Illinois Superconductor Registration Statement

-----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, JxjNIvvoHFxSAS3AN35VhHNn1ifFk+/ulAEesY+eDOqhU8Hy/WQjOHI6YIE8w6Eg ERFmdjD9FpU8a3hKoxgpwg== 0000950137-01-500939.txt : 20010424 0000950137-01-500939.hdr.sgml : 20010424 ACCESSION NUMBER: 0000950137-01-500939 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20010420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS SUPERCONDUCTOR CORPORATION CENTRAL INDEX KEY: 0000888693 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 363688459 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-59344 FILM NUMBER: 1608080 BUSINESS ADDRESS: STREET 1: 451 KINGSTON CT 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 c61784s-3.htm REGISTRATION STATEMENT Illinois Superconductor Registration Statement

TABLE OF CONTENTS


Form S-3
Opinion of Pepper Hamilton LLP
Common Stock Purchase Agreement
Escrow Agreement
Placement Agreement
Waiver Letter
Amr Abdelmonem Employment Agreement
Consent of Grant Thorton LLP
Consent of Ernst & Young LLP

As filed with the Securities and Exchange Commission on April 20, 2001

Registration No. 333-[_____]

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 Incorporation or Organization)		(IRS Employer Identification Number)

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)

Dr. George Calhoun
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)

COPIES TO:


Barry M. Abelson, Esquire Pepper Hamilton LLP 3000 Two Logan Square Eighteenth and Arch Streets Philadelphia, Pennsylvania 19103-2799 (215) 981-4000		Michael P. Gallagher, Esquire Pepper Hamilton LLP 1235 Westlakes Drive Suite 400 Berwyn, Pennsylvania 19312 (610) 640-7800

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. [ ]

CALCULATION OF REGISTRATION FEE

Proposed Maximum

Amount Of

Title of Shares

Amount

Aggregate Price

Aggregate Offering

Registration

To Be Registered

To Be Registered⁽¹⁾

Per Unit⁽²⁾

Price

Fee

Common Stock, $0.001 par value, including preferred stock purchase rights

1,818,182

1.22

2,218,182

555

(1) Includes an indeterminate number of shares of Illinois Superconductor Corporation common stock that may be issuable by reason of stock splits, stock dividends or similar transactions.

(2) The amount is based on the average of the bid and asked price of Illinois Superconductor’s common stock on the Over The Counter Bulletin Board on April 17, 2001 and is used solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended.

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 SAID SECTION 8(A), MAY DETERMINE.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. 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 NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

Subject to Completion, dated April 20, 2001

PROSPECTUS

1,818,182 SHARES

ILLINOIS
SUPERCONDUCTOR
CORPORATION

Common Stock

This prospectus relates to the resale of common stock, including preferred stock purchase rights, that we issued and sold to the selling stockholders listed on page 13. We will not receive any proceeds from the sale of the shares by the selling stockholders.

The selling stockholders, or their pledgees, donees, transferees or other successors-in-interest, may offer the common stock through public or private transactions, at prevailing market prices, at prices related to prevailing market prices or at privately negotiated prices.

Our common stock is listed on the Over The Counter Bulletin Board under the symbol “ISCO.” On April 19, 2001, the reported last sale price of our common stock on the Over The Counter Bulletin Board was $1.47 per share.

Our principal offices are located at 451 Kingston Court, Mt. Prospect, Illinois 60056, our telephone number is (847) 391-9400.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. YOU SHOULD CAREFULLY CONSIDER THE “RISK FACTORS” BEGINNING ON PAGE 3 OF THIS PROSPECTUS BEFORE YOU DECIDE TO INVEST.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is April 20, 2001

TABLE OF CONTENTS


ADDITIONAL INFORMATION			1




RISK FACTORS			3




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			11




WHO WE ARE			12




USE OF PROCEEDS			13




SELLING STOCKHOLDERS			13




PLAN OF DISTRIBUTION			14




LEGAL MATTERS			16




EXPERTS			16




INDEMNIFICATION			16

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock.

ADDITIONAL INFORMATION

This prospectus is part of a registration statement we have filed with the Securities and Exchange Commission. This prospectus does not contain all of the information contained in the registration statement or the exhibits to the registration statement. For further information about us, please see the complete registration statement. Summaries of agreements or other documents in this prospectus are not necessarily complete. Please refer to the exhibits to the registration statement for complete copies of these documents.

We are subject to the information requirements of the Securities Exchange Act of 1934 and file reports, proxy statements and other information with the SEC. You may read and copy such reports, proxy statements and other information, including the registration statements and all of their exhibits, at the following SEC public reference rooms:


450 Fifth Street, N.W. Judiciary Plaza Room 1024 Washington, D.C. 20549		Seven World Trade Center Suite 1300 New York, NY 10048		Citicorp Center 500 West Madison Street Suite 1400 Chicago, IL 60661

You may obtain information on the operation of the SEC public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Our SEC filings, including the registration statement of which this prospectus forms a part and the documents incorporated by reference that are listed below, are also available from the SEC’s Web site at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically.

The SEC allows us to “incorporate by reference” into this prospectus certain information that we file with it. This means that we can disclose important information to you by referring you to another document that we filed separately with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information in this prospectus. You should read the information incorporated by reference because it is an important part of this prospectus.

We incorporate by reference the following documents that we previously filed with the SEC pursuant to the Exchange Act and any future filings we will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act:

1. Our Annual Report on Form 10-K for our fiscal year ended December 31, 2000.

2. Our Definitive Additional Proxy Materials filed June 9, 2000.

3. Our Current Report on Form 8-K filed on January 4, 2001 announcing that we, through our wholly-owned subsidiary, Illinois Superconductor Canada Corporation, acquired certain assets related to the Adaptive Notch Filtering business unit of Lockheed Martin Canada, Inc. and that on December 29, 2000, holders of our senior convertible notes converted $14,354,778 in principal amount of such notes plus accrued interest into 63,283,309 shares of common stock.

4. Our Current Report on Form 8-K on January 8, 2001, and the related report on Form 8-K/A on March 1, 2001, announcing that we had entered into an agreement with KMW, Inc. of Korea to jointly develop an advanced-design cryogenic receiver front-end (CRFE) system to meet the requirements of third-generation (3G) Wideband-CDMA wireless systems and that on January 4, 2001, all of our Senior Convertible Notes had been converted into common stock in accordance with their terms.

5. Our Current Report on Form 8-K on February 22, 2001 announcing that a settlement of previously disclosed shareholder litigation had been reached, which, subject to court approval, will result in us receiving $15 million, less legal fees and certain other expenses.

6. Our Current Report on Form 8-K filed on March 20, 2001 announcing that a settlement of previously disclosed shareholder litigation has been reached, which, subject to court approval, will result in us receiving $5 million, less legal fees and certain other expenses.

7. Our Current Report on Form 8-K filed on March 22, 2001 reporting on our earnings for the fourth quarter 2000 and for fiscal year 2000, the receipt of a clean audit opinion, and an additional financing commitment.

8. Our Current Report on Form 8-K filed on April 6, 2001 announcing that a previously disclosed settlement of shareholder litigation was approved by the court on March 30, 2001, which will result in us receiving $15 million, less legal fees.

9. The description of our common stock contained in our registration statement on Form S-2, filed on September 26, 2000, including any amendment or report filed with the SEC for the purpose of updating such description.

The documents incorporated by reference in this prospectus that are not delivered with this prospectus may be obtained from us without charge. You may obtain these documents incorporated by reference in this prospectus by telephoning us at (847) 391-9400 or writing us at the following address:

Corporate Secretary
Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056

Our Web site is located at http://www.iscointl.com. Information contained in our Web site is not a part of this prospectus.

RISK FACTORS

You should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.

Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus.

Risks Related to Our Operations

We have a limited operating history and expect to encounter difficulties in the early stages of product commercialization.

We were founded in October 1989 and through 1996 were engaged principally in research and development, product testing, manufacturing, marketing and sales activities. We have incurred net losses since our inception. As of December 31, 2000, our accumulated deficit was approximately $101 million. We have only recently begun to generate revenues from the sale of our radio frequency, or RF, filter products. Prior to the commencement of these sales, the majority of our revenues were derived from research and development contracts, primarily from the U.S. government. We do not expect revenues to increase dramatically until we ship a significantly larger amount of our RF products. Accordingly, we expect to continue to experience net losses, and we cannot be certain if or when we will become profitable. In addition, we may incur non-cash compensation charges related to our stock option repricing which may further decrease our earnings in the future. Spectral Solutions and the Adaptive Notch Filtering business unit of Lockheed Martin Canada, both of which we recently acquired, have similar operating histories and financial uncertainties.

We have only a limited operating history upon which an evaluation of us and our prospects can be based. We must therefore be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of product commercialization.

We expect our operations to continue to produce a negative cash flow; consequently, if we cannot raise additional capital, we may not be able to fund our continued operations

To date, we have financed our operations primarily through public and private equity and debt financings. We believe that we have sufficient funds to operate our business without the need for substantial future capital sources other than those described herein until the end of the first quarter of fiscal 2002. In addition, we believe we have put in place mechanisms to raise additional capital when and if needed. We intend to augment our existing capital position through these funding mechanisms and through other strategic sources of capital. Although we believe we have sufficient capital resources available to meet our obligations over the next fiscal year, there is no guarantee that the funding mechanisms identified will allow to us to access necessary additional funds.

The actual amount of our future funding requirements will depend on many factors, including:

• the amount and timing of future revenues;

• the level of product marketing and sales efforts to support our commercialization plans;

• the magnitude of our research and product development programs;

• our ability to improve product margins;

• the cost of additional plant and equipment for manufacturing; and

• the costs involved in protecting our patents or other intellectual property.

We must develop and expand our manufacturing and sales and marketing capabilities in order to sustain or grow our business.

For us to be financially successful, we must either manufacture our products in substantial quantities, at acceptable costs and on a timely basis, or enter into an outsourcing arrangement with a qualified manufacturer that will provide us the same. In the event that we are unable to enter into a manufacturing arrangement on acceptable terms with a qualified manufacturer, we would have to produce our products in commercial quantities in our own facilities. Although we have produced limited quantities of our products for commercial installations and for use in development and customer field trial programs, we face a number of technological and engineering challenges in producing large quantities of our products at competitive costs. We may not be able to manufacture such products in sufficient volume. We have limited experience in manufacturing, and substantial costs and expenses may be incurred in connection with attempts to manufacture larger quantities of our products. In addition, we may not be able to make the transition to large-scale commercial production successfully.

Our sales and marketing experience is very limited. We will be required to further develop our marketing and sales force in order to effectively demonstrate the advantages of our products over more traditional products, as well as other competitors’ high temperature superconductor, or HTS, products. We also may elect to enter into arrangements with third parties regarding the commercialization and marketing of our products. If we enter into such arrangements, we will be substantially dependent upon the efforts of others in deriving commercial benefits from our products. We may not be able to establish adequate sales and distribution capabilities, we may not be able to enter into marketing arrangements or relationships with third parties on financially acceptable terms and any such third party may not be successful in marketing our products. There is no guarantee that our sales and marketing experience will be successful.

Failure to manage our growth may seriously harm our ability to deliver products in a timely manner, fulfill existing customer commitments and attract and retain new customers

Our growth has caused, and we expect will continue to cause, a significant strain on our management, operational, financial and other resources. Our ability to manage growth effectively will require us to implement and improve our operational, financial, manufacturing and management information systems and expand, train, manage and motivate our employees. These demands may require us to add new management personnel and/or to cause our management to develop additional expertise. Any increase in resources devoted to product development and marketing and sales efforts could have an adverse effect on our financial performance in the next several fiscal quarters. The failure of our management team to effectively manage growth could have a material adverse effect on our business, operating results and financial condition.

Risks Related To Our Common Stock and Charter Provisions

Our common stock was de-listed from the NASDAQ National Market in June 1999 which may make it more difficult for you to sell your shares and may cause the market price of our common stock to decrease.

Our common stock was de-listed from trading on the NASDAQ National Market in June 1999 due to our inability to meet the net tangible assets requirement for continued listing. Our common stock is now traded in the over-the-counter market and quoted on the over-the-counter bulletin board. While to date, the Bulletin Board market has not diminished the liquidity of our common stock, there is no guarantee that the Bulletin Board will provide the same liquidity for the trading of securities as the NASDAQ National Market in the future. We intend to apply for relisting on the NASDAQ National Market when we are reasonably confident that our application would be approved. However, there is no guarantee that our application for relisting will be approved.

Our stock price may be volatile and your investment in our common stock could suffer a decline in value.

The market price of our common stock, like that of many other high-technology companies, has fluctuated significantly and is likely to continue to fluctuate in the future. Since January 1, 1999 and through March 31, 2001, the closing price of our common stock has ranged from a low of $0.3438 per share to a high of $39.00 per share. Announcements by us or others regarding the receipt of customer orders, quarterly variations in operating

results, acquisitions or divestitures, additional equity or debt financings, 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 our common stock. In addition, fluctuations in the price of our common stock could affect our ability to have our common stock accepted for listing on a securities market or exchange.

Exercise of outstanding warrants and options and sales by us of additional shares pursuant to currently filed registration statements will dilute existing stockholders and could decrease the market price of our common stock.

As of December 31, 2000, we had (i) outstanding warrants to purchase 95,533 shares of our common stock at a weighted average exercise price of $10.20 per share and (ii) outstanding options to purchase 5,442,596 shares of our common stock at a weighted average exercise price of $3.02 per share (3,876,578 of which have not yet vested) issued to employees, directors and consultants pursuant to our 1993 Stock Option Plan, the merger agreement with Spectral Solutions, and individual agreements with our management and directors. In order to attract and retain key personnel, we may issue additional securities, including stock options, in connection with our employee benefit plans, or may lower the price of existing stock options.

On January 8, 2001, we filed a registration statement on Form S-3 for the sale of up to $20 million shares of our common stock in a rights offering to common stockholders as of a certain holding date not yet determined. On January 12, 2001, we filed a registration statement on Form S-3 for the sale of up to $50 million shares of our common stock in a “universal shelf” offering. During March, 2001, we entered into an agreement with Paul Revere Capital Partners, Ltd., whereby Paul Revere Capital commits to acquire up to $20 million shares of our common stock over the next 24 months upon demand by us, subject to the conditions contained in the agreement. Pursuant to this facility, we may, at our discretion, sell shares of our common stock to Paul Revere Capital Partners at a discount to the market price of 94% of the average weighted volume price over a 22 day measurement period. Each draw down is limited to the lesser of $4 million or 20% of the trading volume over a specified period of time. We will also issue a warrant to Paul Revere Capital Partners to purchase a number of shares equal to 0.5% of the shares issued in each draw down. We have also agreed to pay a placement agent a fee equal to 4% of each draw down and issue a warrant to the placement agent to purchase a number of shares equal to 0.5% of the shares issued in each draw down.

The exercise of options and warrants for common stock and the issuance of additional shares of our common stock and/or rights to purchase common stock at prices below market value will be dilutive to existing stockholders and may have an adverse effect on the market price of our common stock.

The concentration of ownership of our stock could limit the ability of stockholders to influence the outcome of director elections and other transactions submitted for a vote of our stockholders

Our officers, directors and principal stockholders (holding greater than 5% of our outstanding shares) together control approximately 66% of our outstanding voting power. Consequently, these stockholders, if they act together, would be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change of control of our company, even when a change may be in the best interests of our stockholders. The interests of these stockholders may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that we would not otherwise consider.

We have in place several anti-takeover measures that could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.

We have certain arrangements 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 our company. In February 1996, our Board of Directors adopted a stockholders rights plan. In addition, our Certificate of Incorporation and By-Laws provide that (i) stockholder action may be taken only at stockholders meetings; (ii) the Board of Directors has authority to issue series of our preferred stock with such voting rights and other powers as the Board of Directors may determine; (iii) prior specified notice must be given by a stockholder making nominations to the Board of Directors or raising

business matters at stockholders meetings; and (iv) the Board of Directors is divided into three classes, each serving for staggered three-year terms. The effect of the rights plan and the anti-takeover provisions in our charter documents may be to deter business combination transactions not approved by our Board of Directors, including acquisitions that may offer a premium over market price to some or all of our stockholders.

Technology and Market Risks

We are dependent on the build-out of 3G networks and the capital spending patterns of wireless network operators.

Increased sales of our products is dependent on the build-out of third generation, or 3G, enabled wireless communications networks. Building these networks is capital intensive, as is the process of upgrading existing second generation equipment. Further, the capital spending patterns of wireless network operators is beyond our control and depends on a variety of factors, including access to financing, the status of federal, local and foreign government regulation and deregulation, changing standards for wireless technology, the overall demand for wireless services, competitive pressures and general economic conditions. The build-out of 3G enabled networks may take years to complete and is dependent upon the level of capital spending by wireless network operators. The magnitude and timing of capital spending by these operators for constructing, rebuilding or upgrading their systems significantly impacts the demand for our products. Any decrease or delay in capital spending patterns in the wireless communication industry, whether because of a general business slowdown or a reevaluation of the prospective demand for 3G services, would delay the build-out of 3G networks and significantly harm our business prospects.

Our success depends on the market’s acceptance of our HTS telecommunications products.

Our radio frequency filter products, which are based on our HTS technology, and our Adaptive Notch Filtering, or ANF, technology, have not been sold in very large quantities and a sufficient market may not develop for our products. Our customers establish demanding specifications for performance and reliability, and although we believe we have met or exceeded these specifications to date, there is no guarantee that the wireless service providers will elect to use our HTS or ANF solutions to solve their interference problems.

