of 1997 the Company is unable to secure adequate additional financing through the issuance of Additional Preferred Stock or from other sources, it will have to reduce its operating plans in order to continue its operations through the end of 1997. The Company regularly examines opportunities to expand its technology base and product line through means such as licenses, joint ventures and acquisitions of assets or ongoing businesses, and may issue securities in connection with such transactions. However, no commitments to enter into or pursue any such transactions have been made at this time, and there can be no assurance that any such discussions will result in any such transaction being concluded. In December 1996, the Company received an aggregate of approximately $4,400,000 from the exercise of warrants that were issued in the Company's private placement completed in November 1995, approximately $1,100,000 of which was in the form of promissory notes. Approximately $716,000 in principal amount of these promissory notes was due on April 30, 1997, of which approximately $699,000 remains outstanding as of the date hereof. The Company has filed a lawsuit to collect repayment of these promissory notes, including accrued interest. There can be no assurance, however, when or if such 5 7 promissory notes will be repaid and a further delay or failure in repayment could adversely effect the Company's cash flow and liquidity. VOLATILITY OF COMMON STOCK PRICE The market price of the Common Stock, like that of many other high-technology companies, has fluctuated significantly and is likely to continue to fluctuate in the future. Announcements by the Company or others regarding the receipt of customer orders, quarterly variations in operating results, additional equity financings, changes in recommendations of securities analysts, results of customer field trials, scientific discoveries, technological innovations, litigation, product developments, patent or proprietary rights, government regulation and general market conditions may have a significant impact on the market price of the Common Stock. LIMITED EXPERIENCE IN MANUFACTURING, MARKETING AND SALES For the Company to be financially successful, it must manufacture its products in substantial quantities, at acceptable costs and on a timely basis. Although the Company to date has produced limited quantities of its products for commercial installations and for use in development and customer field trial programs, production of large quantities at competitive costs presents a number of technological and engineering challenges for the Company, and there can be no assurance that the Company will be able to manufacture such products in sufficient volume. The Company has limited experience in manufacturing, and substantial costs and expenses may be incurred in connection with attempts to manufacture substantial quantities of the Company's products. No assurance can be given that the Company will be able to make the transition to full commercial production successfully. The Company's marketing and sales experience to date is very limited. The Company will be required to further develop its marketing and sales force in order to effectively demonstrate the advantages of its products over more traditional products, as well as competitive superconductive products. The Company may also elect to enter into agreements or relationships with third parties regarding the commercialization or marketing of its products. If the Company enters into such agreements or relationships, it will be substantially dependent upon the efforts of others in deriving commercial benefits from its products. There can be no assurance that the Company will be able to establish adequate sales and distribution capabilities, that it will be able to enter into marketing agreements or relationships with third parties on financially acceptable terms or that any third parties with whom it enters into such arrangements will be successful in marketing the Company's products. COMPETITION The wireless telecommunications equipment market is very competitive. The Company's products compete directly with products which embody existing and future competing commercial technologies. In particular, in cellular telecommunications applications, the Company competes with conventional RF component manufacturers whose products are currently in use by the Company's potential customers. Many of these companies have substantially greater financial resources, larger R&D staffs and greater manufacturing and marketing capabilities than the Company. Other emerging wireless technologies may also provide protection from RF interference and offer enhanced range to cellular and PCS service providers at lower prices and may therefore compete with the Company's products. There can be no assurance that high performance RF filters will become a preferred technology to address the needs of cellular and PCS service providers. Failure of the Company's products to improve performance sufficiently or at an acceptable price or to achieve commercial acceptance or otherwise compete with conventional technologies will have a material adverse effect on the Company's business, operating results and financial condition. 6 8 Although the market for superconductive electronics currently is small and in the early stages of development, the Company believes it will become intensely competitive, especially if products with significant market potential are successfully developed. In addition, if the superconducting industry develops, additional competitors with significantly greater resources are likely to enter the field. In order to compete successfully, the Company must develop and maintain technologically advanced products, attract and retain highly qualified personnel, obtain additional patent or other protection for its technology and products and manufacture and market its products, either alone or with third parties. There can be no assurance that the Company will be able to achieve these objectives. Failure to do so would have a material adverse effect on the Company's business, operating results and financial condition. MANAGEMENT OF GROWTH The Company's growth to date has caused, and will continue to cause, a significant strain on its management, operational, financial and other resources. The Company's ability to manage its growth effectively will require it to implement and improve its operational, financial, manufacturing and management information systems and expand, train, manage and motivate its employees. These demands may require the addition of new management personnel and the development of additional expertise by management. Any increase in resources devoted to product development and marketing and sales efforts could have an adverse effect on the Company's performance in the next several quarters. If the Company were to receive substantial orders, the Company may have to expand its current facility, which could cause an additional strain on the Company's management personnel and development resources. The failure of the Company's management team to effectively manage growth could have a material adverse effect on the Company's business, operating results and financial condition. RAPID TECHNOLOGICAL CHANGE; POSSIBLE PURSUIT OF OTHER MARKET OPPORTUNITIES The field of superconductivity is characterized by rapidly advancing technology. The success of the Company will depend in large part upon its ability to keep pace with advancing superconducting technology, high performance RF filter design and efficient, low cost cryogenic technologies. Rapid changes have occurred, and are likely to continue to occur, in the development of superconducting materials and processes. The Company will have to continue to improve its ability to fabricate thick-film HTS devices, design high performance RF filters and efficient cryogenic subsystems and produce significant quantities of products based on these improvements. There can be no assurance that the Company's development efforts will not be rendered obsolete by the adoption of alternative solutions to current wireless operator problems or by technological advances made by others, or that other materials or processes, including other superconducting materials or fabrication processes, will not prove more advantageous for the commercialization of high performance wireless products than the materials and processes selected by the Company. Because HTS product development is a new and emerging field, there may in the future be new opportunities that are more attractive than those initially identified by the Company for its targeted markets. As a result, there is no assurance that the Company will not elect in the future to commit its resources to such other potentially more attractive market opportunities. Such election may require the Company to limit or abandon its current focus on developing, manufacturing, marketing and selling HTS products for cellular, PCS and other telecommunications markets. The risks associated with other markets may be different from the risks associated with the cellular, PCS and other wireless telecommunications markets. FOCUS ON WIRELESS TELECOMMUNICATIONS MARKET; CURRENT AND FUTURE COMPETITIVE TECHNOLOGIES The Company has selected the wireless telecommunications market, in particular the cellular and PCS markets, as the first principal target market for its superconductor-based products. The devotion of substantial resources to the wireless telecommunications market makes the Company vulnerable to adverse changes in this market. Adverse developments in the wireless telecommunications market, which 7 9 could come from a variety of sources, including future competition, new technologies or regulatory decisions, could affect the competitive position of wireless systems. Any adverse developments in the wireless telecommunications market during the foreseeable future would have a material adverse effect on the Company's business, operating results and financial condition. The Federal Communications Commission ("FCC") has adopted rules that provide preferential licensing treatment for parties that develop new communications services and technologies. These developments and further technological advances may make available other alternatives to cellular or PCS service, thereby creating additional sources of competition. There can be no assurance that competition to cellular or PCS technologies will not adversely affect the market for the Company's products, or result in changes in the Company's development and manufacturing programs. DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS To date, the Company's marketing and sales efforts have focused on major cellular service providers in retrofit applications and, to a lesser extent, on PCS operators and cellular and PCS OEMs. The Company expects that if its RF filter products achieve market acceptance, a limited number of wireless service providers and OEMs will account for a substantial portion of its revenue during any period. Sales of many of the Company's RF filter products depend in significant part upon the decision of prospective customers and current customers to adopt and expand their use of the Company's products. Wireless service providers and the Company's other customers are significantly larger than, and are able to exert a high degree of influence over, the Company. Customers' orders are affected by a variety of factors such as new product introductions, regulatory approvals, end user demand for wireless services, customer budgeting cycles, inventory levels, customer integration requirements, competitive conditions and general economic conditions. The loss of one or more of the Company's customers or the failure to attract new customers would have a material adverse effect on the Company's business, operating results and financial condition. LENGTHY SALES CYCLES Wireless service providers and the Company's other customers are significantly larger than, and