Rapid technological change and future competitive technologies could negatively affect our operations.

The field of superconductivity is characterized by rapidly advancing technology. Our success will depend in large part upon our 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. Our development efforts may be rendered obsolete by the adoption of alternative solutions to current wireless operator problems or by technological advances made by others. In addition, other materials or processes, including other superconducting materials or fabrication processes, may prove more advantageous for the commercialization of high performance wireless products than the materials and processes selected by us.

We are dependent on the wireless telecommunications and 3G markets.

Our principal target market for our products is wireless telecommunications. The devotion of substantial resources to the wireless telecommunications market makes us vulnerable to adverse changes in this market. Adverse developments in the wireless telecommunications market, which 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 our business, operating results and financial condition.

Our principal focus within the wireless telecommunications market has been on the emerging 3G wireless systems in Asia. The devotion of substantial resources to this emerging market makes us vulnerable to adverse developments in this market, including the potential decisions by 3G wireless operators to not adopt HTS Radio Frequency filters into their system specifications or on a retrofit schedule, to delay in the roll-out of 3G systems, to future competition, new technologies or regulatory decisions, all of which could have an adverse effect on our business, operating results and financial condition.

Business Risks

Our customers are concentrated and the loss of one of our largest customers could cause our revenues to drop quickly and unexpectedly.

To date, our sales and marketing efforts have focused on cellular and PCS service providers in retrofit applications. Sales to three of our customers accounted for over 80% and 65% of our total revenues for 2000 and 1999, respectively. In addition, we have focused a significant amount of our technical and managerial resources to working with the limited number of 3G license holders in Japan and Korea, as well as, established original equipment manufacturers, or OEMs, who may provide telecommunications equipment to these 3G wireless operators in these markets.

We expect that if our RF filter products achieve market acceptance, a limited number of wireless service providers and OEMs will account for a substantial portion of our revenue during any period. Sales of many of our RF filter products depend in significant part upon the decision of prospective customers and current customers to adopt and expand their use of our products. Wireless service providers, wireless equipment OEMs and our other customers are significantly larger than, and are able to exert a high degree of influence over, us. 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 failure to attract new customers would have a material adverse effect on our business, operating results and financial condition.

The lengthy and variable sales cycles of our products could cause significant fluctuation in our results.

Prior to selling products to our customers, we 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. We may not obtain the necessary approvals or ensuing sales of such products may not occur. The length of our customers’ approval process or delays could have a material adverse effect on our business, operating results and financial condition.

Our ability to deliver our products is dependent on a limited number of suppliers.

Certain parts and components used in our RF filter products, including substrates, vacuum components, and cryogenic coolers, are only available from a limited number of sources. Our reliance on these limited source suppliers exposes us 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 our ability to manufacture and deliver our products on a timely basis and result in the cancellation of orders, which could have a material adverse effect on our 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 our products, we may be unable to manufacture products in quantities sufficient to meet our customers’ demand in any particular period. We have no guaranteed supply arrangements with our limited source suppliers, do not maintain an extensive inventory of parts or components, and customarily purchase parts and components pursuant to purchase orders placed from time to time in the ordinary course of business.

To satisfy customer requirements, we may be required to stock certain long lead time parts in anticipation of future orders. The failure of such orders to materialize as forecasted could limit resources available for other important purposes or accelerate our requirement for additional funds. In addition, such excess inventory could become obsolete, which would adversely affect our financial performance. Business disruption, production shortfalls or financial difficulties of a limited source supplier could materially and adversely affect us by increasing product costs or reducing or eliminating the availability of such parts or components. In such events, our inability to

develop alternative sources of supply quickly and on a cost-effective basis could materially impair our ability to manufacture and deliver our products on a timely basis and could have a material adverse effect on our business, operating results and financial condition.

If we lose our key personnel, or fail to attract and retain additional personnel, the success and growth of our business may suffer.

Our success will depend in large part upon our ability to attract and retain highly qualified management, engineering, manufacturing, marketing, sales and Research and Development personnel. Due to the specialized nature of our business, it may be difficult to locate and hire qualified personnel. The loss of services of one of our executive officers or other key personnel, or the failure to attract and retain other executive officers or key personnel, could have a material adverse effect on our business, operating results and financial condition.

Failure of our products to perform properly might subject us to significant warranty expenses.

To date, our products have been installed in more than 300 cell sites with a wide geographic dispersion. Although we believe our products have not experienced any significant reliability problems to date, our products may develop reliability problems in the future. Repeated or widespread quality problems could result in significant warranty expenses and/or the loss of customer confidence. The occurrence of such quality problems could have a material adverse effect on our business, operating results and financial condition.

Intense competition, and increasing consolidation in our industry, could create stronger competitors and harm our business.

The wireless telecommunications equipment market is very competitive. Our products compete directly with products which embody existing and future competing commercial technologies. Many of these companies have substantially greater financial resources, larger research and development staffs and greater manufacturing and marketing capabilities than we do. Other emerging wireless technologies, including “smart antennas” and tower mounted amplifiers, may also provide protection from RF interference and offer enhanced range to wireless communication service providers at lower prices and/or superior performance, and may therefore compete with our products. High performance HTS RF filters may not become a preferred technology to address the needs of wireless communication service providers. Failure of our products to improve performance sufficiently, reliably, or at an acceptable price or to achieve commercial acceptance or otherwise compete with conventional and new technologies, will have a material adverse effect on the our business, operating results and financial condition.

Although the market for superconductive electronics currently is small, we believe 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, we must continue to develop and maintain technologically advanced products, reduce production costs, attract and retain highly qualified personnel, obtain additional patent or other protection for our technology and products and manufacture and market our products, either alone or with third parties. We may be unable to achieve these objectives. Failure to achieve these objectives would have a material adverse effect on our business, operating results and financial condition.

Legal Risks

Our limited ability to protect our intellectual property rights could impair our ability to compete effectively.

Our success will depend in part on our ability to obtain patent protection for our products and processes, to preserve our 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 of our products are based. As of December 31, 2000, we had been issued 35 U.S. and four foreign patents, had filed and were actively pursuing applications for 13 other U.S. and 23 foreign patents, and were the licensee of seven U.S. patents and patent applications held by others. We acquired additional patent rights in connection with our purchase of the Adaptive Notch Filtering business unit of Lockheed Martin Canada. One of our patents is jointly owned with Lucent Technologies, Inc. We believe 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 have been interference proceedings pending in the United States Patent and Trademark Office (not currently involving us) regarding rights to inventions claimed in some of the HTS materials patent applications. We also believe there are a large number of patents and patent applications covering RF filter products and other products and technologies that we are pursuing. Accordingly, the patent positions of companies using HTS materials technologies and RF technologies, including us, are uncertain and involve complex legal and factual questions. The patent applications filed by us or by our licensors may not result in issued patents or the scope and breadth of any claims allowed in any patents issued to us or our licensors may not exclude competitors or provide competitive advantages to us. In addition, patents issued to us, our subsidiaries or our licensors may not be held valid if subsequently challenged or others may claim rights in the patents and other proprietary technologies owned or licensed by us. Others may have developed or may in the future develop similar products or technologies without violating any of our proprietary rights. Furthermore, our loss of any license to technology that we now have or acquire in the future may have a material adverse effect on our business, operating results and financial condition.

Some of the patents and patent applications owned or licensed by us are subject to non-exclusive, royalty-free licenses held by various U.S. governmental units. These licenses permit these U.S. government units to select vendors other than us to produce products for the U.S. government, which would otherwise infringe our patent rights that are subject to the royalty-free licenses. In addition, the U.S. government has the right to require us to grant licenses (including exclusive licenses) under such patents and patent applications or other inventions to third parties in certain instances.

Older patent applications in the U.S. are currently maintained in secrecy until patents are issued. In foreign countries and for newer U.S. patent applications, 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 or for newer U.S. patent applications 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 we are pursuing, comprehensive patent searches and analyses associated with HTS materials, RF technologies and other products and technologies that we are pursuing are often impractical or not cost-effective. As a result, our patent and literature searches cannot fully evaluate the patentability of the claims in our patent applications or whether materials or processes used by us for our 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 we are pursuing, we believe 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 us. In any such case, to avoid infringement, we would have to either license such technologies or design around any such patents. We may be unable to obtain licenses to such technologies or, if obtainable, such licenses may not be available on terms acceptable to us or we may be unable to 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 us, may be necessary to enforce patents issued or licensed to us, to defend us against infringement claims made by others or to determine the ownership, scope or validity of the proprietary rights of our company and others. The parties to such litigation may be larger, better capitalized than us and better able to support the cost of litigation. An adverse outcome in any such proceedings could subject us to significant liabilities to third parties, require us to seek licenses from third parties and/or require us to cease using certain technologies, any of which could have a material adverse effect on our business, operating results and financial condition.

We believe that a number of patent applications, including applications filed by International Business Machines Corporation, Lucent Technologies, Inc., and other potential competitors of us are pending that may cover the useful compositions and uses of certain HTS materials including yttrium barium copper oxide, the principal HTS material used by us in our present and currently proposed products. Therefore, there is a substantial risk that one or more third parties may be granted patents covering yttrium barium copper oxide and other HTS materials and their uses, in which case we could not use these materials without an appropriate license. As with other patents, we have

no assurance that we will be able to obtain licenses to any such patents for yttrium barium copper oxide or other HTS materials, processes for manufacturing those 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 our business, operating results and financial condition.

We are subject to various lawsuits, and may be subject to future litigation, that could harm our business.

We have been subject to a number of lawsuits and currently have a number of legal proceedings against us involving various claims. Although we have been successful in defending ourselves against these claims to date, there is no guarantee that this success will continue. If we are not successful in defending ourselves against these claims, there may be a material and adverse effect on our business, operating results and financial condition.

Government regulation could adversely affect our business.

Although we believe that our wireless telecommunications products themselves would not be subject to licensing by, or approval requirements of, the Federal Communications Commission, the operation of base stations is subject to FCC licensing and the radio equipment into which our products would be incorporated is subject to FCC approval. Base stations and the equipment marketed for use therein must meet specified technical standards. Our ability to sell our wireless telecommunications products is 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 our base station products must enable them to meet FCC technical standards. We may be subject to similar regulations of the Canadian federal and provincial governments. 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 our business, operating results and financial condition. In addition, HTS RF filters are on the U.S. Department of Commerce’s export regulation list. Therefore, exportation of such RF filters to certain countries may be restricted or subject to export licenses.

We are subject to governmental labor, safety and discrimination laws and regulations with substantial penalties for violations. In addition, employees and others may bring suit against us for perceived violations of such laws and regulations. Defense against such complaints could result in significant legal costs for us. Although we endeavor to comply with all applicable laws and regulations, we may be the subject of complaints in the future, which could have a material adverse effect on our business, operating results and financial condition.

We are subject to state and federal environmental regulations for treatment of hazardous waste.

We use certain hazardous materials in our research, development and manufacturing operations. As a result, we are 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 us to make substantial expenditures for preventive or remedial action, reduction of chemical exposure, or waste treatment or disposal. We believe we are in material compliance with all environmental regulations and to date we have not had to incur significant expenditures for preventive or remedial action with respect to the use of hazardous materials. However, our operations, business or assets could be materially and adversely affected by the interpretation and enforcement of current or future environmental laws and regulations. In addition, although we believe that our 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, we could be held liable for any damages that result. Furthermore, the use and disposal of hazardous materials involves the risk that we 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 our resources or otherwise have a material adverse effect on our business, results of operations and financial condition. We carry property and workman’s compensation insurances in full force and effect through nationally known carriers which include pollution cleanup or removal and medical claims for industrial incidents.

Risks Related To Acquisitions and Business Expansion

Our success depends on our ability to successfully integrate the operations of our recent acquisitions.

We acquired Spectral Solutions in August 2000 and the Adaptive Notch Filtering business unit of Lockheed Martin Canada in December 2000. There are certain risks associated with these acquisitions, including the risk that we will not be able to successfully integrate the Adaptive Notch Filtering business and Spectral Solutions business into our existing business. Spectral Solutions develops and manufactures primarily “thin-film” HTS RF applications for the wireless communications industry. We have concentrated our manufacturing and marketing efforts to date on “thick-film” applications, and there can be no assurance that we will successfully integrate thin-film technology into our product offerings. There is also no assurance that we will be able to achieve the synergies we believe should result from the acquisition of either of these companies.

There are risks associated with future potential acquisitions.

In the future, we may pursue acquisitions to obtain products, services and technologies that we believe will complement or enhance our current product or services offerings. At present, we have no agreements or other arrangements with respect to any acquisition. An acquisition may not produce the revenue, earnings or business synergies that we anticipated and may cause us to assume significant unforeseen liabilities, and an acquired product, service or technology might not perform as we expected. If we pursue any acquisition, our management could spend a significant amount of time and effort in identifying and completing the acquisition and may be distracted from the operations of our business. If we complete an acquisition, we would probably have to devote a significant amount of management resources to integrating the acquired business with our existing business, and that integration may not be successful.

The development of international operations will cause us to face additional risks.

We are in discussions with several companies in non-U.S. markets, in particular in Japan and other parts of Asia, to form manufacturing, product development joint ventures and other marketing or consulting arrangements. Results of these discussions include a joint marketing agreement with CTR Ventures in Japan, the opening of a Japanese office in Tokyo, a joint product development and manufacturing arrangement with KMW, Inc. in Korea and the acquisition of the ANF division from Lockheed Martin Canada.

We believe that non-U.S. markets could provide a substantial source of revenue in the future. However, there are certain risks applicable to doing business in foreign markets that are not applicable to companies doing business solely in the U.S. For example, we will be subject to risks related to fluctuations in the exchange rate between the U.S. dollar and foreign currencies in countries in which we do business. In addition, we will be subject to the additional laws and regulations of these foreign jurisdictions, some of which might be substantially more restrictive than similar U.S. ones. Foreign jurisdictions may also provide less patent protection than is available in the U.S., and we may be less able to protect our intellectual property from misappropriation and infringement in these foreign markets.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Because we want to provide you with more meaningful and useful information, this prospectus contains, and incorporates by reference, certain forward-looking statements that reflect our current expectations regarding our future results of operations, performance and achievements. We have tried, wherever possible, to identify these forward-looking statements by using words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends” and similar expressions. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to certain risks, uncertainties and contingencies, including the factors set forth under the caption “Risk Factors,” which could cause our actual results, performance or achievements for 2001 and beyond to differ materially from those expressed in, or implied by, any of these statements. You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake 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.

WHO WE ARE

We provide a wide array of interference-management solutions for the wireless telecommunications industry. We use both our patented and proprietary adaptive notch filter technology and our patented and proprietary high temperature superconductor technology to monitor and suppress in-band and out-of-band interference in a wireless base station. We believe we are the only company in the world that has proprietary products to address the wireless operator’s need to reduce or eliminate interference that comes from in-band and out-of-band sources.

We were founded in 1989 by ARCH Development Corporation, an affiliate of the University of Chicago, to commercialize superconductor technologies initially developed by Argonne National Laboratory. We were incorporated in Illinois on October 18, 1989 and reincorporated in Delaware on September 24, 1993. Our facilities and principal executive offices are located at 451 Kingston Court, Mt. Prospect, Illinois 60056 and our telephone number is (847) 391-9400.

Recent Developments

Joint Development with KMW

On January 3, 2001, we announced an agreement with KMW, Inc., of Korea, to jointly develop an advanced-design cryogenic receiver front-end system to meet the requirements of a 3G Wideband-CDMA wireless systems to be deployed, beginning this year, in Japan and Korea.

Filing of Rights Offering Statement

On January 8, 2001, we filed with the SEC on Form S-3 a registration statement for a proposed common stock rights offering for up to $20 million. The purpose of the rights offering filing was to put us in the position to access funds on a pro rata, non-dilutive basis from existing shareholders as of a certain holding date. As of the date of this filing, we have not yet determined whether we will proceed with the rights offering, in light of the settlements described elsewhere in this report.

Filing of a Universal Shelf Offering Statement

On January 12, 2001, we filed with the SEC on Form S-3 a registration statement for the purpose of offering up to $50 million of our common stock, warrants, or preferred stock. The filing, known as a universal shelf, was put in place by us to allow us to access funds in the open market on an opportunistic or on an as needed basis. To date, we have not sold any securities registered under the universal shelf.

$15 Million Settlement

On February 22, 2001, we announced that a settlement of previously disclosed shareholder litigation had been reached with two of our shareholders. On March 30, 2001, the settlement was approved by the court which resulted in us receiving $15 million on April 6, 2001, less legal fees and certain other expenses. The court granted $3 million in interim legal fees and pending further review by the court, set aside an additional $1.5 million in escrow for legal fees. Two of our stockholders, Elliott Associates, L.P. and Elliott International, L.P. (formerly Westgate International, L.P.), entered this settlement payment in order to resolve claims asserted against them and certain present and former directors. Shareholder litigation remains outstanding against other third parties.

Short-Term Bridge Loan with Elliott Associates, L.P.

On February 23, 2001, we secured a short-term bridge loan from Elliott Associates, L.P. for up to $3.5 million to fund our working capital needs. The loan matured and was repaid in full on April 6, 2001 upon our receipt of the settlement funds described above. The purpose of the short-term bridge loan was to fund our working capital needs. We accessed the first $2 million of the loan at closing and we accessed the balance of $1.5 million on April 2, 2001.