are able to exert a high degree of influence over, the Company. Prior to selling its products to these customers, the Company must generally undergo lengthy approval and purchase processes. Technical and business evaluation by potential customers can take up to a year or more for products based on new technologies such as HTS. The length of the approval process is affected by a number of factors, including, among others, the complexity of the product involved, priorities of the customers, budgets and regulatory issues affecting customers. There can be no assurance that the Company will obtain the necessary approvals or that ensuing sales of such products will occur. There can also be no assurance that the length of its customers' approval process or delays will not have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON LIMITED SOURCES OF SUPPLY Certain parts and components used in the Company's RF filter products, including substrates and cryogenic refrigerators, are purchased from a single source or are only currently available from a limited number of sources. The Company's reliance on these sole or limited source suppliers exposes the Company to certain risks and uncertainties, including the possibility of a shortage or discontinuation of certain key components and reduced control over delivery schedules, manufacturing capabilities, quality and costs. Any reduced availability of such parts or components when required could materially impair the Company's ability to manufacture and deliver its products on a timely basis and result in the cancellation of orders, which could have material adverse effect on the Company's business, operating results and financial condition. In addition, the purchase of certain key components involves long lead times and, in the event of unanticipated increases in demand for the Company's products, the Company may not be able to manufacture products in a quantity sufficient to meet its customers' demand in any 8 10 particular period. The Company has no guaranteed supply arrangements with its sole or limited source suppliers, does not maintain an extensive inventory of parts or components, and customarily purchases parts and components pursuant to purchase orders placed from time to time in the ordinary course of business. Business disruption, production shortfalls or financial difficulties of a sole or limited source supplier could materially and adversely effect the Company by increasing product costs or reducing or eliminating the availability of such parts or components. In such events, the inability of the Company to develop alternative sources of supply quickly and on a cost-effective basis could materially impair the Company's ability to manufacture and deliver its products on a timely basis and could have a material adverse effect on its business, operating results and financial condition. INTELLECTUAL PROPERTY AND PATENTS The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its trade secrets and to operate without infringing upon the patent or other proprietary rights of others and without breaching or otherwise losing rights in the technology licenses upon which any Company products are based. As of September 1, 1997, the Company has been issued eight U.S. patents, has purchased two U.S. patents from another company and has filed and is actively pursuing applications for 25 other U.S. patents, and is the licensee of 9 patents and patent applications held by others. One of the Company's patents is jointly owned with Lucent Technologies, Inc., formerly a subsidiary of AT&T. The Company believes that, since the discovery of HTS materials in 1986, a large number of patent applications have been filed worldwide and many patents have been granted in the U.S. relating to HTS materials. The claims in those patents often appear to overlap and there are interference proceedings pending in the United States Patent and Trademark Office (not currently involving the Company) regarding rights to inventions claimed in some of the HTS materials patent applications. The Company also believes there are a large number of patents and patent applications covering RF filter products and other products and technologies that the Company is pursuing. Accordingly, the patent positions of companies using HTS materials technologies and RF technologies, including the Company, are uncertain and involve complex legal and factual questions. No assurance can be given that the patent applications filed by the Company or by the Company's licensors will result in issued patents or that the scope and breadth of any claims allowed in any patents issued to the Company or its licensors will exclude competitors or provide competitive advantages to the Company. In addition, there can be no assurance that any patents issued to the Company or its licensors will be held valid if subsequently challenged or that others will not claim rights in the patents and other proprietary technologies owned or licensed by the Company or that others have not developed or will not develop similar products or technologies without violating any of the Company's proprietary rights. Furthermore, the Company's loss of any license to technology that it now has or acquires in the future may have a material adverse effect on the Company's business, operating results and financial condition. Some of the patents and patent applications owned or licensed by the Company are subject to non-exclusive, royalty-free licenses held by various governmental units. These licenses permit these U.S. government units to select vendors other than the Company to produce products for the U.S. Government which would otherwise infringe the Company's patent rights which are subject to the royalty-free licenses. In addition, the U.S. Government has the right to require the Company to grant licenses (including exclusive licenses) under such patents and patent applications or other inventions to third parties in certain instances. Patent applications in the U.S. are currently maintained in secrecy until patents are issued and in foreign countries this secrecy is maintained for a period of time after filing. Accordingly, publication of discoveries in the scientific literature or of patents themselves or laying open of patent applications in foreign countries tends to lag behind actual discoveries and filing of related patent applications. Due to this factor and the large number of patents and patent applications related to HTS materials, RF technologies and other products and technologies that the Company is pursuing, comprehensive 9 11 patent searches and analyses associated with HTS materials, RF technologies and other products and technologies that the Company is pursuing are often impractical or not cost-effective. As a result, the Company's patent and literature searches cannot fully evaluate the patentability of the claims in the Company's patent applications or whether materials or processes used by the Company for its planned products infringe or will infringe upon existing technologies described in U.S. patents or may infringe upon claims in patent applications made available in the future. Because of the volume of patents issued and patent applications filed relating to HTS materials, RF technologies and other products and technologies that the Company is pursuing, the Company believes there is a significant risk that current and potential competitors and other third-parties have filed or will file patent applications for, or have obtained or will obtain, patents or other proprietary rights relating to materials, products or processes used or proposed to be used by the Company. In any such case, to avoid infringement, the Company would have to either license such technologies or design around any such patents. There can be no assurance that the Company will be able to obtain licenses to such technologies or that, if obtainable, such licenses would be available on terms acceptable to the Company or that the Company could successfully design around these third-party patents. Participation in litigation or patent office proceedings in the U.S. or other countries, which could result in substantial cost to and diversion of effort by the Company, may be necessary to enforce patents issued or licensed to the Company, to defend the Company against infringement claims made by others or to determine the ownership, scope or validity of the proprietary rights of the Company and others. An adverse outcome in any such proceedings could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and/or require the Company to cease using certain technologies, any of which could have a material adverse effect on the Company's business, operating results and financial condition. The Company believes that a number of patent applications, including applications filed by International Business Machines Corporation, Lucent Technologies, Inc., and other potential competitors of the Company are pending that may cover the useful compositions and uses of certain HTS materials including yttrium barium copper oxide ("YBCO"), the principal HTS material used by the Company in its present and currently proposed products. Therefore, there is a substantial risk that one or more third parties may be granted patents covering YBCO and other HTS materials and their uses, in which case the Company could not use these materials without an appropriate license. As with other patents, the Company has no assurance that it will be able to obtain licenses to any such patents for YBCO or other HTS materials or their uses or that such licenses would be available on commercially reasonable terms. Any of these problems would have a material adverse effect on the Company's business, operating results and financial condition. GOVERNMENT REGULATIONS Although the Company believes that its wireless telecommunications products themselves would not be subject to licensing by, or approval requirements of, the FCC, the operation of base stations is subject to FCC licensing and the radio equipment into which the Company's products would be incorporated is subject to FCC approval. Base stations and the equipment marketed for use therein must meet specified technical standards. The Company's ability to sell its wireless telecommunications products will be dependent on the ability of wireless base station equipment manufacturers and wireless base station operators to obtain and retain the necessary FCC approvals and licenses. In order for them to be acceptable to base station equipment manufacturers and to base station operators, the characteristics, quality and reliability of the Company's base station products must enable them to meet FCC technical standards. Any failure to meet such standards or delays by base station equipment manufacturers and wireless base station operators in obtaining the necessary approvals or licenses could have a material adverse effect on the Company's business, operating results and financial condition. In addition, HTS 10 12 RF filters are on the U.S. Department of Commerce's export regulation list and therefore exportation of such RF filters to certain countries may be restricted or subject to export licenses. The Company uses certain hazardous materials in its research, development and manufacturing operations. As a result, the Company is subject to stringent federal, state and local regulations governing the storage, use and disposal of such materials. It is possible that current or future laws and regulations could require the Company to make substantial expenditures for preventive or remedial action, reduction is in material compliance with all environmental regulations and to date the Company has not had to incur significant expenditures for preventive or remedial action with respect to the use of hazardous materials. However, there can be no assurance that the operations, business or assets of the Company will not be materially and adversely affected by the interpretation and enforcement of current or future