$5 Million Settlement Expected to be Received

On March 16, 2001, we announced that a settlement of previously disclosed shareholder litigation had been reached, which, subject to court approval, will result in us receiving $5 million, less legal fees and certain other expenses. One of our stockholders, Alexander Finance has agreed to make this settlement payment in order to resolve claims asserted against them. A notice regarding the settlement has been mailed to all of our stockholders. The court hearing to consider the settlement is scheduled for April 27, 2001.

Repricing of Employee Stock Options

On February 5, 2001, our Board of Directors elected to reprice certain options granted to employees and directors during 2000. In total, 2,676,000 options with prices ranging from $2.9688 to $6.6094 were repriced to $1.9375, the closing price of our common stock on the repricing date. The Board elected to reprice the options to maintain employee morale and to more clearly align the management and employee goals with those of our stockholders. The resulting variable accounting may lead to substantial non-cash expense charges in the future. No other terms of the options were affected.

$20 Million Equity Commitment Line

During March, 2001, we entered into an agreement with Paul Revere Capital Partners, Ltd., whereby Paul Revere Capital commits to acquire up to $20 million of our common stock over the next 24 months upon demand by us, subject to the conditions contained in the agreement. Pursuant to this facility, we may, at our discretion, sell shares of our common stock to Paul Revere Capital Partners at a discount to the market price of 94% of the average weighted volume price over a 22 day measurement period. Each draw down is limited to the lesser of $4 million or 20% of the trading volume over a specified period of time. We will also issue a warrant to Paul Revere Capital Partners to purchase a number of shares equal to 0.5% of the shares issued in each draw down. We have also agreed to pay a placement agent a fee equal to 4% of each draw down and issue a warrant to the placement agent to purchase a number of shares equal to 0.5% of the shares issued in each draw down.

Name Change

We applied for the right to do business as “ISCO International” and intend to present a formal name change resolution to our stockholders at our annual meeting in 2001.

USE OF PROCEEDS

We will not receive any proceeds from the sale by the selling stockholders of our common stock. The selling stockholders will receive all of the net proceeds from the sale of the shares.

SELLING STOCKHOLDERS

We issued 1,818,182 shares of common stock in a private placement on October 20, 2000. Messrs. Brodsky and Lou, directors of our company, provide management services to Elliott Associates and Elliott International. Mr. Brodsky has served as a director on our board since November 1999 and was previously a director between June 1998 and March 1999. Mr. Lou has served as a director on our board since January 2001. Mr. Brodsky was designated as a director in November 1999 pursuant to a letter agreement dated November 5, 1999 between us and Elliott Associates, L.P.

The shares listed under the column “Number of Shares Being Offered” represents the number of shares that may be sold by each selling stockholder pursuant to this prospectus. Pursuant to Rule 416 under the Securities Act of 1933, the registration statements of which this prospectus is a part also covers any additional shares of our common stock which becomes issuable in connection with such shares because of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the number of outstanding shares of our common stock

We do not know when or in what amounts the selling stockholders may offer shares for sale. The selling stockholders may not sell all or any of the shares offered by this prospectus. Because the selling stockholders may offer all or some of the shares pursuant to this offering, and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares that will be held by the selling stockholders after completion of the offering, we cannot estimate the number of the shares that will be held by the selling stockholders after completion of the offering. However, for purposes of this table, we have assumed that, after completion of the offering, none of the shares covered by this prospectus will be held by the selling stockholders.

The following table sets forth, to our knowledge, certain information regarding the beneficial ownership of the shares of common stock by the selling stockholders as of April 1,2001. Beneficial ownership is calculated based upon SEC requirements and is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated below, the selling stockholder named in this table has sole voting and investment power with respect to all shares beneficially owned. The presentation is based on 107,751,607 shares of our common stock outstanding as of April 1, 2001:


	Shares						Shares
	Beneficially Owned						Beneficially Owned
	Prior to Offering				Number of		After Offering
					Shares
Name of Selling Stockholders(1)	Number		Percentage		Being Offered		Number		Percent

Elliott Associates, L.P. 712 Fifth Avenue New York, New York 10019		19,900,979		18.5%		909,091		18,991,888		17.6	%

Elliott International, L.P.(2) c/o Elliot International Capital Advisors, Inc. 712 Fifth Avenue New York, New York 10019		19,900,974		18.5%		909,091		18,991,883		17.6	%

(1) Includes limited partners, donees and pledgees selling shares that are received from a named selling stockholder.

(2) Formerly known as Westgate International, L.P.

We prepared this table based on the information supplied to us by the selling stockholders named in the table or pursuant to documents publicly available.

PLAN OF DISTRIBUTION

Pursuant to a letter agreement dated as of October 20, 2000 by and between us and the selling stockholders, we agreed to register for public resale the shares of our common stock issued to the selling stockholders, or their pledgees, donees, transferees or other successors in interest. The registration statement of which this prospectus is a part have been filed with the SEC pursuant to the registration rights agreements. We have agreed to use our best efforts to keep each such registration statement effective for a period of four years commencing on the effective date of the applicable registration statement, or a shorter period if all of such 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 four-year period. The aggregate proceeds to the selling stockholders from the sale of shares offered pursuant to this prospectus will be the prices at which such securities are sold, less any commissions. The selling stockholders may choose to not sell any or all of the shares of our common stock offered pursuant to this prospectus.

The selling stockholders, or their pledgees, donees, transferees or other successors in interest, may, from time to time, sell all or a portion of the shares of our common stock 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 selling stockholders may offer their shares of our common stock at various times in one or more of the following transactions:

• in the over-the-counter market;

• on any national securities exchange or market, if any, on which our common stock may be listed at the time of
sale;

• through 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;

• through purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant
to this prospectus;

• in ordinary brokerage transactions and transactions in which the broker solicits purchasers;

• through options, swaps or derivatives;

• in privately negotiated transactions;

• in transactions to cover short sales;

• through any other legally permissible method; and

• through a combination of any such methods of sale.

The selling stockholders may also sell their shares of our common stock in accordance with Rule 144 under the Securities Act, rather than pursuant to this prospectus.

The selling stockholders may sell their shares of our common stock directly to purchasers or may use brokers, dealers, underwriters or agents to sell such shares. In effecting sales, brokers and dealers engaged by the selling stockholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions, discounts or concessions from a selling stockholder or, if any such broker-dealer acts as agent for the purchaser of such shares, from a purchaser in amounts to be negotiated. Such compensation may, but is not expected to, exceed that which is customary for the types of transactions involved. Broker-dealers may agree with a 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 stockholders. 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. In connection with such resales, broker-dealers may pay to or receive from the purchasers of such shares commissions as described above.

The selling stockholders and any broker-dealers or agents that participate with the selling stockholders in sales of their shares of our common stock 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 such shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

From time to time the selling stockholders may engage in short sales, short sales against the box, puts and calls and other hedging transactions in our securities, and may sell and deliver their shares of our common stock in connection with such transactions or in settlement of securities loans. These transactions may be entered into with broker-dealers or other financial institutions. In addition, from time to time a selling stockholder may pledge its shares pursuant to the margin provisions of its customer agreements with its broker-dealer. Upon delivery of such shares or a default by a selling stockholder, the broker-dealer or financial institution may offer and sell such pledged shares from time to time.

We are required to pay all fees and expenses incident to the registration of the shares of our common stock, including fees and disbursements, not to exceed an aggregate of $5,000, of counsel to the selling stockholders. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. We have advised the selling stockholders that during such time as they may be engaged in a distribution of the shares of our common stock, they are required to comply with the anti-manipulative provisions of Regulation M under the Securities Exchange Act.

LEGAL MATTERS

The validity of the shares of our common stock offered by this prospectus will be passed upon for us by Pepper Hamilton LLP, Philadelphia, Pennsylvania.

EXPERTS

Our annual financial statements incorporated into this prospectus by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2000 have been audited in part by Grant Thornton LLP, independent public accountants, as indicated in their report with respect thereto, and by Ernst & Young LLP, independent public accountants, as indicated in their report with respect thereto and are included herein in reliance upon the authority of those firms as experts in accounting and auditing in giving said reports.

INDEMNIFICATION

Article 9 of our Certificate of Incorporation provides that we shall indemnify our directors to the full extent permitted by the General Corporation Law of the State of Delaware and may indemnify our officers and employees to such extent, except that we shall not be obligated to indemnify any such person (1) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense, or (2) for any amounts paid in settlement of an action indemnified against by us without our prior written consent. We have entered into indemnity agreements with each of our directors and officers. These agreements may require us, among other things, to indemnify such directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers, as the case may be, 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’ and officers’ liability insurance if available on reasonable terms.

In addition, Article 8 of our Certificate of Incorporation provides that a director of ours shall not be personally liable to us or our stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (1) for any breach of the director’s duty of loyalty to us or our stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) 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.

Part II

Information Not Required In Prospectus

Item 14. Other Expenses of Issuance and Distribution

The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered. All of the amounts shown are estimates except the Securities and Exchange Commission registration fee.


SEC registration fee		$	555




Printing fees			200




Legal fees and expenses*			10,000




Accounting fees and expenses*			5,000




Miscellaneous fees and expenses*			1,231




	TOTAL	$	16,986

Indicates our estimate of such expense.

Item 15. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law (“Section 145”) permits a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer or agent of the corporation or another enterprise if serving at the request of the corporation. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and, in respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of an action by or in the right of the corporation, no indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that, despite the adjudication of liability, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director, officer, employee or agent of a corporation has been successful in the defense of any action, suit or proceeding referred to above, or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

In addition, Article 8 of our Certificate of Incorporation provides that a director of us shall not be personally liable to us or our stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (1) for any breach of the director’s duty of loyalty to us or our stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) 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.

We have obtained a directors’ and officers’ liability insurance policy which entitles us to be reimbursed for certain indemnity payments we are required or permitted to make to its directors and officers.

Item 16. List of Exhibits

The exhibits filed as part of this registration statement are as follows:


Exhibit		Description

4.1(1)		Letter Agreement dated October 20, 2000 by and between the Company and Elliott Associates, L.P. and Westgate International.
5.1*		Opinion of Pepper Hamilton LLP regarding legality of securities being registered.
10.1*		Common Stock Purchase Agreement with Paul Revere Capital Partners, Ltd. dated March 21, 2001.
10.2*		Escrow Agreement with Paul Revere Capital Partners, Ltd. and Epstein Becker & Green, P.C. dated March 21, 2001.
10.3*		Placement Agreement with Ladenburg Thalmann & Co. Inc. dated December 12, 2000.
10.4*		Waiver Letter by Ladenburg Thalmann & Co. Inc. dated March 19, 2001.
10.5*		Employment Agreement with Amr Abdelmonem dated January 1, 2001.
23.1*		Consent of Grant Thornton LLP
23.2*		Consent of Ernst & Young LLP
23.3*		Consent of Pepper Hamilton LLP (included in its Opinion filed as Exhibit 5.1 hereto).
24.1*		Powers of Attorney (included on signature page)

(1)		Incorporated by reference to Exhibit B to the Schedule 13D filed with the SEC by Elliott Associates, L.P. on November 13, 2000.




*		Filed herewith.

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:

(i) To include any prospectus required by Section 10(a)(3) the Securities Act;

(ii) To reflect in the prospectus any facts or events which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increases or decreases in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

(iii) To include any additional or changed 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; provided, however, that paragraphs (a)(1)(i); and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those clauses is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in this Registration Statement.

(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment 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) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange 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 Registrant in the 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 Registrant 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.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Illinois Superconductor Corporation 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 Mt. Prospect, Illinois on April 20, 2001.

	Illinois Superconductor Corporation

	By: /s/ George M. Calhoun George M. Calhoun Chairman and Chief Executive Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Exchange Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Each person whose signature appears below in so signing also makes, constitutes and appoints George M. Calhoun, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments and post-effective amendments to this Registration Statement and a related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and in each case to file the same, with all exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.


Signature	Title	Date

/s/ George M. Calhoun George M. Calhoun	Chief Executive Officer and Director (Principal Executive Officer)	April 20, 2001

/s/ Charles F. Willes Charles F. Willes	Chief Financial Officer (Principal and Accounting Officer)	April 20, 2001

/s/ Mark D. Brodsky Mark D. Brodsky	Director	April 20, 2001

/s/ Howard S. Hoffmann Howard S. Hoffmann	Director	April 20, 2001

/s/ Norbert Lou Norbert Lou	Director	April 20, 2001

/s/ Daniel T. Spoor Daniel T. Spoor	Director	April 20, 2001

Exhibit Index


Exhibit		Description

4.1(1)		Letter Agreement dated October 20, 2000 by and between the Company and Elliott Associates, L.P. and Westgate International.
5.1*		Opinion of Pepper Hamilton LLP regarding legality of securities being registered.
10.1*		Common Stock Purchase Agreement with Paul Revere Capital Partners, Ltd. dated March 21, 2001.
10.2*		Escrow Agreement with Paul Revere Capital Partners, Ltd. and Epstein Becker & Green, P.C. dated March 21, 2001.
10.3*		Placement Agreement with Ladenburg Thalmann & Co. Inc. dated December 12, 2000.
10.4*		Waiver Letter by Ladenburg Thalmann & Co. Inc. dated March 19, 2001.
10.5*		Employment Agreement with Amr Abdelmonem dated January 1, 2001.
23.1*		Consent of Grant Thornton LLP
23.2*		Consent of Ernst & Young LLP
23.3*		Consent of Pepper Hamilton LLP (included in its Opinion filed as Exhibit 5.1 hereto).
24.1*		Powers of Attorney (included on signature page)

(1)		Incorporated by reference to Exhibit B to the Schedule 13D filed with the SEC by Elliott Associates, L.P. on November 13, 2000.




*		Filed herewith.

21 EX-5.1 2 c61784ex5-1.htm OPINION OF PEPPER HAMILTON LLP Opinion of Pepper Hamilton LLP

Exhibit 5.1

[Pepper Hamilton LLP Letterhead]

April 19, 2001

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 to Illinois Superconductor Corporation, a Delaware corporation (the “Company”), in connection with the registration under the Securities Act of 1933, as amended (the “Act”), of an aggregate of 1,818,182 shares of the Company’s common stock, $.001 par value, (the “Shares”) issued in connection with an Additional Investment Agreement among Elliott Associates, L.P., Elliott International, L.P. (f/k/a Westgate International, L.P.) and the Company (the “Investment Agreement”).

The opinion is delivered in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act.

We have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-3 (the “Registration Statement”); (ii) the Investment Agreement; (iii) the Company’s Certificate of Incorporation and Bylaws, as in effect on the date hereof; (iv) certain resolutions of the Board of Directors of the Company relating to, among other things, the issuance of the Shares; and (v) such other documents relating to the Company and the proposed issuance of the Shares as we have deemed necessary or appropriate as a basis for the opinions set forth below.

In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. As to any facts material to the opinions expressed herein which were not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others.

Members of our firm are admitted to the Bar of the Commonwealth of Pennsylvania, and we express no opinion as to the laws of any other jurisdiction other than the Federal laws of the United States of America and the General Corporation Law of the State of Delaware (“GCL”).

Illinois Superconductor Corporation
Page 2.

Based upon and subject to the foregoing, we are of the opinion that the Shares have been duly and validly issued and are fully-paid and non-assessable by the Company under the GCL.

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption “Legal Matters” in the prospectus filed as part of the Registration Statement. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act.

This opinion is furnished by us, as your counsel, in connection with the filing of the Registration Statement and, except as provided in the immediately preceding paragraph, is not to be used, circulated, quoted or otherwise referred to for any other purpose without our express written permission or relied upon by any other person.

Very truly yours,

/s/ Pepper Hamilton LLP
PEPPER HAMILTON LLP

EX-10.1 3 c61784ex10-1.htm COMMON STOCK PURCHASE AGREEMENT Common Stock Purchase Agreement

Exhibit 10.1

COMMON STOCK PURCHASE AGREEMENT

This COMMON STOCK PURCHASE AGREEMENT (this “Agreement”) is dated as of March 21, 2001 by and between Illinois Superconductor Corporation, a Delaware corporation (the “Company”), and Paul Revere Capital Partners, Ltd., a British Virgin Islands corporation (the “Purchaser”).

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to Purchaser from time to time as provided herein, and Purchaser shall purchase, up to $20,000,000 of Common Stock and the Warrant; and

NOW, THEREFORE, in consideration of the foregoing premises, and the promises and covenants herein contained, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties, intending to be legally bound, hereby agree as follows:

ARTICLE 1

PURCHASE AND SALE OF COMMON STOCK

Section 1.1. Purchase and Sale of Stock. Subject to the terms and conditions of this Agreement, the Company shall sell and issue to the Purchaser and the Purchaser shall be obligated to purchase from the Company, up to an aggregate of, $20,000,000 of the Common Stock and the Warrant, subject to the terms and conditions herein.

Section 1.2. Purchase Price and Initial Closing. The Company agrees to issue and sell to the Purchaser and, in consideration of and in express reliance upon the representations, warranties, covenants, terms and conditions of this Agreement, the Purchaser agrees to purchase that number of the Shares to be issued in connection with each Draw Down. The delivery of executed documents under this Agreement and the other agreements referred to herein and the payment of the fees set forth in Article I of the Escrow Agreement, attached as Exhibit B hereto, (the “Initial Closing”) shall take place at the offices of Epstein Becker & Green, P.C., 250 Park Avenue, New York, New York 10177 (i) within five (5) days from the date hereof, or (ii) such other time and place or on such date as the Purchaser and the Company may agree upon (the “Initial Closing Date”). Each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the Initial Closing.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES

Section 2.1. Representation and Warranties of the Company. The Company hereby makes the following representations and warranties to the Purchaser, except as disclosed in SEC Documents:

            (a)  Organization, Good Standing and Power. The Company is a corporation duly incorporated validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate authority to own, lease and operate its properties and assets and to carry on its business as now being conducted. The Company does not own more than fifty percent (50%) of or control any other business entity except as set forth in the SEC Documents. The Company is duly qualified to do business and is in good standing as a foreign corporation in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not have a Material Adverse Effect.

            (b)  Authorization, Enforcement. (i) The Company has the requisite corporate power and corporate authority to enter into and perform its obligations under the Transaction Documents and to issue the Draw Down Shares pursuant to their respective terms, (ii) the execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required, other than approval of each Draw Down by the Board of Directors or a pricing committee thereof, and (iii) the Transaction Documents have been duly executed and delivered by the Company and at the Initial Closing shall constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application. The Company has duly and validly authorized and reserved for issuance shares of Common Stock sufficient in number for the issuance of the Draw Down Shares.

            (c)  Capitalization. The authorized capital stock of the Company consists of 250,000,000 shares of Common Stock of which 107,719,307 shares are issued and outstanding and 300,000 shares of preferred stock, none of which are issued and outstanding. All of the outstanding shares of the Company’s Common Stock have been duly and validly authorized and are fully paid and non-assessable. Except as set forth in this Agreement or on Schedule 2.1(c) hereto, no shares of Common Stock are entitled to preemptive rights or registration rights and there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company. Furthermore, except as set forth in this Agreement or on Schedule 2.1(c), there are no

contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of the capital stock of the Company or options, securities or rights convertible into shares of capital stock of the Company. Except as set forth on Schedule 2.1(c), the Company is not a party to any agreement granting registration rights to any person with respect to any of its equity or debt securities. Except as set forth on Schedule 2.1(c), the Company is not a party to, and it has no knowledge of, any agreement restricting the voting or transfer of any shares of the capital stock of the Company. Except as set forth on Schedule 2.1(c) hereto, the offer and sale of all capital stock, convertible securities, rights, warrants, or options of the Company issued prior to the date hereof complied with all applicable federal and state securities laws, and no stockholder has a right of rescission or damages with respect thereto which would have a Material Adverse Effect on the Company’s financial condition or operating results. The Company has made available to the Purchaser true and correct copies of the Company’s articles or certificate of incorporation as in effect on the date hereof (the “Charter”), and the Company’s bylaws as in effect on the date hereof (the “Bylaws”). The Company has not received any notice from the Principal Market questioning or threatening the continued inclusion of the Common Stock on such market.

(d) [INTENTIONALLY DELETED]

(e) No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated herein do not and will not, (i) violate any provision of the Company’s Charter or Bylaws, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company is a party, (iii) create or impose a lien, charge or encumbrance on any property of the Company under any agreement or any commitment to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, or (iv) result in a violation of any federal, state, local or other foreign statute, rule, regulation, order, judgment or decree (including any federal or state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries are bound or affected, except, in all cases, for such conflicts, defaults, termination, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect. The business of the Company and its subsidiaries is not being conducted in violation of any laws, ordinances or regulations of any governmental entity, except for possible violations which singularly or in the aggregate do not and will not have a Material Adverse Effect. The Company is not required under any federal law, rule or regulation of the United States, or any law, rule or regulation of a state or locality thereof to obtain any consent, authorization or order of, or make any filing or registration with, any court or United States governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement, or issue and sell the Shares in accordance with the terms hereof (other than any filings which may be required to be made by the Company with the SEC, the Principal Market or U.S. state securities

administrators subsequent to the date hereof); provided that, for purpose of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Purchaser herein.

(f) SEC Documents, Financial Statements.

                  (i)  The Company meets the requirements for use of Form S-3 under the Securities Act in connection with the offering pursuant to the Registration Statement. The Registration Statement has remained in effect since it was originally declared effective by the SEC on January 26, 2001. The Registration Statement covers, among other securities, the registration under the Securities Act of the offering and sale of the Shares to the Purchaser and will be amended to cover the Plan of Distribution of the Purchaser, and upon such amendment, the Registration Statement and the sale of the Shares hereunder will meet the requirements set forth in Rules 415(a)(1)(x) and (a)(4).

                  (ii)  The Company has not distributed and, prior to each Settlement Date, shall not have distributed, any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prospectus or other materials, if any, permitted by the Securities Act.

                  (iii)  The Common Stock of the Company is registered pursuant to Section 12(b) or Section 12(g) of the Exchange Act, and, except as disclosed on Schedule 2.1(f) hereto, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange Act at least since December 31, 1998. The Company has not provided to the Purchaser any information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed, other than with respect to the transactions contemplated by this Agreement. As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act or the Securities Act, as applicable, and the rules and regulations of the SEC promulgated thereunder applicable to such documents, and, as of their respective filing dates, none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared by management in accordance with GAAP applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), and fairly

present in all material respects the financial position of the Company and its subsidiaries as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Ernst & Young LLP has audited the annual financial statements and reviewed the quarterly financial statements for all periods up to and including September 30, 2000, and are independent public accountants as required by Regulation S-X of the Securities Act. Grant Thornton LLP was engaged by the Company on December 7, 2000 to audit the annual financial statements for the year ended December 31, 2000 and review the quarterly financial statements for periods thereafter, and are independent public accountants as required by Regulation S-X of the Securities Act.

            (g)  Subsidiaries. The SEC Documents or Schedule 2.1(g) hereto sets forth each subsidiary of the Company, showing the jurisdiction of its incorporation or organization and showing the percentage of the Company’s ownership of the outstanding stock or other interests of such subsidiary. For the purposes of this Agreement, “subsidiary” shall mean any corporation or other entity of which at least a majority of the securities or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by the Company and/or any of its other subsidiaries. All of the issued and outstanding shares of capital stock of each subsidiary have been duly authorized and validly issued, and are fully paid and non-assessable. There are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon any subsidiary for the purchase or acquisition of any shares of capital stock of any subsidiary or any other securities convertible into, exchangeable for or evidencing the rights to subscribe for any shares of such capital stock. Neither the Company nor any subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of the capital stock of any subsidiary or any convertible securities, rights, warrants or options of the type described in the preceding sentence. Neither the Company nor any subsidiary is a party to, nor has any knowledge of, any agreement restricting the voting or transfer of any shares of the capital stock of any subsidiary.

            (h)  No Material Adverse Effect. Since the date of the financial statement contained in the Company’s most recently filed Form 10-Q or Form 10-K, whichever is most current, no Material Adverse Effect has occurred or exists with respect to the Company, except as disclosed on Schedule 2.1(h) hereto.

            (i)  No Undisclosed Liabilities. Except as disclosed on Schedule 2.1(i) hereto, neither the Company nor any of its subsidiaries has any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) that would be required to be disclosed on a balance sheet of the Company or any subsidiary (including the notes thereto) in conformity with GAAP which are not disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company’s or its subsidiaries’ respective businesses since such

date and which, individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company or its subsidiaries.

            (j)  No Undisclosed Events or Circumstances. Since the date of the financial statement contained in the Company’s most recently filed Form 10-Q or Form 10-K, whichever is most current, except as disclosed in Schedule 2.1(j), no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the SEC Documents.

            (k)  Indebtedness. The SEC Documents or Schedule 2.1(k) hereto sets forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any subsidiary, or for which the Company or any subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” shall mean (A) any liabilities for borrowed money or amounts owed in excess of $500,000 (other than trade accounts payable incurred in the ordinary course of business), (B) all guaranties, endorsements and contingent obligations in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (C) the present value of any lease payments in excess of $500,000 due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any subsidiary is in default with respect to any Indebtedness.

            (l)  Title to Assets. Each of the Company and the subsidiaries has good and marketable title to all of its real and personal property reflected in the SEC Documents, free of any mortgages, pledges, charges, liens, security interests or other encumbrances, except for those indicated on Schedule 2.1(1) hereto or such that do not cause a Material Adverse Effect. All said leases of the Company and each of its subsidiaries are valid and subsisting and in full force and effect.

            (m)  Actions Pending. There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any subsidiary which questions the validity of this Agreement or the transactions contemplated hereby or any action taken or to be taken pursuant hereto or thereto. Except as set forth on Schedule 2.1(m) hereto, there is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened, against or involving the Company, any subsidiary or any of their respective properties or assets which individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any subsidiary.

            (n)  Necessary Authorizations. The Company and each of its subsidiaries have all franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of their respective businesses as now being conducted by them under applicable law, including but not limited to, any environmental laws, unless the failure to possess such franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

            (o)  Taxes. The Company and each subsidiary has filed all Tax Returns which it is required to file under applicable laws; all such Tax Returns are true and accurate and have been prepared in compliance with all applicable laws; the Company has paid all Taxes due and owing by it or any subsidiary (whether or not such Taxes are required to be shown on a Tax Return) and has withheld and paid over to the appropriate taxing authorities all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third parties; and since December 31, 1999, the charges, accruals and reserves for Taxes with respect to the Company (including any provisions for deferred income taxes) reflected on the books of the Company are adequate to cover any Tax liabilities of the Company if its current tax year were treated as ending on the date hereof.

             No claim has been made by a taxing authority in a jurisdiction where the Company does not file tax returns that the Company or any subsidiary is or may be subject to taxation by that jurisdiction. Except as set forth on Schedule 3(o) hereto, there are no foreign, federal, state or local tax audits or administrative or judicial proceedings pending or being conducted with respect to the Company or any subsidiary; no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority; and no written notice indicating an intent to open an audit or other review has been received by the Company or any subsidiary from any foreign, federal, state or local taxing authority. There are no material unresolved questions or claims concerning the Company’s Tax liability. The Company (A) has not executed or entered into a closing agreement pursuant to § 7121 of the Internal Revenue Code or any predecessor provision thereof or any similar provision of state, local or foreign law; and (B) has not agreed to or is required to make any adjustments pursuant to § 481 (a) of the Internal Revenue Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by the Company or any of its subsidiaries or has any knowledge that the IRS has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of the Company. The Company has not been a United States real property holding corporation within the meaning of § 897(c)(2) of the Internal Revenue Code during a period of five (5) years from the date hereof.

             The Company has not made an election under § 341(f) of the Internal Revenue Code. The Company is not liable for the Taxes of another person that is not a subsidiary of the Company under (A) Treas. Reg. § 1.1502-6 (or comparable provisions

of state, local or foreign law), (B) as a transferee or successor, (C) by contract or indemnity or (D) otherwise. The Company is not a party to any tax sharing agreement with any person other than a subsidiary of the Company. The Company has not made any payments, is not obligated to make payments nor is it a party to an agreement that could obligate it to make any payments that would not be deductible under § 280G of the Internal Revenue Code.

             For purposes of this Section 2.1(o):

             “Internal Revenue Code” means the Internal Revenue Code of 1986, as amended.

             “IRS” means the United States Internal Revenue Service.

             “Tax” or “Taxes” means federal, state, county, local, foreign, or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not.

             “Tax Return” means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof.

            (p)  Certain Fees. Except as set forth on Schedule 2.1(p) hereto, no brokers, finders or financial advisory fees or commissions will be payable by the Company or any subsidiary with respect to the transactions contemplated by this Agreement.

            (q)  Disclosure. Neither this Agreement or the Schedules hereto nor any other documents, certificates or instruments furnished to the Purchaser by or on behalf of the Company or any subsidiary in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made herein or therein, in the light of the circumstances under which they were made herein or therein, not misleading.

            (r)  Operation of Business. Except as set forth on Schedule 2.1(r) hereto, the Company and each of the subsidiaries has sufficient right, title or interest in the patents, trademarks, service marks, trade names, copyrights, licenses and authorizations (collectively, “Intellectual Property”) necessary for the conduct of its business as now conducted. To the best of the Company’s knowledge, the conduct of the business of the Company and each of the subsidiaries as presently conducted does not violate, conflict with or infringe the Intellectual Property rights of any third party.

            (s)  Insurance. Except as disclosed on Schedule 2.1(s) hereto, the Company carries or will have the benefit of insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaging in similar businesses and similar industries.

            (t)  Books and Records. The records and documents of the Company and its subsidiaries accurately reflect in all material respects the information relating to the business of the Company and the subsidiaries, the location and collection of their assets, and the nature of all transactions giving rise to the obligations or accounts receivable of the Company or any subsidiary.

            (u)  Material Agreements. Except as set forth on Schedule 2.1(u) hereto, neither the Company nor any subsidiary is a party to any written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement, a copy of which would be required to be filed with the SEC as an exhibit to a registration statement on Form S-1 or other applicable form (collectively, “Material Agreements”) if the Company or any subsidiary were registering securities under the Securities Act. Except as set forth on Schedule 2.1(u), the Company and each of its subsidiaries has in all material respects performed all the obligations required to be performed by them to date under the foregoing agreements, have received no notice of default and are not in default under any Material Agreement now in effect, the result of which could cause a Material Adverse Effect. No written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement of the Company or of any subsidiary limits or shall limit the payment of dividends on the Company’s Common Stock.

            (v)  Transactions with Affiliates. Except as set forth on Schedule 2.1(v) hereto, there are no loans, leases, agreements, contracts, royalty agreements, management contracts or arrangements or other continuing transactions exceeding $100,000 between (A) the Company, any subsidiary or any of their respective customers or suppliers on the one hand, and (B) on the other hand, any officer, employee, consultant or director of the Company, or any of its subsidiaries, or any person owning 5% or more of the capital stock of the Company or any subsidiary or any member of the immediate family of such officer, employee, consultant, director or stockholder or any corporation or other entity controlled by such officer, employee, consultant, director or stockholder, or a member of the immediate family of such officer, employee, consultant, director or stockholder.

            (w)  Accuracy of Registration Statement. The Registration Statement and the Prospectus do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading in light of the circumstances under which they were made; provided, however, the Company makes no representations or warranties as to the information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with the information furnished in writing to the Company by the Purchaser specifically for inclusion in the Registration Statement.

(x) Employees. Neither the Company nor any subsidiary has any collective bargaining arrangements or agreements covering any of its employees, except as set forth on Schedule 2.1(x) hereto. Except as set forth on Schedule 2.1(x) hereto, neither the Company nor any subsidiary is in breach of any employment contract, agreement regarding proprietary information, noncompetition agreement, nonsolicitation agreement, confidentiality agreement, or any other similar contract or restrictive covenant, relating to the right of any officer, employee or consultant to be employed or engaged by the Company or such subsidiary. Since the date of the financial statement in the Company’s most recently filed Form 10-K, no officer, consultant or key employee of the Company or any subsidiary whose termination, either individually or in the aggregate, could have a Material Adverse Effect, has terminated or, to the knowledge of the Company, has any present intention of terminating his or her employment or engagement with the Company or any subsidiary.

(y) Absence of Certain Developments. Except as provided in SEC Documents or on Schedule 2.1(y) hereto, since the date of the financial statement contained in the Company’s most recently filed Form 10-Q or Form 10-K, whichever is most current, neither the Company nor any subsidiary has:

                  (i)  issued any stock, bonds or other corporate securities or any rights, options or warrants with respect thereto;

                  (ii)  borrowed any amount or incurred or become subject to any liabilities (absolute or contingent) except current liabilities incurred in the ordinary course of business which are comparable in nature and amount to the current liabilities incurred in the ordinary course of business during the comparable portion of its prior fiscal year, as adjusted to reflect the current nature and volume of the Company’s or such subsidiary’s business;

                  (iii)  discharged or satisfied any lien or encumbrance or paid any obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business;

                  (iv)  declared or made any payment or distribution of cash or other property to stockholders with respect to its stock, or purchased or redeemed, or made any agreements so to purchase or redeem, any shares of its capital stock;

                  (v)  sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business;

                  (vi)  sold, assigned or transferred any patent rights, trademarks, trade names, copyrights, trade secrets or other intangible assets or intellectual property rights, or disclosed any proprietary confidential information to any person except in each case, to customers in the ordinary course of business or to the Purchaser or its representatives;

                  (vii)  suffered any material losses (except for anticipated losses consistent with prior quarters) or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of prospective business;

                  (viii)  made any changes in employee compensation except in the ordinary course of business and consistent with past practices;

                  (ix)  made capital expenditures or commitments therefor that aggregate in excess of $500,000;

                  (x)  entered into any other material transaction, whether or not in the ordinary course of business;

                  (xi)  suffered any material damage, destruction or casualty loss, whether or not covered by insurance;

                  (xii)  experienced any material problems with labor or management in connection with the terms and conditions of their employment; or

                  (xiii)  effected any two or more events of the foregoing kind which in the aggregate would be material to the Company or its subsidiaries.

(z) Governmental Approvals. Except as set forth in the SEC Documents or on Schedule 2.1(z) hereto, and except for the filing of any notice prior or subsequent to any Settlement Date that may be required under applicable federal or state securities laws (which if required, shall be filed on a timely basis), including the filing of a registration statement or post-effective amendment or prospectus supplement pursuant to this Agreement, no authorization, consent, approval, license, exemption of, filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with, the delivery of the Shares, or for the performance by the Company of its obligations under this Agreement.