environmental laws and regulations. In addition, although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, there is the risk of accidental contamination or injury from these materials. In the event of an accident, the Company could be held liable for any damages that result. Furthermore, the use and disposal of hazardous materials involves the risk that the Company could incur substantial expenditures for such preventive or remedial actions. The liability in the event of an accident or the costs of such actions could exceed the Company's resources or otherwise have a material adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON KEY PERSONNEL The Company's success will depend in large part upon its ability to attract and retain highly qualified management, manufacturing, marketing, sales and R&D personnel. Due to the specialized nature of the Company's business, it may be difficult to locate and hire qualified personnel. The loss of services of one of its executive officers or other key personnel, or the failure of the Company to attract and retain other executive officers or key personnel, could have a material adverse effect on the Company's business, operating results and financial condition. BUSINESS INTERRUPTIONS AND DEPENDENCE ON A SINGLE U.S. FACILITY The Company's primary operations, including engineering, manufacturing, research, distribution and general administration, are housed in a single facility in Mount Prospect, Illinois. Any material disruption in the Company's operations, whether due to fire, natural disaster, power loss or otherwise, could have a material adverse effect on the Company's business, operating results and financial condition. SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE On June 6, 1997 and August 29, 1997, the Company sold 600 shares of Series B Stock and 300 shares of Series C Stock, respectively, to the Selling Stockholder in private placements pursuant to the Purchase Agreement. Each share of Series B Stock and Series C Stock is convertible at any time into a number of shares of Common Stock determined by dividing $5,000, plus any accrued but unpaid dividends to be paid in Common Stock, by the lesser of (i) the average closing bid price for the five consecutive trading days immediately preceding the date of issuance of the Series B Stock or the Series C Stock, as the case may be, and (ii) 101% of the average of the lowest closing bid prices for five consecutive trading days during the 60 consecutive trading days immediately preceding the date of conversion of the Series B Stock or the Series C Stock, as the case may be. No shares of Series B Stock or Series C Stock have been converted into shares of Common Stock as of the date hereof. In connection with the issuance of the Series B Stock, the Warrant exercisable for 62,500 shares of Common Stock was also issued to the Selling Stockholder. The Warrant has not been exercised for shares of Common Stock as of the date hereof. 11 13 Pursuant to the Purchase Agreement, the Company has the option to issue up to 2,100 shares of Additional Preferred Stock to the Selling Stockholder in up to three additional tranches, if certain conditions are satisfied or waived; provided, however, that the Company and the Selling Stockholder have agreed that of such 2,100 shares of Additional Preferred Stock, the Company may issue 300 additional shares of Series C Stock at such time or times as the parties may agree, which issuance would not be considered one of the three additional tranches. The Company may also issue additional warrants exercisable for up to 62,500 shares of Common Stock if and when certain of the Additional Preferred Stock is sold. The Company may also issue additional capital stock, warrants and/or other securities to raise capital in the future. In order to attract and retain key personnel, the Company may also issue additional securities, including stock options, in connection with its employee benefit plans. During the terms of such options, warrants, Series B Stock, Series C Stock and Additional Preferred Stock, if any, the holders thereof are given the opportunity to benefit from a rise in the market price of the Common Stock. The sale of a substantial number of shares of Common Stock by the Company or any of its significant stockholders, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. In June 1997, the Company's Registration Statement on Form S-3 (Reg. No. 333-29797) was declared effective by the Commission, registering for public resale 715,488 Shares of which (i) 637,061 are Shares which may in the future be issued to the Selling Stockholder upon the conversion of outstanding shares of Series B Stock, (ii) 15,927 are Shares which may be issued to the Selling Stockholder as accrued dividends for one year on the Series B Stock and (iii) 62,500 are Shares which may in the future be issued to the Selling Stockholder upon the exercise of the Warrant. In connection with the Registration Statement of which this Prospectus is a part, an additional 468,572 Shares are being registered by the Company for public resale, of which (i) 457,143 are Shares which may in the future be issued to the Selling Stockholder upon the conversion of outstanding shares of Series C Stock and (ii) 11,429 are Shares which may be issued to the Selling Stockholder as accrued dividends for one year on the Series C Stock. A total of 1,184,060 Shares are being registered under the two registration statements. The Company may be obligated to register additional shares of Common Stock for public resale prior to or upon conversion of the Series B Stock and the Series C Stock depending on, among other factors, the future market price of the Common Stock. The increase in the number of outstanding shares of Common Stock that are available for sale without restriction due to the registration of the Shares and the perception that a substantial number of the Shares may be sold by the Selling Stockholder, or the actual sale of a substantial number of the Shares by the Selling Stockholder, could adversely affect the market price of the Common Stock. The Company is unable to make any prediction as to the effect, if any, that future sales of Common Stock or the availability of Common Stock for sale may have on the market price of the Common Stock prevailing from time to time. In addition, any such sale or such perception could make it more difficult for the Company to sell equity securities in the future at a time and price that the Company deems appropriate. The Company currently has outstanding warrants to purchase 599,993 shares of Common Stock at a weighted average exercise price of $9.36 per share and options to purchase 775,728 shares of Common Stock at a weighted average exercise price of $13.56 per share (673,174 of which have not yet vested) issued to employees, directors and consultants pursuant to the Company's Amended and Restated 1993 Stock Option Plan and individual agreements with management and directors of the Company. DILUTION AND DIVIDEND POLICY The conversion of Series B Stock, Series C Stock or Additional Preferred Stock, if any, or the exercise of options and warrants, including the Warrant, as well as the sale by the Company of additional securities, including the Additional Preferred Stock, and/or rights to purchase such securities, would likely have an adverse or dilutive effect on the market value of the Common Stock, including the shares of Common Stock being offered hereby. The Series B Stock and Series C Stock may be converted into 12 14 shares of Common Stock at a discount to the market price of the Common Stock on the particular date of conversion. The Company also may in the future offer equity participation in connection with the obtaining of non-equity financing, such as debt or leasing arrangements accompanied by warrants to purchase equity securities of the Company. This could also have a dilutive effect upon the holders of Common Stock. The Company has never paid a cash dividend on its Common Stock and does not expect to do so in the foreseeable future. Dividends on the Series B Stock and Series C Stock are payable at the rate of 5% per annum and are payable in cash or shares of Common Stock at the option of the Company. While the Series B Stock and Series C Stock is outstanding, the Company is limited in its ability to pay dividends on the Common Stock. ANTI-TAKEOVER PROVISIONS The Company has certain provisions which may be deemed to have a potential "anti-takeover" effect in that such provisions may delay, defer or prevent a change of control of the Company. In February 1996, the Board of Directors of the Company (the "Board of Directors") adopted a stockholders rights plan (the "Rights Plan"). By causing substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors, the Series A Rights and Series B Rights of the Rights Plan may interfere with certain acquisitions, including acquisitions that may offer a premium over market price to some or all of the Company's stockholders. In addition, the Company's Certificate of Incorporation and Bylaws contain provisions that include (i) a requirement that stockholder action may be taken only at stockholders meetings; (ii) the authority of the Board of Directors to issue series of the Company's preferred stock with such voting rights and other powers as the Board of Directors may determine; (iii) notice requirements in the Bylaws relating to nominations to the Board of Directors and to the raising of business matters at stockholders meetings; and (d) the classification of the Board of Directors into three classes, each serving for staggered three-year terms. 13 15 USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Shares by the Selling Stockholder. If and when all or a portion of the Warrant is exercised and up to 62,500 Shares are issued to the Selling Stockholder, the Company will receive the proceeds from the sale of such Shares to the Selling Stockholder. If the Warrant is exercised in full, the Company will receive $925,781. Such amount is intended to be used by the Company for working capital and other general corporate purposes, including funding of its product development programs, expansion of its sales and marketing efforts, and acquisition of manufacturing equipment. SELLING STOCKHOLDER The following table sets forth, as of September 22, 1997, certain information regarding the beneficial ownership of the outstanding Common Stock by the Selling Stockholder, consisting of the Shares which the Selling Stockholder may be issued upon conversion of the Series B Stock and Series C Stock, the Shares which the Selling Stockholder may be issued as accrued dividends on the Series B Stock and Series C Stock and the Shares which the Selling Stockholder may acquire upon exercise of the Warrant, both before the offering of the Shares and as adjusted to reflect the sale of the Shares.
SHARES BENEFICIAL OWNERSHIP BENEFICIALLY AFTER OFFERING(3)(4) OWNED PRIOR NUMBER OF SHARES -------------------------- NAME OF SELLING STOCKHOLDER TO OFFERING(1) BEING OFFERED(1)(2) NUMBER OF SHARES PERCENT - --------------------------------------- -------------- ------------------- ---------------- ------- Southbrook International Investments, Ltd. 1,184,060 1,184,060 -- --