Section 2.2. Representations and Warranties of the Purchaser. The Purchaser hereby makes the following representations and warranties to the Company:

(a) Organization and Standing of the Purchaser. The Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the British Virgin Islands.

(b) Authorization and Power. The Purchaser has the requisite corporate power and corporate authority to enter into and perform the Transaction Documents and to purchase the Shares being, and to be sold to it hereunder. The execution, delivery and performance of the Transaction Documents by Purchaser and the

consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action.

(c) No Conflicts. The execution, delivery and performance of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby or relating hereto do not and will not (i) result in a violation of the Purchaser’s charter documents or bylaws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument to which the Purchaser is a party, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to the Purchaser or its properties (except for such conflicts, defaults and violations as would not, individually or in the aggregate, have a Material Adverse Effect on Purchaser). The Purchaser is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or to purchase the Shares in accordance with the terms hereof.

(d) Information. The Purchaser and its advisors, if any, have access to the SEC Documents. The Purchaser has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Shares. The Purchaser understands that it (and not the Company) shall be responsible for its own tax liabilities that may arise as a result of this investment or the transactions contemplated by this Agreement.

ARTICLE 3

COVENANTS

The Company covenants with the Purchaser, which covenants are for the benefit of the Purchaser, that during the term of this Agreement:

Section 3.1. The Shares. As of the date of each Draw Down, the Company will have authorized and reserved, free of preemptive rights and other similar contractual rights of stockholders, a sufficient number of its authorized but unissued shares of its Common Stock to cover the Shares to be issued in connection with such Draw Down. The Shares to be issued under this Agreement, when paid for and issued in accordance with the terms hereof, shall be validly issued and outstanding, fully paid and non-assessable, and the Purchaser shall be entitled to all rights accorded to a holder of Common Stock. Anything in this Agreement to the contrary notwithstanding, the Company may not make a Draw Down to the extent that, after such purchase by the Purchaser, the sum of the number of shares of Common Stock beneficially owned by the Purchaser and its affiliates would result in beneficial ownership by the Purchaser and its affiliates of more than 9.9% of the then outstanding shares of Common Stock. For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act.

Section 3.2. Securities Compliance. If applicable, the Company shall notify the Principal Market, in accordance with its rules and regulations, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Shares to the Purchaser or subsequent holders.

Section 3.3. Registration and Listing. The Company will cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all respects with its reporting and filing obligations under the Exchange Act, will comply with all requirements related to any registration statement filed pursuant to this Agreement, and will not take any action or file any document (whether or not permitted by the Securities Act or the Exchange Act or the rules promulgated thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under the Exchange Act or Securities Act, until 30 days after the final Settlement Date for the Shares. The Company will take all action necessary to continue the listing or trading of its Common Stock on the Principal Market and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Principal Market and shall provide the Purchaser with copies of any correspondence to or from such Principal Market which questions or threatens delisting of the Common Stock, within three (3) Trading Days of the Company’s receipt thereof, until the Purchaser has disposed of all of the Shares. The Company will arrange, if necessary, for the qualification of the Common Stock for sale under the laws of such jurisdictions as the Purchaser may designate, will maintain such qualifications in effect so long as required for the distribution of the Common Stock and will pay any fees required by NASD Regulation, Inc., if any, in connection with its review of the offering, provided that, in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to (a) service of process in suits, in any jurisdiction where it is not now so subject or (b) subject it to taxation in any such jurisdiction.

Section 3.4. Escrow Arrangement. The Company and the Purchaser shall enter into an escrow arrangement with Epstein Becker & Green, P.C. (the “Escrow Agent”) in the form of Exhibit A hereto respecting delivery of the documents set forth therein to be delivered at the Initial Closing or at each Settlement and payment against delivery of the Shares.

Section 3.5. Registration Statement. The Company shall cause the Registration Statement to remain effective from the date hereof until 30 calendar days after the final Settlement Date and, as of each date a Draw Down Notice is deemed delivered, shall have and shall reserve a dollar amount of shares of Common Stock and Warrants equal to or in excess of the number of Shares issuable pursuant to such Draw Down Notice or Warrants based on the Threshold Price, or, if the Company has not specified a Threshold Price in such notice, 50% of the VWAP on the Trading Day prior to such notice date. Prior to the termination of this Agreement, the Company will not file any amendment to the Registration Statement unless the Company has furnished the Purchaser a copy for its review prior to filing and will not file any such proposed amendment or supplement to which Purchaser reasonably objects. The Company will cause the Registration Statement, properly completed, and any supplement thereto to be filed with the SEC pursuant to the applicable paragraph of Rule 424(b) within the time period prescribed and in accordance with Rules 415, 424(b) and 430A and will provide evidence

satisfactory to Purchaser of such timely filing. On the Trading Day immediately prior to the commencement of each Settlement Period, the Company shall provide the Purchaser with copies of the Pricing Supplement relating to such Settlement Period. Such Pricing Supplement shall contain information permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A, together with all other such required information, including, without limitation, Purchaser’s plan of distribution of the Shares, and, except to the extent the Purchaser shall agree in writing to a modification, shall be in all substantive respects in the form furnished to the Purchaser on or prior to the commencement of the Settlement Period. Notwithstanding anything herein to the contrary, if during any Draw Down Pricing Period the Company reasonably believes an event may occur which would require the suspension of the Registration Statement or sales of the Shares thereunder, the Company shall immediately notify the Purchaser of its good faith belief that such a suspension shall occur and such Draw Down Pricing Period shall terminate and the parties shall settle as to any Trading Days on which shares were purchased during such shortened Draw Down Pricing Period prior to such suspension within three (3) Trading Days of such notice.

Section 3.6. Accuracy of Registration Statement. On each Settlement Date, the Registration Statement and the Prospectus shall not contain any untrue statement of a material fact or omit to state any material fact to be required to be stated therein or necessary in order to make the statements therein not misleading in light of the circumstances under which they were made; and on such Settlement Date or date of filing of the Pricing Supplement, the Registration Statement and the Prospectus will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, the Company makes no representations or warranties as to the information contained in or omitted from the Registration Statement and the Prospectus in reliance upon and in conformity with the information furnished in writing to the Company by the Purchaser specifically for inclusion in the Registration Statement and the Prospectus.

Section 3.7. Other Agreements. The Company shall not enter into any agreement the terms of which such agreement would restrict or impair the ability of the Company to perform its obligations under this Agreement.

Section 3.8. Notice of Certain Events Affecting Registration. The Company will immediately notify the Purchaser upon the occurrence of any of the following events in respect of the Registration Statement or related Prospectus in respect of the Shares: (i) receipt of any request for additional information from the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement the response to which would require any amendments or supplements to the Registration Statement or related Prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material

respect or that requires the making of any changes in the Registration Statement, related Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company’s reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Purchaser any such supplement or amendment to the related Prospectus.

Section 3.9. Compliance with Law. Neither the Company nor any of its affiliates (as that term is defined in Rule 405 under the Securities Act) has taken, nor will any of them take, directly or indirectly, any action designed to cause or that would result in, or which constitutes or that might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Stock.

Section 3.10. Use of Proceeds. The proceeds from the sale of the Shares will be used by the Company and its subsidiaries as described in the Prospectus.

Section 3.11. Limitation on Future Financing. During the term of this Agreement, the Company agrees that is shall not enter into any other stand-by equity based credit facility.

The Purchaser covenants with the Company as follows:

Section 3.12. Compliance With Law. The Purchaser’s trading and distribution activities with respect to the Shares will be in compliance with all applicable state and federal securities laws, rules and regulations and the rules and regulations of the NASD and the Principal Market. Neither the Purchaser nor any of its affiliates (as that term is defined in Rule 405) has taken, nor will any of them take, directly or indirectly, any action designed to cause or that would result in, or which constitutes or that might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Stock.

Section 3.13. No Short Sales. The Purchaser and its affiliates shall not engage in short sales of the Company’s Common Stock (as defined in applicable SEC and the Principal Market rules) during the term of this Agreement and shall not otherwise hedge its position through the use of option, swaps or other derivative to create a net short position of the Company’s Common Stock.

Section 3.14. Selling Restriction. The Purchaser has the right to sell shares of the Company’s Common Stock during the term of this Agreement. The Purchaser covenants that prior to and during the term of this Agreement, neither the Purchaser nor any of its affiliates nor any entity managed by the Purchaser will ever sell shares of Common Stock of the Company other than what the Purchaser has accumulated to purchase under the terms of this Agreement or

in accounts directly or indirectly managed by the Purchaser or any affiliate of the Purchaser or any entity managed by the Purchaser.

ARTICLE 4

CONDITIONS TO THE INITIAL CLOSING AND SETTLEMENT

Section 4.1. Conditions Precedent to the Obligation of the Company to Proceed with the Initial Closing and to Sell the Shares. The obligation hereunder of the Company to proceed with the Initial Closing and to issue and sell the Shares to the Purchaser from time to time is subject to the satisfaction or waiver of each of the conditions set forth below. These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion.

            (a)  Accuracy of the Purchaser’s Representations and Warranties. The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made, as of the Initial Closing, as though made at that time (except for representations and warranties that speak as of a particular date), and as of the Settlement Date as though made at that time, except for representations and warranties that speak as of a particular date.

            (b)  Performance by the Purchaser. The Purchaser shall have performed, satisfied and complied in all material respects with all material covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser as of the Initial Closing and at or prior to the Settlement Date.

            (c)  No Proceedings or Litigation. No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against the Purchaser or the Company or any subsidiary, or any of the officers, directors or affiliates of the Purchaser or the Company or any subsidiary seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

            (d)  No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

            (e)  Amendment of Registration Statement. The Registration Statement shall be been amended to describe the Purchaser’s Plan of Distribution, and such amendment shall have been declared effective by the SEC.

Section 4.2. Conditions Precedent to the Obligation of the Purchaser to Proceed with the Initial Closing and to Purchase the Shares. The obligation hereunder of the Purchaser to perform its obligations under this Agreement, to proceed with the Initial Closing and to purchase the Shares is subject to the satisfaction or waiver of each of the conditions set forth below. These conditions are for the Purchaser’s sole benefit and may be waived by the Purchaser at any time in its sole discretion.

            (a)  Accuracy of the Company’s Representations and Warranties. Each of the representations and warranties of the Company shall be true and correct in all material respects as of the date when made as of the Initial Closing, as though made at that time (except for representations and warranties that speak as of a particular date), and as of the Settlement Date as though made at that time (except for representations and warranties that speak as of a particular date).

            (b)  Performance by the Company. The Company shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company as of the Initial Closing and at or prior to the Settlement Date.

            (c)  No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

            (d)  No Proceedings or Litigation. No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against the Purchaser or the Company or any subsidiary, or any of the officers, directors or affiliates of the Purchaser or the Company or any subsidiary seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

            (e)  Opinion of Counsel. At or prior to (i) the first Settlement Date, and (ii) any subsequent Settlement Date (if reasonably requested by the Purchaser due to a specific subsequent event identified to the Company by the Purchaser), the Purchaser shall have received the opinion of counsel to the Company in form and substance acceptable to Ladenburg Thalmann & Co. Inc., which shall also be addressed to the Purchaser, dated the date of the Initial Closing or the Settlement.

            (f)  Effective Registration Statement. The Registration Statement, as amended to provide the Plan of Distribution of the Purchaser, registering the Shares and Warrants shall be effective.

            (g)  No Suspension. Trading in the Company’s Common Stock shall not have been suspended by the SEC or the Principal Market (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be

terminated prior to the next Settlement Date), and, at any time subsequent to the execution of this Agreement and prior to the commencement of any Settlement Period, trading in securities generally as reported on the Principal Market shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported on the Principal Market unless the general suspension or limitation shall have been terminated prior to the Initial Closing or commencement of the Settlement Period.

            (h)  Material Adverse Effect. No Material Adverse shall have occurred, unless such Material Adverse Effect is publicly disclosed at least ten (10) Trading Days prior to the Initial Closing or Trading Day the Draw Down Notice is deemed delivered as applicable and the average VWAP or trading volume of the Common Stock on the Principal Market since such disclosure has not decreased by more than 20%.

            (i)  Comfort Letter of Accountants. The Purchaser shall have received from the Company’s auditors, a copy of the letter, addressed to Ladenburg Thalmann & Co. Inc. and the Board of Directors of the Company (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, and (ii) stating, as of the date of the first Settlement (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the first Settlement Date), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants’ “comfort letters” to underwriters in connection with registered public offerings.

            (j)  Officers’ Certificate. The Company shall furnish to the Purchaser as of the date hereof, at the Initial closing and shall have furnished to Purchaser on the date the Draw Down Notice is delivered, a certificate, dated such date, of its Chairman of the Board, its President or a Vice President and its Chief Financial Officer or Treasurer (the “Officers’ Certificate”) stating that:

(i) The representations and warranties of the Company in this Agreement are true and correct in all material respects as if made at and of such date; provided, however, that in all cases any qualifications as to materiality shall be considered in the aggregate; the Company has in all material respects complied with all its agreements contained herein; and the Company will in all respects satisfy the conditions to the Initial Closing or Settlement on its part to be complied with or satisfied at such date; and

(ii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion as of such date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary

to make the statements therein not misleading, and no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus which was not included in such a supplement or amendment.

(k) Warrants. On each Settlement Date, the Company shall issue to the Purchaser a registered warrant to purchase up to a number of shares of Common Stock equal to the 0.5% of the number of Draw Down Shares purchased on such Settlement Date. The Warrant shall be in the form of the warrant issued Ladenburg Thalmann & Co. Inc. pursuant to that certain letter agreement, dated December 12, 2000, between the Company and Ladenburg Thalmann & Co. Inc. and on the Settlement Date.

ARTICLE 5

DRAW DOWN TERMS

Section 5.1. Draw Down Terms. Subject to the satisfaction of the conditions set forth in this Agreement, the parties agree as follows:

(a) The Company, may, in its sole discretion, issue and exercise up to eighteen (18) draw downs (a “Draw Down”) during the Commitment Period, which Draw Downs the Purchaser shall be obligated to accept.

(b) Only one Draw Down shall be allowed in each Draw Down Pricing Period. The number of shares of Common Stock purchased by the Purchaser with respect to each Draw Down shall be determined as set forth in Section 5.1(e) herein and settled on:

(i) as to the 1st through the 11th Trading Days after a Draw Down Pricing Period commences, on or before the 13th Trading Day after a Draw Down Pricing Period commences; and

(ii) as to the 12th through the 22nd Trading Days after a Draw Down Pricing Period commences, on or before the 24th Trading Day after a Draw Down Pricing Period (such settlement periods and such settlement dates in subsection (i) and this subsection (ii) each referred to as a “Settlement Period” and a “Settlement Date”, respectively).

(c) In connection with each Draw Down Pricing Period, the Company may set the Threshold Price in the Draw Down Notice.

(d) The minimum Investment Amount for any Draw Down shall be $100,000 and the maximum Investment Amount as to each Draw Down shall be the lesser of (i) $4,000,000, and (ii) 20% of the average of the VWAPs for the Common

Stock for the twenty-two (22) Trading Day period immediately prior to the applicable Commencement Date (defined below) multiplied by the total trading volume in respect of the Common Stock for such period.

(e) The number of Shares of Common Stock to be issued on each Settlement Date shall be a number of shares equal to the sum of the quotients (for each trading day within the Settlement Period) of (x) 1/22nd of the Investment Amount, and (y) the Purchase Price on each Trading Day within the Settlement Period, subject to the following adjustments:

(i) if the VWAP on a given Trading Day is less than the Threshold Price, then the Investment Amount will be reduced by 1/22nd and that day shall be withdrawn from the Settlement Period; and

(ii) if trading of the Common Stock on the Principal Market is suspended for more than three (3) hours, in the aggregate, on any Trading Day during the Settlement Period or if the Trading Day is shortened because of a public holiday or the Registration Statement or trading thereunder is suspended for more than three (3) hours in the aggregate in accordance with Section 3.5, the Investment Amount shall be reduced by 1/22nd and that day shall be withdrawn from the applicable Settlement Period.

(f) The Company must inform the Purchaser by delivering a draw down notice, in the form of Exhibit B hereto (the “Draw Down Notice”), via facsimile transmission in accordance with Section 8.4 as to the amount of the Draw Down (the “Investment Amount”) the Company wishes to exercise, before the first day of the Draw Down Pricing Period (the “Commencement Date”). If the Commencement Date is to be the date of the Draw Down Notice, the Draw Down Notice must be delivered to and receipt confirmed by the Purchaser at least one hour before trading commences on such date. At no time shall the Purchaser be required to purchase more than the maximum Investment Amount for a given Draw Down Pricing Period so that if the Company chooses not to exercise the maximum Investment Amount in a given Draw Down Pricing Period the Purchaser is not obligated to and shall not purchase more than the scheduled maximum Investment Amount in a subsequent Draw Down Pricing Period.