(1) The Selling Stockholder holds 600 shares of Series B Stock and 300 shares of Series C Stock, each with a stated value of $5,000 per share, which may be converted into shares of Common Stock from time to time at a conversion price (the "Conversion Price") equal to the lesser of (i) the average closing bid price for the five consecutive trading days immediately preceding the date of issuance of the Series B Stock or Series C Stock, as the case may be, and (ii) 101% of the average of the lowest closing bid prices for five consecutive trading days during the 60 consecutive trading days immediately preceding the date of conversion of the Series B Stock or Series C Stock, as the case may be. The number of shares of Common Stock shown in the table includes 637,061 shares of Common Stock, which represents two times the number of shares of Common Stock into which the full 600 shares of Series B Stock might have been converted on June 23, 1997 based on the then Conversion Price of $9.41825 per share and 457,143 shares of Common Stock, which represents two times the number of shares of Common Stock into which the full 300 shares of Series C Stock might have been converted on September 22, 1997 based on the then Conversion Price of $6.5625 per share. Because the number of shares of Common Stock that will be ultimately issued to the Selling Stockholder upon conversion of the Series B Stock and Series C Stock is dependent upon the applicable Conversion Price at the time of conversion, that number of shares of Common Stock, and therefore the number of shares of Common Stock offered hereby, cannot be determined at this time. The number of shares of Common Stock shown in the table also includes 62,500 shares of Common Stock issuable upon exercise of the presently exercisable Warrant. The number of shares of Common Stock shown in the table also includes 15,927 shares of Common Stock, which represents accrued dividends for one year on the Series B Stock based on the Conversion Price of $9.41825 at June 23, 1997 and 11,429 shares of Common Stock, which represents accrued dividends for one year on the Series C Stock based on the Conversion Price of $6.5625 at September 22, 1997. Dividends on the Series B Stock and Series C Stock are payable at the rate of 5% per annum and are payable in cash or shares of Common Stock at the Company's option. (2) Represents the maximum number of Shares that may be sold by the Selling Stockholder pursuant to this Prospectus; provided, however, that the Registration Statement of which this Prospectus is a part shall also cover any additional shares of Common Stock which become issuable in connection with the Shares registered for sale hereby by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the Company's number of outstanding shares of Common Stock. (3) Assumes the Selling Stockholder sells all of its Shares offered hereby to unaffiliated third parties pursuant to this Prospectus. The Selling Stockholder may sell all or part of its Shares. (4) The Purchase Agreement limits the conversion and exercise rights of the Selling Stockholder to the extent that the maximum number of shares of Common Stock held by the Selling Stockholder and its affiliates after such conversion of the Series B Stock and Series C Stock and/or exercise of the Warrant would exceed 4.999% of the then issued and outstanding shares of Common Stock following such conversion and/or exercise. 14 16 PLAN OF DISTRIBUTION Pursuant to the Registration Rights Agreement dated as of June 6, 1997, by and between the Company and the Selling Stockholder (the "Registration Rights Agreement"), the Company has previously filed a Registration Statement on Form S-3 (Reg. No. 333-29797) which registers for public resale 715,488 Shares, of which (i) 637,061 are Shares which may in the future be issued to the Selling Stockholder upon the conversion of outstanding shares of Series B Stock, (ii) 15,927 are Shares which may be issued to the Selling Stockholder as accrued dividends for one year on the Series B Stock and (iii) 62,500 are Shares which may in the future be issued to the Selling Stockholder upon the exercise of the Warrant. Such registration statement was declared effective by the Commission in June 1997. Pursuant to the Registration Rights Agreement, the Company also agreed to file with the Commission by the 30th day following the issuance of the Series C Stock a registration statement registering for public resale additional shares of Common Stock which may in the future be issued to the Selling Stockholder upon the conversion of the outstanding shares of Series C Stock and/or as accrued dividends for one year on the Series C Stock. The Company also agreed to use its best efforts to cause such registration statement to be declared effective as promptly as possible after the filing thereof, but in any event prior to the 90th day following the issuance of the Series C Stock. The Registration Statement of which this Prospectus is a part has been filed with the Commission pursuant to the Registration Rights Agreement. The Selling Stockholder may sell all or a portion of the Shares held by it from time to time while the applicable registration statements remain effective. The Company has agreed that it will use all reasonable efforts to keep the registration statements effective for a period of three years commencing on the effective date of the applicable registration statement (or a shorter period if all of the Shares registered under the applicable registration statement have been sold or may be sold without volume restrictions pursuant to Rule 144 under the Securities Act prior to the expiration of the three-year period). The aggregate proceeds to the Selling Stockholder from the sale of Shares offered by the Selling Stockholder hereby will be the prices at which such securities are sold, less any commissions. There is no assurance that the Selling Stockholder will sell any or all of the Shares offered hereby. The Selling Stockholder may, from time to time, sell all or a portion of the Shares on the NNM, in privately negotiated transactions or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such market prices or at negotiated prices. The Shares may be sold by the Selling Stockholder by one or more of the following methods, without limitation: (a) block trades in which the broker or dealer so engaged will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction, (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus, (c) an exchange distribution in accordance with the rules of such exchange, (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers, (e) privately negotiated transactions, (f) short sales and (g) a combination of any such methods of sale. In effecting sales, brokers and dealers engaged by the Selling Stockholder may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from the Selling Stockholder (or, if any such broker-dealer acts as agent for the purchaser of such shares, from such purchaser) in amounts to be negotiated which are not expected to exceed those customary in the types of transactions involved. Broker-dealers may agree with the Selling Stockholder to sell a specified number of such Shares at a stipulated price per share, and, to the extent such broker-dealer is unable to do so acting as agent for a Selling Stockholder, to purchase as principal any unsold Shares at the price required to fulfill the broker-dealer commitment to the Selling Stockholder. Broker-dealers who acquire Shares as principal may thereafter resell such Shares from time to time in transactions (which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above) in the over-the-counter market or otherwise at prices and on terms then prevailing at the time of sale, at prices then related to the then-current market price or in negotiated transactions and, in connection with such resales, may pay to or receive from the purchasers of such Shares commissions as described above. 15 17 The Selling Stockholder may also sell the Shares in accordance with Rule 144 under the Securities Act, rather than pursuant to this Prospectus. The Selling Stockholder and any broker-dealers or agents that participate with the Selling Stockholder in sales of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. From time to time the Selling Stockholder may engage in short sales, short sales against the box, puts and calls and other transactions in securities of the Company or derivatives thereof, and may sell and deliver the Shares in connection therewith. If the Selling Stockholder engages in such transactions, the Conversion Price may be affected. From time to time the Selling Stockholder may pledge its shares pursuant to the margin provisions of its customer agreements with its brokers. Upon a default by the Selling Stockholder, the broker may offer and sell the pledged shares of Common Stock from time to time. The Company is required to pay all fees and expenses incident to the offering and sale of the Shares, including fees and disbursements (not to exceed $5,000) of counsel to the Selling Stockholder. The Company has agreed to indemnify the Selling Stockholder against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters with respect to the validity of the Shares will be passed upon for the Company by Katten Muchin & Zavis, a partnership including professional corporations, Chicago, Illinois. EXPERTS The financial statements and schedule of the Company appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 16 18 No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with this offering other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction where such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof. TABLE OF CONTENTS PAGE ---- Available Information............................ 2 Incorporation of Certain Documents by Reference....................................... 3 Risk Factors..................................... 4 Use of Proceeds.................................. 14 Selling Stockholder.............................. 14 Plan of Distribution............................. 15 Legal Matters.................................... 16 Experts.......................................... 16 [ILLINOIS SUPERCONDUCTOR CORPORATION LOGO] 1,184,060 Shares Common Stock PROSPECTUS , 1997 19 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of fees and expenses (other than underwriting commissions and discounts) payable by the Company in connection with the issuance and distribution of the Common Stock pursuant to the Prospectus contained in this Registration Statement. The Company will pay all of these expenses. All amounts are estimates except the Securities and Exchange Commission registration fee and the Nasdaq National Market listing fee. APPROXIMATE AMOUNT Securities and Exchange Commission registration fee............................................... $ 1,114 Nasdaq National Market listing fee................. 4,800 Accountants' fees and expenses..................... 2,500 Legal fees and expenses............................ 15,000 Miscellaneous expenses............................. 1,586 ------- Total............................................ $25,000 -------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article 9 of the Company's Certificate of Incorporation provides that the Company shall indemnify its directors to the full extent permitted by the General Corporation Law of the State of Delaware and may indemnify its officers and employees to such extent, except that the Company shall not be obligated to indemnify any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, or (ii) for any amounts paid in settlement of an action indemnified against by the Company without the prior written consent of the Company. The Company has entered into indemnity agreements with each of its directors. These agreements may require the Company, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors, to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification and to obtain directors' liability insurance if available on reasonable terms. In addition, Article 8 of the Company's Certificate of Incorporation provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (iv) for any transaction from which the director derives an improper personal benefit. Reference is made to Section 145 of the General Corporation Law of the State of Delaware which provides for indemnification of directors and officers in certain circumstances. The Company has obtained a directors' and officers' liability insurance policy which entitles the Company to be reimbursed for certain indemnity payments it is required or permitted to make to its directors and officers. Under the Registration Rights Agreement, the Company has agreed to indemnify the Selling Stockholder and the Selling Stockholder has agreed to indemnify the Company and its directors, its II-1 20 officers, and certain control persons against certain liabilities and expenses incurred in connection with the Registration Statement, including with respect to their respective obligations under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 3.1* Certificate of Incorporation of the Company. 3.2* Bylaws of the Company. 3.3* Certificate of Amendment of Certificate of Incorporation of the Registrant. 4.1* Specimen stock certificate representing Common Stock. 4.2** Certificate of Designation, Preferences and Rights relating to the Company's Series B Convertible Preferred Stock. 4.3** Convertible Preferred Stock Purchase Agreement dated as of June 6, 1997, by and between the Company and Southbrook International Investments, Ltd. 4.4** Registration Rights Agreement dated as of June 6, 1997, by and between the Company and Southbrook International Investments, Ltd. 4.5** Warrant dated June 6, 1997 issued to Southbrook International Investments, Ltd. 4.6 Rights Agreement dated as of February 9, 1996, by and between the Company and LaSalle National Trust, N.A., filed as the Exhibit to the Company's Registration Statement on Form 8-A, filed February 12, 1996, and incorporated herein by reference. 4.7 Certificate of Designation, Preferences and Rights relating to the Company's Series C Convertible Preferred Stock 5 Opinion of Katten Muchin & Zavis as to the legality of the securities being registered (including consent). 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Katten Muchin & Zavis (contained in its opinion filed as Exhibit 5 hereto). 24 Power of Attorney (included on the signature page hereto).
- --------------- * Incorporated by reference from the same exhibit number to the Company's Registration Statement on Form S-1 dated August 20, 1993, Reg. No. 33-67756. ** Incorporated by reference from the same exhibit number to the Company's Registration Statement on Form S-3 dated June 23, 1997, Reg. No. 333-29797. II-2 21 ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, as amended (the "Securities Act"), each such post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Company's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offer therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Company in thee successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 22 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mt. Prospect, State of Illinois on the 22nd day of September, 1997. ILLINOIS SUPERCONDUCTOR CORPORATION By: /S/ EDWARD W. LAVES ------------------------------------- Edward W. Laves, President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Edward W. Laves, Ora E. Smith and Stephen G. Wasko and each of them his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Registration Statement on Form S-3 (including registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, and all amendments thereto) and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission under the Securities Act of 1933, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons on September 22, 1997 in the capacities indicated. SIGNATURE TITLE - --------------------------- ------------------------------------------- /S/ EDWARD W. LAVES President, Chief Executive Officer - --------------------------- (Principal Executive Officer) and Director Edward W. Laves /S/ STEPHEN G. WASKO Vice President, Chief Financial Officer, - --------------------------- Treasurer and Secretary (Principal Stephen G. Wasko Financial and Accounting Officer) /S/ PETER S. FUSS - --------------------------- Peter S. Fuss Director /S/ STEVEN LAZARUS - --------------------------- Steven Lazarus Director /S/ TOM L. POWERS - --------------------------- Tom L. Powers Director /S/ ORA E. SMITH - --------------------------- Ora E. Smith Chairman of the Board and Director II-4 23 INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT - ----------- ---------------------------------------------------------- 4.7 Certificate of Designation, Preferences and Rights relating to the Company's Series C Convertible Preferred Stock. 5 Opinion of Katten Muchin & Zavis as to the legality of the securities being registered (including consent). 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Katten Muchin & Zavis (contained in its opinion filed as Exhibit 5 hereto). 24 Power of Attorney (included on the signature page hereto). EX-4.7 2 CERTIFICATE OF DESIGNATION 1 EXHIBIT 4.7 CERTIFICATE OF DESIGNATION OF SERIES C CONVERTIBLE PREFERRED STOCK OF ILLINOIS SUPERCONDUCTOR CORPORATION The undersigned, Edward W. Laves and Stephen G. Wasko, hereby certify that: I. They are the duly elected and acting President and Secretary, respectively, of Illinois Superconductor Corporation, a Delaware corporation (the "Company"). II. The Certificate of Incorporation of the Company authorizes 100,000 shares of preferred stock, par value $.001 per share, 600 shares of which are currently issued and outstanding. III. The following is a true and correct copy of resolutions duly adopted by the Board of Directors of the Company (the "Board of Directors") at a meeting duly held on June 4, 1997, which constituted all requisite action on the part of the Company for adoption of such resolutions. RESOLUTIONS WHEREAS, the Board of Directors is authorized to provide for the issuance of the shares of preferred stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designations, relative rights, qualifications, limitations or restrictions of the shares of each such series. WHEREAS, the Board of Directors desires, pursuant to its authority as aforesaid, to designate a new series of preferred stock, set the number of shares constituting such series and fix the rights, preferences, privileges and restrictions of such series. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby designates a new series of preferred stock and the number of shares constituting such series and fixes the rights, preferences, privileges and restrictions relating to such series as follows: Section 1. Designation, Amount and Par Value. The series of preferred stock shall be designated as the Series C Convertible Preferred Stock (the "Preferred Stock"), and the number of shares so designated shall be 600 (which shall not be subject to increase without the consent of the holders of a majority of the then outstanding Preferred Stock hereof). Each share of Preferred Stock shall have a par value of $.001 per share and a stated value of $5,000 per share (the "Stated Value"). 2 Section 2. Dividends. (a) Holders of Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, and the Company shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) equal to 5% per annum, payable, in cash or shares of Common Stock (as defined in Section 7) at the option of the Company, quarterly in arrears, but in no event later than the Conversion Date (as hereinafter defined) applicable to such share of Preferred Stock in accordance with the delivery terms hereof. Dividends on the Preferred Stock shall be calculated on the basis of a 360-day year, shall accrue daily commencing the Original Issue Date (as defined in Section 7), and shall be deemed to accrue on such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. The party that holds the Preferred Stock of record on an applicable record date for any dividend payment will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such dividend payment date, without regard to any sale or disposition of such Preferred Stock subsequent to the applicable record date but prior to the applicable dividend payment date. Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on account of the Preferred Stock, such payment shall be distributed ratably among the holders of the Preferred Stock based upon the number of shares held by each holder. Payment of dividends on the Preferred Stock is further subject to the provisions of Section 5(c)(i). Notwithstanding anything to the contrary contained herein, the Company may not, without the written consent of the holders of a majority of the then outstanding Preferred Stock, pay dividends in cash on the Preferred Stock unless both the payment thereof and the retention of such paid cash by the holders is consented to in writing free of any subordination prior thereto by all lenders and debt holders of the Company or by all holders of any class of securities of the Company who by agreement have the right to consent to or force the subordination of such payment. (b) Notwithstanding anything to the contrary contained herein, the Company may not issue shares of Common Stock in payment of dividends (and must deliver cash in respect thereof) on the Preferred Stock if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to issue such dividends to be paid in shares of Common Stock; (ii) such shares are not registered for resale pursuant to an effective registration statement that names the recipient of such dividend as a selling stockholder thereunder and may not be sold without volume restrictions pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Company's transfer agent, in the form and substance reasonably acceptable to the holder; -2- 3 (iii) such shares are not listed on the Nasdaq National Market, The Nasdaq SmallCap Market, the New York Stock Exchange, the American Stock Exchange and any other exchange or quotation system on which the Common Stock is then listed for trading; or (iv) the issuance of such shares would result in the recipient thereof beneficially owning, in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended, more than 4.999% of the issued and outstanding shares of Common Stock. (c) So long as any Preferred Stock shall remain outstanding, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities (as defined in Section 7), nor shall the Company directly or indirectly pay or declare any dividend or make any distribution (other than a dividend or distribution described in Section 5) in excess, of in the aggregate, $250,000 upon, nor shall any distribution be made in respect of, any Junior Securities, nor shall any monies in excess, of in the aggregate, $1,000,000 be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities. Section 3. Voting Rights. Except as otherwise provided herein and as otherwise required by law, the Preferred Stock shall have no voting rights. However, so long as any shares of Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the shares of the Preferred Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock, (b) alter or amend this Certificate of Designation or (c) authorize or create any class of stock ranking as to dividends or distribution of assets upon a Liquidation (as defined in Section 4) senior to, prior to or pari passu with the Preferred Stock, except for any other series of Preferred Stock issued and sold in accordance with the Purchase Agreement. Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid dividends per share, whether declared or not, before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders of Preferred Stock shall be distributed among the holders of Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. A sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or companies shall not be treated as a Liquidation, but instead shall be subject to the provisions of Section 5. The Company shall -3- 4 mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record holder of Preferred Stock. Section 5. Conversion. (a)(i) Each share of Preferred Stock shall be convertible into shares of Common Stock (subject to reduction pursuant to Section 5(a)(ii) and Section 5(a)(iii) below and Section 3.8 of the Purchase Agreement (as defined in Section 7)) at the Conversion Ratio (as defined in Section 7) at the option of the holder in whole or in part at any time after the Original Issue Date. The holder shall effect conversions by surrendering the certificate or certificates representing the shares of Preferred Stock to be converted to the Company, together with a fully executed notice of conversion in the form of conversion notice attached hereto as Exhibit A (the "Conversion Notice"). Each Conversion Notice shall specify the number of shares of Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the date such Conversion Notice is delivered hereunder (the "Conversion Date"). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that the Conversion Notice is deemed delivered pursuant to Section 5(i). Subject to Sections 5(b), 5(a)(ii) hereof and Section 3.8 of the Purchase Agreement, each Conversion Notice, once given, shall be irrevocable. If the holder is converting less than all shares of Preferred Stock represented by the certificate or certificates tendered by the holder with the Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall promptly deliver to such holder (in the manner and within the time set forth in Section 5(b)) a certificate for such number of shares as have not been converted. (ii) Certain Regulatory Approval. If on the Conversion Date applicable to any conversion under this Section 5(a), (A) the Common Stock is then listed for trading on the Nasdaq National Market or if the rules of The Nasdaq Stock Market, Inc. are hereafter amended to extend Rule 4460(i) promulgated thereby (or any successor or replacement provision thereof) to The Nasdaq SmallCap Market or the American Stock Exchange and the Company's Common Stock is then listed for trading on such market or exchange, (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion of all outstanding shares of Preferred Stock, together with any shares of Common Stock previously issued upon conversion of Preferred Stock and in respect of payment of dividends hereunder, would equal or exceed 20% of the number of shares of Common Stock outstanding on the Original Issue Date (the "Issuable Maximum"), and (C) the Company has not previously obtained Shareholder Approval (as defined below), then the Company shall issue to the holder so requesting conversion of Preferred Stock an amount of shares of Common Stock equal to the Issuable Maximum and, with respect to any shares of Common Stock that otherwise would have been issuable to such holder in respect of the Conversion Notice at issue or in respect of payment of dividends hereunder in excess of the Issuable Maximum, the holder shall have the option to require the Company to either (1) as promptly as possible, but in no event later than 60 days after such Conversion Date, convene a meeting of the holders of the Common Stock and use its best efforts to obtain the Stockholder Approval or (2) redeem, from funds legally available therefor at the time of such redemption, -4- 5 the balance of the Preferred Stock subject to such Conversion Notice at a price per share equal to the product of (i) the average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such redemption price, whichever is greater, and (ii) the Conversion Ratio calculated on the Conversion Date; provided, however, that if the holder has requested that the Company obtain Stockholder Approval under paragraph (1) above and the Company fails for any reason to obtain such Stockholder Approval within the time period set forth in (1) above, the Company shall be obligated to redeem the Preferred Stock not converted as a result of the provisions of this Section in accordance with the provisions of paragraph (2) above, and in such case the interest contemplated by the immediately succeeding sentence shall be deemed to accrue from the Conversion Date. If the holder has requested that the Company redeem shares of Preferred Stock pursuant to this Section and the Company fails for any reason to pay the redemption price under (2) above within seven days after the Conversion Date, the Company will pay interest on such redemption price at a rate of 15% per annum to the converting holder of Preferred Stock, accruing from the Conversion Date until the redemption price plus any accrued interest thereon is paid in full. The entire redemption price, including interest thereon, shall be paid in cash. "Stockholder Approval" means the approval by a majority of the total votes cast on the proposal, in person or by proxy, at a meeting of the shareholders of the Company held in accordance with the Company's Certificate of Incorporation and by-laws, of the issuance by the Company of shares of Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Preferred Stock into Common Stock at a price less than the greater of the book or market value on the Original Issue Date as and to the extent required pursuant to Rule 4460(i) of The Nasdaq Stock Market, Inc. or Rule 713 of the American Stock Exchange (or any successor or replacement provision thereof), as applicable. (iii) If on any Conversion Date applicable to a conversion under Section 5(a) or a redemption pursuant to Section 6, the average Per Share Market Value for the five Trading Days immediately preceding such Conversion Date exceeds the Initial Conversion Price (defined in Section 5(c(i)) by more than 50%, the Conversion Price otherwise applicable to such conversion or repayment shall be increased by an amount equal to 50% of the difference between (A) the average Per Share Market Value for the five Trading Days immediately preceding such Conversion Date, and (B) 150% of the Initial Conversion Price. (b) Not later than three Trading Days after the Conversion Date, the Company will deliver to the holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of shares of Preferred Stock (subject to reduction pursuant to Sections 5(a)(ii), 5(a)(iii) and Section 3.8 of the Purchase Agreement) and (ii) one or more certificates representing the number of shares of Preferred Stock not converted, if any, and (iii) a check drawn on the account of the Company and payable to the holder in an amount equal to any accrued but unpaid dividends, if the Company elects to pay such dividends in cash; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any shares of Preferred Stock until certificates evidencing such shares of Preferred -5- 6 Stock are either delivered for conversion to the Company for the Preferred Stock or Common Stock, or the holder of such Preferred Stock notifies the Company that such certificates have been lost, stolen or destroyed and provides a bond (or other adequate security reasonably acceptable to the Company) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the holder, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates, including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, are not delivered to or as directed by the applicable holder by the third Trading Day after the Conversion Date, the holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the shares of Preferred Stock tendered for conversion. If the Company fails to deliver to the holder such certificate or certificates pursuant to this Section, including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, prior to the fifth Trading Day after the Conversion Date, the Company shall pay to such holder, in cash, as liquidated damages and not as a penalty, $1,500 for each Trading Day after such fifth Trading Day until such certificates are delivered. If the Company fails to deliver to the holder such certificate or certificates pursuant to this Section prior to the 20th day after the Conversion Date, the Company shall, at the holder's option (i) redeem, from funds legally available therefor at the time of such redemption, such number of shares of Preferred Stock then held by such holder, as requested by such holder, and (ii) pay all accrued but unpaid dividends on account of the Preferred Stock for which the Company shall have failed to issue Common Stock certificates hereunder, in cash. The redemption price per share shall be equal to the sum of (i) the product of (A) the average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such redemption price, whichever is greater, and (B) the Conversion Ratio calculated on the Conversion Date and (ii) the aggregate of all accrued and unpaid dividends and other amounts payable in respect of such shares. If the holder has requested that the Company redeem shares of Preferred Stock pursuant to this Section and the Company fails for any reason to pay the redemption price above within seven days after such notice is deemed delivered pursuant to Section 5(i), the Company will pay interest on the redemption price at a rate of 15% per annum, in cash to such holder, accruing from such seventh day until the redemption price and any accrued interest thereon is paid in full. (c) (i) The conversion price ("Conversion Price") applicable to conversions of Preferred Stock into Common Stock hereunder shall be determined in accordance with this Section. Subject to adjustment as provided in this paragraph (c)(i), for any conversions that occur prior to the earlier of (1) the date the Securities and Exchange Commission (the "Commission") declares effective an Underlying Shares Registration Statement (as defined below) or (ii) the 89th day after the Original Issue Date (such period, the "Pre-Effective Period"), the Conversion Price for each share of Preferred Stock shall equal the average Per -6- 7 Share Market Value for the five (5) Trading Days immediately preceding the Original Issue Date (the "Initial Conversion Price"). For all conversions occurring after the Pre-Effective Period, subject to the immediately preceding sentence, the Conversion Price shall be the lesser of (a) the Initial Conversion Price or (b) 101% of the average of the lowest Per Share Market Value for the five (5) consecutive Trading Days during the 60 Trading Days immediately preceding such Conversion Date (which may not include the date that any Conversion Notice is deemed delivered pursuant to Section 5(i) below); provided, however, that in no event shall the Conversion Price be calculated based on the Per Share Market Value for any five (5) consecutive Trading Day period for which the Purchaser's or any of its Affiliates' volume of trading in the Common Stock exceeds 20% of the trading volume in the Common Stock (excluding any de minimis amount by which the Purchaser or any of its Affiliates' inadvertently exceeds such 20% limitation) during such five (5) consecutive Trading Day period as reported by the Nasdaq National Market, The Nasdaq SmallCap Market, the New York Stock Exchange, the American Stock Exchange or such other market or exchange on which the Common Stock is traded (for example, if the Purchaser's or any of its Affiliates' volume in the Common Stock exceeds such 20% level during Trading Days 10-14, but does not exceed such level for Trading Days 11-15, then the Conversion Price may be calculated based upon the Per Share Market Value for Trading Days 11-15 but not for Trading Days 10-14). Notwithstanding the foregoing, (a) if the registration statement contemplated by the Registration Rights Agreement, which among other things, requires the Company to register the resale of the shares of Common Stock issuable upon conversion of the Preferred Stock (the "Underlying Shares Registration Statement") is not filed on or prior to the 30th day after the Original Issue Date, or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Securities Exchange Act of 1934, as amended, within five (5) days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that an Underlying Shares Registration Statement will not be "reviewed" or is advised that such Registration Statement is not subject to further review or comment, or (c) if the Underlying Shares Registration Statement is not declared effective by the Commission on or prior to the 90th day after the Original Issue Date, or (d) if such Underlying Shares Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities (as such term is defined in the Registration Rights Agreement) at any time prior to the expiration of the "Effectiveness Period" (as such term as defined in the Registration Rights Agreement), without being succeeded within 10 Business Days by a subsequent Underlying Shares Registration