(g) On each Settlement Date, the Shares purchased by the Purchaser shall be delivered to The Depository Trust Company (“DTC”) on the Purchaser’s behalf. Upon the Company electronically delivering whole shares of Common Stock to the Purchaser or its designees via DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system by 1:00 p.m. ET, the Purchaser shall wire transfer immediately available funds to the Company’s designated account on such day, less any fees as set forth in the Escrow Agreement, which fees shall be wired as directed in the Escrow Agreement. Upon the Company electronically delivering whole shares of Common Stock to the Purchaser or its designees DTC account via DWAC after 1:00 p.m. ET, the Purchaser shall wire transfer next day available funds to the Company’s designated

account on such day, less any fees as set forth in the Escrow Agreement, which fees shall be wired as directed in the Escrow Agreement. In the event that either party elects to use the Escrow Agent, the Shares shall be credited by the Company to the DTC account designated by the Purchaser via DWAC upon receipt by the Escrow Agent of payment for the Draw Down Shares into the Escrow Agent’s master escrow account, all as further set forth in the Escrow Agreement. The Escrow Agent shall be directed to pay the purchase price to the Company, net of one thousand dollars ($1,000) per Settlement as escrow expenses to the Escrow Agent and any additional fees as set forth in the Escrow Agreement. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligations of the Company and the Purchaser hereunder.

ARTICLE 6

TERMINATION

Section 6.1. Term. The term of this Agreement shall be the earlier of (i) 24 months from the date hereof or as otherwise set forth in Section 6.2, and (ii) the date that an aggregate of the shares of Common Stock valued, as of the respective Closing Dates, at $20,000,000 which were registered under the Registration Statement have been issued and sold to the Purchaser hereunder.

Section 6.2. Other Termination.

(a) This Agreement shall terminate upon one (1) Trading Day’s notice if (i) an event resulting in a Material Adverse Effect has occurred and the average VWAP or trading volume of the Common Stock decreases by more than 50% during the 30 calendar days after such Material Adverse Effect is disclosed, (ii) the Common Stock is de-listed from the OTC Bulletin Board, unless such de-listing is in connection with the Company’s subsequent listing of the Common Stock on the Nasdaq National Market, Nasdaq SmallCap Market, the American Stock Exchange or the New York Stock Exchange, or (iii) the Company files for protection from creditors under any applicable law.

(b) The Company may terminate this Agreement (i) upon one (1) Trading Day’s notice if the Purchaser shall fail to fund more than one properly noticed Draw Down within five (5) Trading Days of the end of the applicable Settlement Period.

Section 6.3. Effect of Termination. Section 6.4. In the event of termination by the Company or the Purchaser, written notice thereof shall forthwith be given to the other party and the transactions contemplated by this Agreement shall be terminated without further action by either party. If this Agreement is terminated as provided in Section 6.1 or 6.2 herein, this Agreement shall become void and of no further force and effect upon the conclusion of the current Draw Down Pricing Period, except for Sections 8.1, 8.2 and 8.9, and Article 7 herein. Nothing in this Section 6.3 shall be deemed to release the Company and the Purchaser from any liability for any

breach under this Agreement, or to impair the rights of the Company or the Purchaser to compel specific performance by the other party of its obligations under this Agreement.

ARTICLE 7

INDEMNIFICATION

General Indemnity.

(a) The Company agrees to indemnify and hold harmless the Purchaser (and its directors, officers, fund managers, affiliates, agents, successors and assigns and each person, if any, who controls the purchaser within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Purchaser as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Company herein or based upon, (i) any untrue statement or alleged untrue statement of a material fact contained, or incorporated by reference, in the Registration Statement, the Prospectus or supplements thereto, or (ii) the omission or alleged omission to state in the Registration Statement, the Prospectus or supplements thereto, or any document incorporated by reference therein, any material fact required to be stated herein or necessary to make the statements therein not misleading; provided, however, that the Company shall not be liable to the Purchaser for any losses, liabilities, deficiencies, costs, damages and expenses to the extent that it arises out of or is based upon information provided by the Purchaser for use in connection with the Registration Statement.

(b) The Purchaser agrees to indemnify and hold harmless the Company and its directors, officers, affiliates, agents, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Company as result of any inaccuracy in or breach of the representations, warranties or covenants made by the Purchaser or based upon any untrue statement or alleged untrue statement of a material fact provided by the Purchaser for inclusion in the Registration Statement or the Prospectus. Notwithstanding anything to the contrary herein, the Purchaser shall be liable under this Section 7.1(b) for only that amount as does not exceed the net proceeds to such Purchaser as a result of the sale of Shares pursuant to the Registration Statement.

Section 7.2. Indemnification Procedure. Any party entitled to indemnification under this Article 7 (an “Indemnified Party”) will give written notice to the indemnifying party of any matters giving rise to a claim for indemnification; provided, that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Article 7 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any action, proceeding or claim is brought against an Indemnified Party in respect of which indemnification

is sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the reasonable judgment of counsel to the Indemnified Party a conflict of interest between it and the indemnifying party may exist with respect of such action, proceeding or claim, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party. In the event that the indemnifying party advises an Indemnified Party that it will contest such a claim for indemnification hereunder, or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the Indemnified Party may, at its option, defend, settle or otherwise compromise or pay such action or claim. In any event, unless and until the indemnifying party elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the Indemnified Party’s costs (including reasonable attorneys’ fees, charges and disbursements) and expenses arising out of the defense, settlement or compromise of any such action, claim or proceeding shall be losses subject to indemnification hereunder. The Indemnified Party shall cooperate fully with the indemnifying party in connection with any settlement negotiations or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party, which relates to such action or claim. The indemnifying party shall keep the Indemnified Party fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. If the indemnifying party elects to defend any such action or claim, then the Indemnified Party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. The indemnifying party shall not be liable for any settlement of any action, claim or proceeding effected without its prior written consent. Notwithstanding anything in this Article 7 to the contrary, the indemnifying party shall not, without the Indemnified Party’s prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof which imposes any future obligation on the Indemnified Party or which does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such claim. The indemnification required by this Article 7 shall be made by periodic payments of the amount thereof during the course of investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred, within ten (10) Trading Days of written notice thereof to the indemnifying party so long as the Indemnified Party irrevocably agrees to refund such moneys if it is ultimately determined by a court of competent jurisdiction that such party was not entitled to indemnification. The indemnity agreements contained herein shall be in addition to (a) any cause of action or simi lar rights of the Indemnified Party against the indemnifying party or others, and (b) any liabilities to which the indemnifying party may be subject.

ARTICLE 8

MISCELLANEOUS

Section 8.1. Fees and Expenses. The Company agrees to pay (i) the costs incident to the authorization, issuance, sale and delivery of the Common Stock and any taxes payable in that connection; (ii) the costs incident to the preparation, printing and filing under the

Securities Act of the Registration Statement and any amendments and exhibits thereto; (iii) the costs of distributing the Registration Statement and any post-effective amendments thereof (including, in each case, exhibits and filings incorporated by reference), the Prospectus or any document incorporated by reference therein, all as provided in this Agreement; (iv) at the Initial Closing, a non-accountable expense allowance of $25,000 for the Purchaser’s legal and administrative costs and expenses and any other additional fees as set forth in the Escrow Agreement; (v) any filing fees incident to securing any required review by NASD Regulation, Inc. of the terms of sale of the Common Stock; (vi) any applicable listing or other fees; (vii) the fees and expenses of qualifying the Common Stock under the securities laws of the several jurisdictions and of preparing, printing and distributing a blue sky memorandum; and (viii) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement. Except as provided in this Section 8.1, the Purchaser shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Common Stock which they may sell and the expenses of advertising any offering of the Common Stock made by the Purchaser.

Section 8.2. Specific Enforcement. The Company and the Purchaser acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity.

Section 8.3. Entire Agreement; Amendment. The Transaction Documents contain the entire understanding of the parties with respect to the matters covered hereby and, except as specifically set forth herein, neither the Company nor the Purchaser makes any representations, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought.

Section 8.4. Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:


If to the Company:		451 Kingston Court Mount Prospect, Illinios 60036 Attn: Charles F. Willes Tel: (847) 391-9400 Fax: (847) 391-5015






With copies to: notice):		Pepper Hamilton LLP Suite 400 1235 Westlakes Drive Berwyn, PA 19312-2401 Telephone: (610) 640-7800 Facsimile: (610) 640-7835 Attn: Michael P. Gallagher









If to Purchaser:		c/o Beacon Capital Management Harbour House, 2nd Floor Waterfront Drive Attn: David Sims Fax: (284) 494-4090









with copies to: (which shall not constitute notice)		Epstein Becker & Green P.C. 250 Park Avenue New York, NY 10177-1211 Tel: (212) 351-3771 Fax: (212) 661-0989 Attn: Robert F. Charron

Any party hereto may from time to time change its address for notices by giving written notice of such changed address to the other party hereto in accordance herewith.

Section 8.5. Waivers. No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provisions, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter.

Section 8.6. Headings. The article, section and subsection headings in this Agreement are for convenience only and shall not constitute a part of this Agreement for any other purpose and shall not be deemed to limit or affect any of the provisions hereof.

Section 8.7. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. The parties hereto may not amend this Agreement or any rights or obligations hereunder without the prior written consent of the Company and each Purchaser to be affected by the amendment.

Section 8.8. No Third Party Beneficiaries.This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

Section 8.9. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to the choice of law provisions. The Company and the Purchaser agree to submit themselves to the in personam jurisdiction of the state and federal courts situated within the Southern District of the State of New York with regard to any controversy arising out of or relating to this Agreement.

Section 8.10. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart. Execution may be made by delivery by facsimile.

Section 8.11. Publicity. Neither the Company nor the Purchaser shall issue any press release or otherwise make any public statement or announcement with respect to this Agreement or the transactions contemplated hereby or the existence of this Agreement unless in strict compliance with Rule 134 of the Securities Act, or as otherwise required by the Securities Act or Exchange Act.

Section 8.12. Severability. The provisions of this Agreement are severable and, in the event that any court or officials of any regulatory agency of competent jurisdiction shall determine that any one or more of the provisions or part of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement and this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of such provision, had never been contained herein, so that such provisions would be valid, legal and enforceable to the maximum extent possible, so long as such construction does not materially adversely effect the economic rights of either party hereto.

Section 8.13. Further Assurances. From and after the date of this Agreement, upon the request of the Purchaser or the Company, each of the Company and the Purchaser shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. Section 8.14. Effectiveness of Agreement. This Agreement shall become effective only upon satisfaction of the conditions precedent to the Initial Closing set forth in Article I of the Escrow Agreement.

ARTICLE 9

DEFINITIONS

Section 9.1. Certain Definitions.

(a) “Commitment Amount” shall have the meaning assigned to such term in Section 1.1 hereof.

            (b)  “Commitment Period” shall mean the period of 24 consecutive months commencing immediately after the date hereof.

            (c)  “Common Stock” shall mean the Company’s common stock, $0.001 par value per share.

            (d)  “Draw Down” shall have the meaning assigned to such term in Section 5.1(a) hereof.

            (e)  “Draw Down Notice” shall have the meaning assigned to such term in Section 5.1(f) hereof.

            (f)  “Draw Down Pricing Period” shall mean a period of twenty-two (22) consecutive Trading Days beginning on the date specified in the Draw Down Notice or such other period mutually agreed to at the time of such Draw Down Notice by the Purchaser; provided, however, the Draw Down Pricing Period shall not begin before the day on which receipt of such notice is confirmed by the Purchaser unless otherwise agreed to at the time of such Draw Down Notice by the Purchaser.

            (g)  “Exchange Act” shall mean the Securities and Exchange Act of 1934, as amended.

            (h)  “GAAP” shall mean the United States Generally Accepted Accounting Principles as those conventions, rules and procedures are determined by the Financial Accounting Standards Board and its predecessor agencies.

            (i)  “Initial Closing” shall have the meaning assigned to such term in Section 1.2 hereof.

            (j)  “Investment Amount” shall have the meaning assigned to such term in Section 5.1(f) hereof.

            (k)  “Material Adverse Effect” shall mean any adverse effect on the business, operations, properties or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole and/or any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to perform any of its material obligations under this Agreement or to perform any of its obligations under any other material agreement.

            (l)  “Pricing Supplement” shall mean the supplement to the Registration Statement which sets forth, with respect to a Settlement, the number of Shares purchased, the anticipated Settlement Date, and any other information mutually agreed to be included by the Company and the Purchaser.

            (m)  “Principal Market” shall mean initially the OTC Bulletin Board and thereafter shall include the American Stock Exchange, Nasdaq National Market,

Nasdaq SmallCap Market or the New York Stock Exchange if the Company becomes listed and trades on such market or exchange after the date hereof.

            (n)  “Prospectus” shall mean the base prospectus contained in the Registration Statement and each prospectus supplement (including any Pricing Supplement) relating to the Common Stock to be purchased pursuant to this Agreement filed pursuant to Rule 424(b).

            (o)  “Purchase Price” shall mean, with respect to Draw Down Shares purchased during each applicable Settlement Period, 94% of the VWAP on the date in question (the “Purchase Price Discount”).

            (p)  “Registration Statement” shall mean the registration statement under the Securities Act, filed with the Securities and Exchange Commission, File No. 333-53646 registering for sale pursuant to Rule 415 certain securities of the Company, including the filings with the Commission pursuant to the Exchange Act incorporated therein, as amended to provide the plan of distribution of the Purchaser as of each Settlement Date and shall include the Prospectus and any subsequent amendments or supplements thereto.

            (q)  “SEC Documents” shall mean the Registration Statement, the documents incorporated by reference therein and all of the documents filed or furnished by the Company to the Securities and Exchange Commission (the “SEC”) pursuant to the Exchange Act. Such documents shall include, but not be limited to, proxy statement, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including all exhibits thereto.

            (r)  “Securities Act” shall mean the Securities Act of 1933, as amended.

            (s)  “Settlement” shall mean the delivery of the Draw Down Shares into the Purchaser’s DTC account in exchange for payment therefor.

            (t)  “Settlement Date” shall have the meaning assigned to such term in Section 5.1(b).

            (u)  “Settlement Period” shall have the meaning assigned to such term in Section 5.1(b).

            (v)  “Shares” shall mean, collectively, the shares of Common Stock of the Company being subscribed for hereunder (also referred to herein as the “Draw Down Shares”) and the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”).

            (w)  “Threshold Price” shall mean the price per Share designated by the Company as the lowest VWAP during any Draw Down Pricing Period at which the

Company will sell its Common Stock in accordance with this Agreement (not taking into account the Purchase Price Discount on such Trading Day).

            (x)  “Trading Day” shall mean any day on which the Principal Market is open for business.

            (y)  “Transaction Documents” shall mean this Agreement and the Escrow Agreement.

            (z)  “VWAP” shall mean the daily volume weighted average price of the Company’s Common Stock on the Principal Market as reported by Bloomberg Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time) using the VAP function on the date in question.

(aa) “Warrants” shall mean the warrants issued to the Purchaser pursuant to Section 4.2(k).

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorize officer as of this 21st day of March, 2001.

ILLINOIS SUPERCONDUCTOR CORPORATION

By: /s/ Charles F. Willes
Charles F. Willes, Chief Financial Officer

PAUL REVERE CAPITAL PARTNERS, LTD

By: /s/ David Sims
David Sims, Authorized Signatory

29 EX-10.2 4 c61784ex10-2.htm ESCROW AGREEMENT Escrow Agreement

Exhibit 10.2

ESCROW AGREEMENT

THIS ESCROW AGREEMENT (this “Agreement”) is made as of March 21, 2001, by and among Illinois Superconductor Corporation, a corporation incorporated under the laws of Delaware (the “Company”), Paul Revere Capital Partners, Ltd. (“Purchaser”), and Epstein Becker & Green, P.C., having an address at 250 Park Avenue, New York, NY 10177 (the “Escrow Agent”). Capitalized terms used but not defined herein shall have the meanings set forth in the Common Stock Purchase Agreement referred to in the first recital.

WHEREAS, the Purchaser will from time to time as requested by the Company, purchase shares of the Company’s Common Stock and Warrants from the Company as set forth in that certain Common Stock Purchase Agreement (the “Purchase Agreement”) dated the date hereof between the Purchaser and the Company, which shares shall be issued pursuant to the terms and conditions contained herein and in the Purchase Agreement; and

WHEREAS, the Company and the Purchaser have requested that the Escrow Agent hold in escrow and then distribute the initial documents and certain funds which are conditions precedent to the effectiveness of the Purchase Agreement, and have further requested that upon each exercise of a Draw Down, the Escrow Agent hold the relevant documents and the applicable purchase price pending receipt by Purchaser of the securities issuable upon such Draw Down;

NOW, THEREFORE, in consideration of the covenants and mutual promises contained herein and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged and intending to be legally bound hereby, the parties agree as follows:

ARTICLE I

TERMS OF THE ESCROW FOR THE INITIAL CLOSING

1.1. The parties hereby agree to establish an escrow account with the Escrow Agent whereby the Escrow Agent shall hold the funds and documents which are referenced in Section 4.2 of the Purchase Agreement.

1.2. At the Initial Closing, the Company shall deliver to the Escrow Agent:

(i) the sum of $25,000 for the Purchaser’s legal and administrative expenses;

(ii) the original executed Company counterpart of this Escrow Agreement; and

(iii) the original executed Company counterpart of the Purchase Agreement.

1.3. Upon receipt of the foregoing, and receipt of executed counterparts from Purchaser of the Purchase Agreement and this Escrow Agreement, the Escrow Agent shall immediately transfer the sum of $25,000 to Epstein Becker & Green, P.C. for the Purchaser’s legal and administrative costs and shall then arrange to have the Purchase Agreement and this Escrow Agreement delivered to the parties.

1.4 Wire transfers to the Escrow Agent (not address for notice or delivery of documents) shall be made as follows:

Epstein Becker & Green, P.C.
Master Escrow Account
Chase Manhattan Bank
1411 Broadway —Fifth Floor
New York, New York 10018
ABA No. 021000021
Account No. 035 1 346036
Attention: L. Borneo

ARTICLE II

TERMS OF THE ESCROW FOR EACH DRAW DOWN

2.1. Each time the Company shall send a Draw Down Notice to the Purchaser as provided in the Purchase Agreement, it shall send a copy, by facsimile, to the Escrow Agent.

2.2. Each time the Purchaser shall purchase Shares pursuant to a Draw Down, the Purchaser shall send the applicable Purchase Price of the Draw Down Shares to the Escrow Agent. Upon receipt of such funds, the Escrow Agent shall advise the Company that it has received the funds for such Draw Down Shares. The Company shall promptly, but no later than one (1) Trading Day after receipt of such funding notice from the Escrow Agent:

(i) cause its transfer agent to issue the Draw Down Shares to the Purchaser via DTC’s DWAC system to the account specified by the Purchaser from time to time;

(ii) deliver a Form 424(b) supplemental prospectus to the Purchaser; and

(iii) the applicable Warrant.

2.3. Upon receipt of written confirmation from the transfer agent or from the Purchaser that such Draw Down Shares have been so deposited and the Warrant and the supplemental prospectus have been so delivered, the Escrow Agent shall, within one (1) Trading

Day, wire 96% of the Purchase Price of such Draw Down Shares per the written instructions of the Company, net of $1,000 as escrow expenses to the Escrow Agent, and wire the remaining 4% of the Purchase Price per the written instructions of Ladenburg Thalmann & Co. Inc.

2.4. In the event that such Draw Down Shares are not in the Purchaser’s DTC account and the opinion and supplemental prospectus are not delivered to the Purchaser within two (2) Trading Days of the date of the Escrow Agent’s notice, then Purchaser shall have the right to demand, by notice, the return of the Purchase Price, and such Draw Down Notice shall be deemed cancelled.

ARTICLE III

MISCELLANEOUS

3.1. No waiver or any breach of any covenant or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed an extension of the time for performance of any other obligation or act.

3.2. All notices or other communications required or permitted hereunder shall be in writing, and shall be sent by fax, overnight courier, registered or certified mail, postage prepaid, return receipt requested, and shall be deemed received upon receipt thereof, as set forth in the Purchase Agreement.

3.3. This Escrow Agreement shall be binding upon and shall inure to the benefit of the permitted successors and permitted assigns of the parties hereto.

3.4. This Escrow Agreement is the final expression of, and contains the entire agreement between, the parties with respect to the subject matter hereof and supersedes all prior understandings with respect thereto. This Escrow Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived, except by written instrument signed by the parties to be charged or by their respective agents duly authorized in writing or as otherwise expressly permitted herein.

3.5. Whenever required by the context of this Escrow Agreement, the singular shall include the plural and masculine shall include the feminine. This Escrow Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to Articles are to this Escrow Agreement.

3.6. The parties hereto expressly agree that this Escrow Agreement shall be governed by, interpreted under and construed and enforced in accordance with the laws of the State of New York. Except as expressly set forth herein, any action to enforce, arising out of, or relating in any way to, any provisions of this Escrow Agreement shall be brought in the Federal or state courts of New York, New York as is more fully set forth in the Purchase Agreement.

3.7. The Escrow Agent’s duties hereunder may be altered, amended, modified or revoked only by a writing signed by the Company, Purchaser and the Escrow Agent.

3.8. The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by the Escrow Agent to be genuine and to have been signed or presented by the proper party or parties. The Escrow Agent shall not be personally liable for any act the Escrow Agent may do or omit to do hereunder as the Escrow Agent while acting in good faith, excepting only its own gross negligence or willful misconduct, and any act done or omitted by the Escrow Agent pursuant to the advice of the Escrow Agent’s attorneys-at-law (other than Escrow Agent itself) shall be conclusive evidence of such good faith.

3.9. The Escrow Agent is hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and is hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case the Escrow Agent obeys or complies with any such order, judgment or decree, the Escrow Agent shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

3.10. The Escrow Agent shall not be liable in any respect on account of the identity, authorization or rights of the parties executing or delivering or purporting to execute or deliver the Purchase Agreement or any documents or papers deposited or called for thereunder or hereunder.

3.11. The Escrow Agent shall be entitled to employ such legal counsel and other experts as the Escrow Agent may deem necessary properly to advise the Escrow Agent in connection with the Escrow Agent’s duties hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Escrow Agent has acted as legal counsel for the Purchaser, and may continue to act as legal counsel for the Purchaser, from time to time, notwithstanding its duties as the Escrow Agent hereunder. The Company consents to the Escrow Agent in such capacity as legal counsel for the Purchaser and waives any claim that such representation represents a conflict of interest on the part of the Escrow Agent. The Company understands that the Purchaser and the Escrow Agent are relying explicitly on the foregoing provision in entering into this Escrow Agreement.

3.12. The Escrow Agent’s responsibilities as escrow agent hereunder shall terminate if the Escrow Agent shall resign by written notice to the Company and the Purchaser. In the event of any such resignation, the Purchaser and the Company shall appoint a successor Escrow Agent.

3.13. If the Escrow Agent reasonably requires other or further instruments in connection with this Escrow Agreement or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

3.14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the documents or the escrow funds held by the Escrow Agent hereunder, the Escrow Agent is authorized and directed in the Escrow Agent’s sole discretion (1) to retain in the Escrow Agent’s possession without liability to anyone all or any part of said documents or the escrow funds until such disputes shall have been settled either by mutual written agreement of the parties concerned by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but the Escrow Agent shall be under no duty whatsoever to institute or defend any such proceedings or (2) to deliver the escrow funds and any other property and documents held by the Escrow Agent hereunder to a state or Federal court having competent subject matter jurisdiction and located in the State and City of New York in accordance with the applicable procedure therefor.

3.15. The Company and the Purchaser agree jointly and severally to indemnify and hold harmless the Escrow Agent and its partners, employees, agents and representatives from any and all claims, liabilities, costs or expenses in any way arising from or relating to the duties or performance of the Escrow Agent hereunder or the transactions contemplated hereby or by the Purchase Agreement other than any such claim, liability, cost or expense to the extent the same shall have been determined by final, unappealable judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Escrow Agent.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement as of this 21st day of March, 2001.

ILLINOIS SUPERCONDUCTOR CORPORATION

By: /s/ Charles F. Willes
       Charles F. Willes, Chief Financial Officer

PAUL REVERE CAPITAL PARTNERS, LTD.

By: /s/ David Sims

       Name:
       Title:

ESCROW AGENT:

EPSTEIN BECKER & GREEN, P.C.

By: /s/ Robert F. Charron
       Robert F. Charron, Authorized Signatory

6 EX-10.3 5 c61784ex10-3.htm PLACEMENT AGREEMENT Placement Agreement

Exhibit 10.3

[Ladenburg Thalmann Logo]

December 12, 2000

Charles F. Willes
Chief Financial Officer
Illinois Superconductor Corporation
451 Kingston Court
Mount Prospect, IL 60056

Dear Mr. Willes:

The purpose of this letter agreement (the “Agreement”) is to set forth the terms and conditions pursuant to which Ladenburg Thalmann & Co. Inc. (“LTCO”) shall serve as placement agent in connection with the proposed offering of equity securities (the “Securities”) of Illinois Superconductor Corporation (the “Company”) pursuant to a “blank” shelf registration statement to be filed by the Company naming LTCO as sole placement agent (the “Offering”). The gross proceeds from the Offering will be up to $50,000,000. All references to dollars shall be to U.S. dollars. The terms of such Offering and the Securities shall be as agreed to between the Company and the purchasers thereof.

Upon the terms and subject to the conditions of this Agreement, the parties hereto agree as follows:

1. Appointment. (a) Subject to the terms and conditions of this Agreement hereinafter set forth, the Company hereby retains LTCO, and LTCO hereby agrees to act as the Company’s placement agent and financial advisor in connection with the Offering, effective as of the date hereof. The Company expressly acknowledges and agrees that LTCO’s obligations hereunder are on a reasonable best efforts basis only and that the execution of this Agreement does not constitute a commitment by LTCO to purchase the Securities and does not ensure the successful placement of the Securities or any portion thereof or the success of LTCO with respect to securing any other financing on behalf of the Company. LTCO shall not commence any selling efforts until the registration statement has been declared effective by the SEC and all applicable state securities (“Blue Sky”) filings have been made.

2. Fees and Compensation. In consideration of the services rendered by LTCO in connection with the Offering, the Company agrees to pay LTCO the following fees and other compensation:

(a) 1) 1% warrant coverage as a fee payable on each date that the Company makes any draw down under the Offering, and based on the amount drawn down by the Company during each such draw down, which warrants shall be in the form of Exhibit D; and

2) a cash fee payable upon the initial and each subsequent closing equal to 4% of the amount drawn down by the Company at each such closing; and

(b) $35,000 non-accountable expense allowance payable upon the engagement of LTCO by the Company hereunder.

(c) All fees payable hereunder shall be paid to LTCO out of an attorney escrow account at the closing or by such other means acceptable to LTCO.

3. Terms of Retention. (a) Unless extended or terminated in writing by the parties hereto in accordance with the provisions hereof, this Agreement shall remain in effect until the termination date of the stock purchase commitment of the investor as approved and agreed to by the Company in its sole discretion, if one investor commits to purchase the entire Offering, or November 1, 2002 if the Company elects to pursue an open shelf registration. If the Company elects to pursue an open shelf registration, and on any particular date when the Company wishes to sell Securities off of the shelf LTCO cannot provide an investor within 30 days on terms and conditions acceptable to the Company in its sole discretion, then the Company shall have a window of 60 days in which to place such securities itself on the same terms as proposed to LTCO, and the Company shall owe LTCO no fees in connection therewith.

(b) Notwithstanding anything herein to the contrary, the obligation to pay the Fees and Compensation and Expenses described in Section 2, if any, and the provisions of paragraphs 2, 5, and 8 of Exhibit A and all of Exhibit B and Exhibit C attached hereto, each of which exhibits is incorporated herein by reference, shall survive any termination or expiration of the Agreement. It is expressly understood and agreed by the parties hereto that, with respect to any investors to whom the Company was introduced by LTCO or who was contacted by LTCO while this Agreement was in effect, with the approval of the Company, and disclosed to the Company in writing, any private financing of equity or debt or other capital raising activity of the Company within 24 months of the termination or expiration of this Agreement shall result in fees and compensation being due and payable by the Company to LTCO under the same terms of Section 2 above.

4. [Intentionally Omitted]

5. Information. The Company recognizes and confirms that in completing its engagement hereunder, LTCO will be using and relying solely on publicly available information and on data, material and other information furnished to LTCO by the Company or the Company’s affiliates and agents. It is

understood and agreed that in performing under this engagement, LTCO will rely upon the accuracy and completeness of, and is not assuming any responsibility for independent verification of, such publicly available information and the other information so furnished (except information furnished to the Company by LTCO). Notwithstanding the foregoing, it is understood that LTCO will conduct a due diligence investigation of the Company and the Company will cooperate in all respects with such investigation as a condition of LTCO’s obligations hereunder.

6. Registration. Promptly following execution of this Agreement, the Company shall prepare and, following review and approval by LTCO’s counsel, file with the SEC a registration statement. From time to time in connection with any particular sale of Securities, the Company will, at its own expense, obtain any registration or qualification required to sell any Securities under the Blue Sky laws of any applicable jurisdictions, as reasonably requested by LTCO, and shall pay any filing fees required by NASD Regulation, Inc. in connection with their review of the terms of this Agreement, if so required.

7. No General Solicitation. The Securities will be offered only by approaching prospective purchasers on an individual basis. No general solicitation or general advertising in any form will be used in connection with the offering of the Securities. From and after the execution of this Agreement until the completion of the Offering, the Company shall pre-clear any proposed press release which mentions this Agreement or the Offering with LTCO.

8. Closing. The closing of the sale of the Securities shall be subject to customary closing conditions, including the provision by the Company to LTCO of officers’ certificates, opinions of counsel and “cold comfort” letters from the Company’s auditors.

9. Miscellaneous. This Agreement together with the attached Exhibits A through D constitutes the entire understanding and agreement between the parties with respect to its subject matter and there are no agreements or understandings with respect to the subject matter hereof which are not contained in this Agreement. This Agreement may be modified only in writing signed by the party to be charged hereunder.

If the foregoing correctly sets forth our agreement, please confirm this by signing and returning to us the duplicate copy of this letter.

We appreciate this opportunity to be of service and are looking forward to working with you on this matter.

Very truly yours,

LADENBURG THALMANN & CO. INC.

By: /s/ Robert Kropp
Name: Robert Kropp
Title: Director of Investment Banking

Agreed to and accepted
as of the date first written above:

ILLINOIS SUPERCONDUCTOR CORPORATION

By: /s/ Charles F. Willes
Name: Charles F. Willes
Title: Chief Financial Officer

EXHIBIT A

STANDARD TERMS AND CONDITIONS

1. The Company shall promptly provide LTCO with all relevant information about the Company (to the extent available to the Company in the case of parties other than the Company) that shall be reasonably requested or required by LTCO, which information shall be complete and accurate in all material respects at the time furnished.

2. LTCO shall keep all information obtained from the Company strictly confidential except: (a) information which is otherwise publicly available, or previously known to, or obtained by LTCO independently of the Company and without breach of LTCO’s agreement with the Company; (b) LTCO may disclose such information to its employees and attorneys, and to its other advisors and financial sources on a need to know basis only and shall use best efforts to ensure that all such employees, attorneys, advisors and financial sources will keep such information strictly confidential; and (c) pursuant to any order of a court of competent jurisdiction or other governmental body (including any subpoena) or as may otherwise be required by law.

3. The Company recognizes that in order for LTCO to perform properly its obligations in a professional manner, it is necessary that LTCO be informed of and, to the extent practicable, participate in meetings and discussions between the Company and any third party, including, without limitation, any prospective purchaser of the securities, relating to the matters covered by the terms of LTCO’s engagement.

4. The Company agrees that any report or opinion, oral or written, delivered to it by LTCO is prepared solely for its confidential use and shall not be reproduced, summarized, or referred to in any public document or given or otherwise divulged to any other person without LTCO’s prior written consent, except as may be required by applicable law or regulation.

5. No fee payable to LTCO pursuant to any other agreement with the Company or payable by the Company to any agent, lender or investor shall reduce or otherwise affect any fee payable by the Company to LTCO hereunder. If LTCO engages any other broker-dealer or other finder to assist LTCO in the placement of the Offering, then the fees of such other broker-dealer or finder shall be paid by LTCO.

EXHIBIT A (CONTINUED)

6. The Company represents and warrants that: (a) it has full right, power and authority to enter into this Agreement and to perform all of its obligations hereunder; (b) this Agreement has been duly authorized and executed by and constitutes a valid and binding agreement of the Company enforceable in accordance with its terms; and (c) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby do not conflict with or result in a breach of (i) the Company’s certificate of incorporation or by-laws or (ii) any agreement to which the Company is a party or by which any of its property or assets is bound (except for such conflicts, defaults, and/or violations as would not, individually or in the aggregate, have a material adverse effect on the Company’s ability to perform its obligations under this Agreement).

7. Nothing contained in this Agreement shall be construed to place LTCO and the Company in the relationship of partners or joint venturers. Neither LTCO nor the Company shall represent itself as the agent or legal representative of the other for any purpose whatsoever nor shall either have the power to obligate or bind the other in any manner whatsoever. LTCO, in performing its services hereunder, shall at all times be an independent contractor.

8. This Agreement has been and is made solely for the benefit of LTCO and the Company and each of the persons, agents, employees, officers, directors and controlling persons referred to in Exhibit B and their respective heirs, executors, personal representatives, successors and assigns, and nothing contained in this Agreement shall confer any rights upon, nor shall this Agreement be construed to create any rights in, any person who is not party to such Agreement, other than as set forth in this paragraph.

9. The rights and obligations of either party under this Agreement may not be assigned without the prior written consent of the other party hereto and any other purported assignment shall be null and void.

10. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and shall be mailed, hand delivered, or sent by a recognized overnight courier service such as Federal Express, via facsimile and confirmed by letter, to the party to whom it is addressed at the following addresses or such other address as such party may advise the other in writing:

To the Company:
Charles F. Willes
Chief Financial Officer
Illinois Superconductor Corporation
451 Kingston Court
Mount Prospect, IL 60056
Telephone: (847) 391-9400
Facsimile: (847) 299-9609

To LTCO:
Ladenburg Thalmann & Co. Inc.
590 Madison Avenue
New York, NY 10022
Attention: Robert J. Kropp
Telephone: (212) 409-2000
Facsimile: (212) 409-2169

All notices hereunder shall be effective upon receipt by the party to which it is addressed.