Statement filed with and declared effective by the Commission, or (e) if trading in the Common Stock shall be suspended for any reason for more than three consecutive Trading Days or five Trading Days in the aggregate, or (f) if the conversion rights of the holders of Preferred Stock hereunder are suspended for any reason, or (g) the Company postpones or suspends the filing or effectiveness of any Registration Statement in excess of 20 consecutive days or 60 days in the aggregate during any twelve month period (any such failure being referred to as an "Event," and for purposes of clauses (a), (c) and (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five (5) day period is exceeded, or for purposes of clause (d) the date which such 10 Business Day-period is exceeded, or for purposes of clause (e) the date on which such three Trading Day period is exceeded, or for purposes of clause (g) the date on which such 20 consecutive day or 60 aggregate day period -7- 8 is exceeded, being referred to as "Event Date"), the Conversion Price shall be decreased by 2.5% on each monthly anniversary of an Event Date until the earlier to occur of the second month anniversary after the Event Date and such time as the applicable Event is cured. Commencing the second month anniversary after the Event Date, at the option of each holder for each applicable monthly period either (a) the Company shall pay to the holders of the Preferred Stock 2.5% of the product of the number of outstanding shares of Preferred Stock and the Stated Value (each holder being entitled to receive such portion of such amount as equals its pro rata portion of the Preferred Stock then outstanding), in cash or (b) the Conversion Price shall be decreased by 2.5% for each additional such month (to be effective in full on the monthly applicable Event Date) as liquidated damages, and not as a penalty on the first day of each monthly anniversary of the Event Date in either case until such time as the applicable Event, is cured. Any decrease in the Conversion Price pursuant to this Section shall continue notwithstanding the fact that the Event causing such decrease has been subsequently cured. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Registration Rights Agreement. Notwithstanding anything to the contrary set forth herein, the Company may not, without the prior written consent of the holders, pay liquidated damages hereunder in cash unless it shall have received the prior written consent of all lenders, debt holders or holders of any class of securities of the Company or its Affiliates that have the right to require such consent or to subordinate any such cash payment, which consent shall provide that the payment by the Company of any such liquidated damages hereunder (and the retention of such sum by the receiving holder) is not subject to any applicable subordination rights of such lender or holders of such class of securities. (ii) If the Company, at any time while any shares of Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of Common Stock any shares of capital stock of the Company, the Initial Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (iii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall issue rights or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Per Share Market Value of Common Stock at the record date mentioned below, the Initial Conversion Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for -8- 9 subscription or purchase, and of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the Initial Conversion Price pursuant to this Section 5(c)(iii), if any such right or warrant shall expire and shall not have been exercised, the Initial Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Initial Conversion Price made pursuant to the provisions of this Section 5 after the issuance of such rights or warrants) had the adjustment of the Initial Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (iv) If the Company, at any time while shares of Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to holders of Preferred Stock) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 5(c)(ii) and (iii) above), then in each such case the Initial Conversion Price at which each share of Preferred Stock shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value of Common Stock determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value of the Common Stock on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; provided, however, that if the holders of a majority in interest of the shares of Preferred Stock dispute such amount, such holders may select a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (an "Appraiser") paid for by the holders of a majority in interest of the shares of Preferred Stock then outstanding, in which case the fair market value shall be equal to the average of the determinations by the Board of Directors and such Appraiser. In either case the adjustments shall be described in a statement provided to the holders of Preferred Stock of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (v) All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. -9- 10 (vi) Whenever the Initial Conversion Price is adjusted pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly mail to each holder of Preferred Stock, a notice setting forth the Initial Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (vii) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another previously unaffiliated person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property (each, a "Business Combination"), the holders of the Preferred Stock then outstanding shall have the right thereafter to, at their option, (A) convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such Business Combination, and the holders of the Preferred Stock shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which such shares of Preferred Stock could have been converted immediately prior to such Business Combination would have been entitled or (B) require the Company to redeem, from funds legally available therefor at the time of such redemption, its shares of Preferred Stock then outstanding at a price per share equal to the sum of (x) the product of (i) the average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the effective date or the date of the closing, as the case may be, of the Business Combination, or the triggering of such redemption right or (2) the date of payment in full by the Company of the redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio calculated on the date of the closing or the effective date, as the case may be, of the Business Combination triggering such redemption right, as the case may be and (y) the aggregate of all accrued and unpaid dividends and other amounts payable in respect of such shares. The entire redemption price shall be paid in cash, and the terms of payment of such redemption price shall be subject to the provisions set forth in Section 6(b). The terms of any such Business Combination shall include such terms so as to continue to give to the holder of Preferred Stock the right to receive the securities, cash or property set forth in this Section 5(c)(vii) upon any conversion or redemption following such Business Combination. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. (viii) If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock; or B. the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or C. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or -10- 11 purchase any shares of capital stock of any class or of any rights; or D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Preferred Stock, and shall cause to be mailed to the holders of Preferred Stock at their last addresses as they shall appear upon the stock books of the Company, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert shares of Preferred Stock during the 30-day period commencing the date of such notice to the effective date of the event triggering such notice. (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Preferred Stock and payment of dividends on Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of Preferred Stock, not less than such number of shares of Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 5(c)) upon the conversion of all outstanding shares of Preferred Stock and payment of dividends hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and freely tradeable. -11- 12 (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the holder of a share of Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of Common Stock on conversion of Preferred Stock shall be made without charge to the holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the holder of such shares of Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Shares of Preferred Stock converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of preferred stock. (h) Any and all notices or other communications or deliveries to be provided by the holders of the Preferred Stock hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number or address of the principal place of business of the Company as set forth in the Purchase Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each holder of Preferred Stock at the facsimile telephone number or address of such holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern Time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:30 p.m. (Eastern Time) on any date and earlier than 11:59 p.m. (Eastern Time) on such date, (iii) four days after deposit in the United States mails, (iv) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. Section 6. Redemption. (a) The Company shall have the right, exercisable at any time upon 5 Trading Days notice to the holders of the Preferred Stock given at any time -12- 13 on or after the third anniversary of the Original Issue Date to redeem, from funds legally available therefor at the time of such redemption, all or any portion of the shares of Preferred Stock which have not previously been converted or redeemed, at a price per share equal to the sum of (x) the product of (i) the average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the date of the redemption notice referenced above or (2) the date of payment in full by the Company of the redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio calculated on the date of such redemption notice and (y) the aggregate of all accrued but unpaid dividends and other amounts payable in respect of such shares. The entire redemption price shall be paid in cash. Holders of Preferred Stock may convert any shares of Preferred Stock, including shares subject to a redemption notice given under this Section, during the period from the date of such redemption notice through the 4th Trading Day thereafter and the Company shall honor all properly tendered Conversion Notices during such period. Any redemption notice under this section shall indicate the number of shares of Preferred Stock to be redeemed and the date (subject to the terms hereof) on which such redemption is to occur. The holders of the Preferred Stock to be redeemed shall tender by overnight mail, shares of Preferred Stock subject to such redemption on the date prior to the redemption date. If the Company intends to redeem less than all of the then outstanding Preferred Stock, it shall do so on a pro rata basis among such holders in accordance with this Section. If any portion of the applicable redemption price under this Section 6 shall not be paid by the Company within seven (7) calendar days after the date due, interest shall accrue thereon at the rate of 15% per annum until the redemption price plus all such interest is paid in full (which amount shall be paid as liquidated damages and not as a penalty). In addition, if any portion of such redemption price remains unpaid for more than 7 calendar days after the date due, the holder of the Preferred Stock subject to such redemption may elect, by written notice to the Company given within 30 days after the date due, to either (i) demand conversion in accordance with the formula and the time frame therefor set forth in Section 5 of all of the shares of Preferred Stock for which such redemption price, plus accrued liquidated damages thereof, has not been paid in full (the "Unpaid Redemption Shares"), in which event the Per Share Market Price for such shares shall be the lower of the Per Share Market Price calculated on the date such redemption price was originally due and the Per Share Market Price as of the holder's written demand for conversion, or (ii) invalidate ab initio such redemption, notwithstanding anything herein contained to the contrary. If the holder elects option (i) above, the Company shall within three (3) Trading Days of its receipt of such election deliver to the holder the shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares subject to such holder conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (ii) above, the Company shall promptly, and in any event not later than three (3) Trading Days from receipt of holder's notice of such election, return to the holder all of the Unpaid Redemption Shares. Notwithstanding anything to the contrary contained herein, the Company may not, without the written consent of the holders of a majority in interest of the then outstanding Preferred Stock, redeem shares of Preferred Stock unless both the payment thereof and the retention of such paid cash by the holder is consented to in writing free of any subordination prior thereto by all lenders or holders of any class of securities of the Company who by agreement have the right to consent to or force the subordination of such payment. -13- 14 (b) The Company shall have the right, exercisable within 20 days after the issuance of a press release disclosing the execution by the Company of a definitive agreement for a Business Combination, to provide a notice of redemption to the holders of the Preferred Stock as to all, but not less than all, of the then outstanding shares of Preferred Stock. The aggregate redemption price shall be paid in cash on the closing date for such Business Combination. The redemption price per share shall equal the sum of (x) the product of (i) the average Per Share Market Value for the five (5) Trading Days immediately preceding the closing date for the Business Combination triggering such redemption and (ii) the Conversion Ratio calculated on the date of such redemption notice (provided, however, the Conversion Price for these purposes shall not be based upon the Pre-Effective Period) and (y) the aggregate of all accrued but unpaid dividends and other amounts payable in respect of such shares. The definitive merger or purchase agreement for such Business Combination shall include a provision by which the Company covenants to pay the redemption price under this Section on the closing date therefor. Section 7. Definitions. For the purposes hereof, the following terms shall have the following meanings: "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "Common Stock" means the common stock, $.001 par value per share, of the Company and stock of any other class into which such shares may hereafter be reclassified or changed. "Conversion Ratio" means, at any time, a fraction, of which the numerator is Stated Value plus accrued but unpaid dividends (including any accrued but unpaid interest thereon) but only to the extent to be paid in shares of Common Stock in accordance with the terms hereof, and of which the denominator is the Conversion Price at such time. "Junior Securities" means the Common Stock and all other equity securities of the Company which are junior in rights and liquidation preference to the Preferred Stock. "Original Issue Date" shall mean the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock. "Per Share Market Value" means on any particular date (a) the closing bid price per share of the Common Stock on such date on The Nasdaq National Market, Inc. or other stock exchange or quotation system on which the Common Stock is then listed or if there is no such price on such date, then the closing bid price on such exchange or quotation system on the date nearest preceding such date, or (b) if the Common Stock is not listed then on The Nasdaq -14- 15 National Market, Inc. or any stock exchange or quotation system, the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith and paid for by the holders of a majority in interest of the shares of Preferred Stock; provided, however, that the Company, after receipt of the determination by such appraiser, shall have the right to select an additional Appraiser (which may be the firm of independent accountants that regularly reviews the Company's financial statements), in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser. "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Purchase Agreement" means the Convertible Preferred Stock Purchase Agreement, dated as of June 6, 1997, between the Company and the original holder of the Preferred Stock. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of June 6, 1997, between the Company and the original holder of Preferred Stock. "Trading Day" means (a) a day on which the Common Stock is traded on The Nasdaq National Market, Inc. or other stock exchange or market on which the Common Stock has been listed, or (b) if the Common Stock is not listed on The Nasdaq National Market, Inc. or any stock exchange or market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). "Underlying Shares" means the number of shares of Common Stock into which the shares of Preferred Stock are convertible in accordance with the terms hereof and the Purchase Agreement. -15- 16 RESOLVED FURTHER, that the President and Secretary of the Company be, and they hereby are, authorized and directed to prepare, execute, verify, and file with the Secretary of State of Delaware, a Certificate of Designation in accordance with these resolutions and as required by law. IN WITNESS WHEREOF, Illinois Superconductor Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Edward W. Laves, its President, and attested by Stephen G. Wasko, its Secretary, this 28th day of August, 1997. ILLINOIS SUPERCONDUCTOR CORPORATION By: /s/ EDWARD W. LAVES ------------------------------- Name: Edward W. Laves Title: President Attest: By: /s/ STEPHEN G. WASKO ----------------------- Name: Stephen G. Wasko Title: Secretary -16- 17 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert shares of Preferred Stock) The undersigned hereby elects to convert the number of shares of Series C Convertible Preferred Stock (the "Preferred Stock") indicated below, into shares of Common Stock, par value $.001 per share (the "Common Stock"), of Illinois Superconductor Corporation (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ___________________________________________________ Date to Effect Conversion ___________________________________________________ Number of shares of Preferred Stock to be Converted ___________________________________________________ Number of shares of Common Stock to be Issued (without taking into account any accrued but unpaid dividends issuable upon this conversion, if any) ___________________________________________________ Applicable Conversion Price ___________________________________________________ Signature ___________________________________________________ Name ___________________________________________________ Address The Company undertakes to promptly upon its receipt of this conversion notice (and, in any case prior to the time it effects the conversion requested hereby), notify the converting holder by facsimile of the number of shares of Common Stock which would be issuable to the holder if the conversion requested in this conversion notice were effected in full, whereupon, if the converting holder determines that such conversion would result in it owning in excess of 4.999% of the outstanding shares of Common Stock on such date, such holder will so notify the Company and the Company shall convert up to an amount equal to 4.999% of the outstanding shares of Common Stock and issue to the holder one or more certificates representing shares of Preferred Stock which have not been converted as a result of this provision. EX-5 3 OPINION OF KATTEN MUCHIN (INCLUDING CONSENT) 1 EXHIBIT 5 [KATTEN MUCHIN & ZAVIS LETTERHEAD] September 22, 1997 Illinois Superconductor Corporation 451 Kingston Court Mt. Prospect, Illinois 60056 RE: REGISTRATION STATEMENT ON FORM S-3 Ladies and Gentlemen: We have acted as counsel for Illinois Superconductor Corporation, a Delaware corporation (the "Company"), in connection with the preparation and filing of a registration statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933, as amended. The Registration Statement relates to 468,572 shares of the Company's Common Stock, $.001 par value per share, of which (i) 457,143 shares (the "Conversion Shares") may in the future be issued upon the conversion of certain outstanding shares of the Company's Series C Convertible Preferred Stock (the "Series C Stock") and (ii) 11,429 shares (the "Dividend Shares") may in the future be issued as accrued dividends for one year on the Series C Stock. In connection with this opinion, we have relied as to matters of fact, without investigation, upon certificates of public officials and others and upon affidavits, certificates and written statements of directors, officers and employees of, and the accountants and transfer agent for, the Company. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such instruments, documents and records as we have deemed relevant and necessary to examine for the purpose of this opinion, including (a) the Registration Statement, (b) the Certificate of Incorporation of the Company, (c) the By-Laws of the Company, (d) the Certificate of Designation, Preferences and Rights relating to the Series C Stock (the "Certificate of Designation") and (e) resolutions adopted by the Board of Directors of the Company. In connection with this opinion, we have assumed the accuracy and completeness of all documents and records that we have reviewed, the genuineness of all signatures, the authenticity of the documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed or reproduced copies. We have further assumed that all natural persons involved in the transactions contemplated by the Registration Statement (the "Offering") have sufficient legal capacity to enter into and perform their respective obligations and to carry out their roles in the Offering. 2 Illinois Superconductor Corporation September 22, 1997 Page 2 Based upon and subject to the foregoing, it is our opinion that: (1) The Conversion Shares, when issued by the Company upon the conversion of the Series C Stock in accordance with the terms of the Certificate of Designation, will be validly issued, fully paid and non-assessable; and (2) The Dividend Shares, if and when issued by the Company as accrued dividends on the Series C Stock in accordance with the terms of the Certificate of Designation, will be validly issued, fully paid and non-assessable. We hereby consent to use of our name under the heading "Legal Matters" in the Prospectus forming a part of the Registration Statement and to use of this opinion for filing as Exhibit 5 to the Registration Statement. Very truly yours, /s/ KATTEN MUCHIN & ZAVIS KATTEN MUCHIN & ZAVIS EX-23.1 4 CONSENT OF ERNST AND YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement and related Prospectus of Illinois Superconductor Corporation for the registration of 468,572 shares of its common stock and to the incorporation by reference therein of our report dated January 29, 1997, except for paragraph 8 of Note 6, for which the date is March 7, 1997, with respect to the financial statements and schedule of Illinois Superconductor Corporation included in its Annual Report (Form 10-K) for the year ended December 31, 1996, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Chicago, Illinois September 19, 1997 -----END PRIVACY-ENHANCED MESSAGE-----