EXHIBIT B

INDEMNIFICATION

The Company agrees that it shall indemnify and hold harmless, LTCO, its stockholders, directors, officers, employees, agents, affiliates and controlling persons within the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933, each as amended (any and all of whom are referred to as an “Indemnified Party”), from and against any and all losses, claims, damages, liabilities, or expenses, and all actions in respect thereof (including, but not limited to, all legal or other expenses reasonably incurred by an Indemnified Party in connection with the investigation, preparation, defense or settlement of any claim, action or proceeding, whether or not resulting in any liability), incurred by an Indemnified Party: (a) arising out of, or in connection with, any actions taken or omitted to be taken by the Company, its affiliates, employees or agents, or any untrue statement or alleged untrue statement of a material fact contained in any of the financial or other information contained in the registration statement and/or final prospectus furnished to LTCO by or on behalf of the Company or the omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading (unless such alleged untrue statement or omission relates to information furnished, or information which should have been furnished, by LTCO to the Company); or (b) with respect to, caused by, or otherwise arising out of any transaction contemplated by the Agreement or LTCO’s performing the services contemplated hereunder; provided, however, the Company will not be liable under clause (b) hereof to the extent, and only to the extent, that any loss, claim, damage, liability or expense is finally judicially determined to have resulted primarily from LTCO’s gross negligence, intentional misconduct or bad faith in performing such services.

LTCO agrees to indemnify and hold harmless the Company and its affiliates, the respective officers, directors, agents, representatives and employees of each of the foregoing, and each other person controlling the Company or any of its affiliates, within the meaning of either Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended (any and all of whom are referred to as an “Indemnified Party”), from and against any and all losses, claims, damages, liabilities, or expenses, and all actions in respect thereof (including, but not limited to, all legal or other expenses reasonably incurred by an Indemnified Party in connection with the investigation, preparation, defense or settlement of any claim, action or proceeding, whether or not resulting in any liability), incurred by an Indemnified Party relating to, arising in any manner from, or based upon, any transaction contemplated by this Agreement or LTCO’s engagement hereunder resulting from (i) the gross negligence or willful misconduct of LTCO or any person acting on its behalf, (ii) breach of any agreement, representation or warranty of LTCO contained in this Agreement, or (iii) violations by LTCO or any person acting on its behalf of any federal or state securities laws.

Each party agrees that the indemnification and reimbursement obligations set forth in this Agreement shall apply whether or not the Indemnified Party is a

formal party to any such claim, action, suit or proceeding. The Company and LTCO each further agree that they will not, without the prior written consent of the other, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any Indemnified Party is a named party or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes the unconditional release of each Indemnified Party hereunder from all liability arising from such claim, action, suit or proceeding.

Promptly after receipt by an Indemnified Party of notice of its involvement in any claim, action, suit, proceeding or investigation (a “Claim”), such Indemnified Party shall, if a Claim in respect thereof is to be made against the Company or LTCO (each, as the context requires, an “Indemnifying Party”), for indemnification, notify the Indemnifying Party in writing of such involvement. Failure by such Indemnified Party to give such notice shall not relieve the Indemnifying Party from its obligation to indemnify all Indemnified Parties under this Indemnification Agreement and shall not relieve the Indemnifying Party from its obligation to provide reimbursement and contribution to the Indemnified Parties, except to the extent that such failure to notify results in the forfeiture by the Indemnifying Party of substantive rights or defenses. If an Indemnified Party seeks indemnification hereunder with respect to any Claim brought by a third party, the Indemnifying Party shall be entitled to assume the defense of any such Claim with counsel reasonably satisfactory to such Indemnified Party. Upon assumption by the Indemnifying Party of the defense of any such Claim, such Indemnified Party shall have the right to participate in the defense of such Claim and to retain its own counsel but the Indemnifying Party shall not be liable for any legal fees or expenses subsequently incurred by such Indemnified Party in connection with the defense thereof. An Indemnifying Party shall not be liable for any settlement of any Claim effected without its written consent (which consent shall not be unreasonably withheld or delayed).

Each party agrees that, except as provided in the last sentence of this paragraph, if any indemnification or reimbursement sought pursuant to this Indemnification Agreement were for any reason not to be available to any Indemnified Party or were insufficient to hold it harmless, then the Indemnifying Party shall contribute to the amount paid or payable by the Indemnified Party as a result of the losses, claims, damages, liabilities and expenses in such proportion as is appropriate to reflect the relative benefits to the Company on the one hand, and LTCO on the other hand, in connection with any transaction to which such indemnification or reimbursement relates. The Company and LTCO hereby agree that the relative benefits to the Company on the one hand and LTCO on the other hand, with respect to LTCO’s engagement, shall be deemed to be in the same proportion as (i) the total amount or value paid or proposed to be paid to the Company in connection with the transactions contemplated by the Agreement, whether or not consummated, bear to (ii) the fees actually paid to LTCO in connection with the transaction to which such contribution relates. If, however, the allocation provided by the first sentence of this paragraph is not permitted by applicable law, then the Indemnifying Party shall contribute to such

amount paid or payable by an Indemnified Party in such proportion as is appropriate to reflect not only such relative benefits, but also the relative fault of the Company on the one hand and LTCO on the other hand in connection with the matters as to which such losses, claims, damages, liabilities or expenses relate and other equitable considerations. In no event shall the aggregate amount payable by LTCO exceed the fees actually received by LTCO pursuant to this Agreement, unless there is a final judicial determination of gross negligence or willful misconduct by LTCO. The parties hereby agree that it would not be just or equitable if the contribution governed by this paragraph were determined by pro rata allocation or any other method that does not take into account the considerations taken into account by this paragraph.

In the event an Indemnified Party incurs any expenses covered by this Exhibit B, the Indemnifying Party shall reimburse the Indemnified Party for such covered expenses within ten (10) business days of the Indemnified Party’s delivery to the Indemnifying Party of an invoice therefor, with receipts attached. Such obligation of an Indemnifying Party to so advance funds is conditioned upon the Indemnifying Party’s receipt of a written undertaking from the Indemnified Party to repay such amounts if it shall be determined that such Indemnified Party was not entitled to indemnification hereunder.

The rights accorded to Indemnified Parties hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise, shall survive termination of this Agreement and shall be binding upon and inure to the benefit of any successors, heirs, representatives and assigns of the respective parties.

EXHIBIT C

JURISDICTION

The Company and LTCO each hereby irrevocably: (a) submits to the jurisdiction of any court of the State of New York sitting in the City of New York or any federal court sitting in the City of New York for the purposes of any suit, action or other proceeding arising out of the Agreement between the Company and LTCO which is brought by or against the Company or LTCO; (b) agrees that all claims in respect of any suit, action or proceeding may be heard and determined in any such court; and (c) to the extent that the Company or LTCO has acquired, or hereafter may acquire, any immunity from jurisdiction of any such court or from any legal process therein, the Company and LTCO each hereby waives, to the fullest extent permitted by law, such immunity. The prevailing party in any litigation respecting this Agreement shall be entitled to an award of its costs, including reasonable attorneys’ fees, in connection therewith.

The Company and LTCO each waives, and agrees not to assert in any such suit, action or proceeding, in each case, to the fullest extent permitted by applicable law, any claim that: (a) it is not personally subject to the jurisdiction of any such court; (b) it is immune from any legal process (whether through service or notice, attachment prior to judgment, attachment in the aid of execution, execution or otherwise) with respect to it or its property; (c) any such suit, action or proceeding is brought in an inconvenient forum; (d) the venue of any such suit, action or proceeding is improper; or (e) this Agreement may not be enforced in or by any such court.

Any process against the Company or LTCO in, or in connection with, any suit, action or proceeding filed in the United States District Court for the Southern District of New York or any other court of the State of New York, arising out of or relating to this Agreement or any transaction or agreement contemplated hereby, may be served personally, or by first class mail or overnight courier (with the same effect as though served personally) addressed to the party being served at the address set forth in the Agreement between the Company and LTCO.

Nothing in these provisions shall affect any party’s right to serve process in any manner permitted by law or limit its rights to bring a proceeding in the competent courts of any jurisdiction or jurisdictions or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.

This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of law principles.

EXHIBIT D

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED OR EXERCISED UNLESS AND UNTIL SUCH WARRANT AND/OR SHARES OF COMMON STOCK IS REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTIONS 4 AND 10 OF THIS WARRANT.


Warrant No. 1 Date of Issuance: ______________, 2000		Number of Shares: _______ (subject to adjustment)

Date of Issuance: ______________, 2000

[ISSUER]

Common Stock Purchase Warrant

(Void after [three years])

[Issuer], a ________________ corporation (the “Company”), for value received, hereby certifies that Ladenburg Thalmann & Co. Inc., or its registered assigns (the “Registered Holder”), is entitled, subject to the terms and conditions set forth below, to purchase from the Company, at any time or from time to time on or after the date which is ninety (90) days after the date of issuance and on or before 5:00 p.m. (Eastern time) on________, 200_, _____________________ shares of Common Stock, of the Company, at a purchase price of $ per share (120% of the average volume weighted average price for the applicable Draw Down Pricing Period). The shares purchasable upon exercise of this Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the “Warrant Shares” and the “Purchase Price,” respectively.

1. Exercise.

(a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by the Registered Holder or by the Registered Holder’s duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise.

(b) The Registered Holder may, at its option, elect to pay some or all of the Purchase Price payable upon an exercise of this Warrant by canceling all or

a portion of this Warrant. If the Registered Holder wishes to exercise this Warrant by this method, the number of Warrant Shares purchasable (which shall in no event exceed the total number of Warrant Shares purchasable under this Warrant as set forth above), subject to adjustment under Section 2 of this Warrant) shall be determined as follows:

X=Y[(A-B)/A]; where

X= the number of Warrant Shares to be issued to the Holder.

Y= the number of Warrant Shares with respect to which this Warrant is being exercised.

A= the Fair Market Value of one share of Common Stock.

B= the Purchase Price of one share of Common Stock.

The Fair Market Value per share of Common Stock shall be determined as follows:

(i) If the Common Stock is listed on a national securities exchange, the Nasdaq National Market or another nationally recognized trading system (including, without limitation, the OTC Bulletin Board and, if the average daily trading volume for the preceding 10 days has been at least 100,000 shares, the Pink Sheets) as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the high and low reported sale prices per share of Common Stock thereon on the trading day immediately preceding the Exercise Date (provided that if no such price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (ii)).

(ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market or another nationally recognized trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within the three-month period prior to the Exercise Date, then (A) the Board of Directors shall make a determination of the Fair Market Value per share of the Common Stock within 15 days of a request by the Registered Holder that it do so, and (B) the exercise of this Warrant pursuant to this subsection 1(b) shall be delayed until such determination is made.

(c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 1(a) above accompanied by payment in full of the Purchase Price (the “Exercise Date”). At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates.

(d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 5 business days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct:

(i) a certificate or certificates for the number of full Warrant Shares to which the Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which the Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; and

(ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of remaining Warrant Shares.

2. Adjustments.

(a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the date on which this Warrant was first issued (the “Original Issue Date”) effect a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective.

(b) Adjustment for Certain Dividends and Distributions. In the event the Company at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction:

(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution;

provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions.

(c) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Purchase Price pursuant to subsections 2(a) or 2(b), the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment.

(d) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than shares of Common Stock) or in cash or other property (other than cash out of earnings or earned surplus, determined in accordance with generally accepted accounting principles), then and in each such event provision shall be made so that the Registered Holder shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable hereunder, the kind and amount of securities of the Company and/or cash and other property which the Registered Holder would have been entitled to receive had this Warrant been exercised into Common Stock on the date of such event and had the Registered Holder thereafter, during the period from the date of such event to and including the Exercise Date, retained any such securities receivable, giving application to all adjustments called for during such period under this Section 2 with respect to the rights of the Registered Holder.

(e) Adjustment for Mergers or Reorganizations, etc. If there shall occur any reorganization, recapitalization, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 2(a), 2(b) or 2(d)), then, following any such reorganization, recapitalization, consolidation or merger, the Registered Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property

which the Registered Holder would have been entitled to receive if, immediately prior to such reorganization, recapitalization, consolidation or merger, the Registered Holder had held the number of shares of Common Stock subject to this Warrant. Notwithstanding the foregoing sentence, if (x) there shall occur any reorganization, recapitalization, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for anything other than solely equity securities, and (y) the common stock of the acquiring or surviving company is publicly traded, then, as part of any such reorganization, recapitalization, consolidation or merger, (i) the Registered Holder shall have the right thereafter to receive upon the exercise hereof such number of shares of common stock of the acquiring or surviving company as is determined by multiplying (A) the number of shares of Common Stock then subject to this Warrant by (B) a fraction, the numerator of which is the Fair Market Value per share of Common Stock as of the effective date of such transaction, as determined pursuant to subsection 1(b), and the denominator of which is the fair market value per share of common stock of the acquiring or surviving company as of the effective date of such transaction, as determined in good faith by the Board of Directors of the Company (using the principles set forth in subsection 1(b) to the extent applicable), and (ii) the exercise price per share of common stock of the acquiring or surviving company shall be the Purchase Price divided by the fraction referred to in clause (B) above. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant.

(e) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Purchase Price pursuant to this Section 2, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Registered Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Purchase Price) and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of the Registered Holder, furnish or cause to be furnished to the Registered Holder a certificate setting forth (i) the Purchase Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant.

3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 1(b) above.

4. Requirements for Transfer.

(a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the “Act”), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act.

(b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a corporation to a wholly owned subsidiary of such corporation, a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership or to the estate of any such partner or retired partner, a transfer by a Registered Holder which is a limited liability company to a member of such limited liability company or a retired member or to the estate of any such member or retired member, or a transfer by a Registered Holder which is a member of the National Association of Securities Dealers (the “NASD”) to an officer or employee of the Registered Holder as permitted by NASD rules, provided that the transferee in each case agrees in writing to be subject to the terms of this Section 4, or (ii) a transfer made in accordance with Rule 144 under the Act.

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required.”

The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act or if an effective registration statement is then in effect permitting the resale of the Warrant Shares.

(d) The Registered Holder shall have “piggyback” registration rights to have the Warrant Shares (but not the Warrants) registered for resale on any registration statement which the Company files for any purpose on a form available for such registration, after the Original Issue Date. Such registration shall be subject to customary obligations by the Registered Holder to provide information to the Company and by the Company to indemnify the Registered Holder against Securities Act liabilities.

5. No Impairment. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of

all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment.

6. Notices of Record Date, etc. In the event:

(a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity and its Common Stock is not converted into or exchanged for any other securities or property), or any transfer of all or substantially all of the assets of the Company; or

(b) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company,

then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten days prior to the record date or effective date for the event specified in such notice.

7. Reservation of Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant.

8. Exchange of Warrants. Upon the surrender by the Registered Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 4 hereof, issue and deliver to or upon the order of such Holder, at the Company’s expense, a new Warrant or Warrants of like tenor, in the name of the Registered Holder or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant.

9. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor.

10. Transfers, etc.

(a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. The Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change.

(b) Subject to the provisions of Section 4 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company.

(c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder as the absolute owner hereof for all purposes; provided, however, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.

11. Representations of the Registered Holder. The Registered Holder of this Warrant represents and warrants to the Company as follows:

(a) Investment. The Registered Holder is acquiring this Warrant and the Warrant Shares issuable upon the exercise of this Warrant, for its own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same, except as otherwise may be permitted under applicable securities laws.

(b) Authority. The Registered Holder has full power and authority to enter into and to perform this Warrant in accordance with its terms. The Registered Holder has not been organized specifically for the purpose of investing in the Company.

(c) Accredited Investor. The Registered Holder is an Accredited Investor within the definition set forth in Rule 501(a) promulgated under the Securities Act.

12. Mailing of Notices, etc. All notices and other communications from the Company to the Registered Holder shall be mailed by first-class certified or registered mail, postage prepaid, to the address last furnished to the Company in writing by the Registered Holder. All notices and other communications from the Registered Holder or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its

principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice.

13. No Rights as Stockholder. Until the exercise of this Warrant, the Registered Holder shall not have or exercise any rights by virtue hereof as a stockholder of the Company. Notwithstanding the foregoing, in the event (i) the Company effects a split of the Common Stock by means of a stock dividend and the Purchase Price of and the number of Warrant Shares are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), and (ii) the Registered Holder exercises this Warrant between the record date and the distribution date for such stock dividend, the Registered Holder shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend.

14. Change or Waiver. Any term of this Warrant may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought.

15. Section Headings. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties.

16. Governing Law. This Warrant will be governed by and construed in accordance with the internal laws of the State of New York (without reference to the conflicts of law provisions thereof).

EXECUTED as of the Date of Issuance indicated above.


		[ISSUER]

		By:________________________________ Title:_______________________________

ATTEST: _________________________

EXHIBIT I

PURCHASE FORM


To:_________________		Dated: _______________________

The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase (check applicable box):

_____ shares of the Common Stock covered by such Warrant; or

the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 1(b).

The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant, which is $________. Such payment takes the form of (check applicable box or boxes):

$______ in lawful money of the United States; and/or

the cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $ per share for purposes of this calculation); and/or

the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in Section 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in Section 1(b).


	Signature: _____________________

	Address: ______________________

	______________________

EXHIBIT II

ASSIGNMENT FORM

FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto:


Name of Assignee	Address	No. of Shares

Dated:_____________________

Signature:________________________________

Signature Guaranteed:

By: _______________________

The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934.

22 EX-10.4 6 c61784ex10-4.htm WAIVER LETTER Waiver Letter

Exhibit 10.4

[Ladenburg Thalmann Logo]

March 19, 2001

Charles F. Willes
Chief Financial Officer
Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, IL 60056

Dear Mr. Willes:

This letter will serve as the agreement of Ladenburg Thalmann & Co. Inc. (“LTCO”) to waive its right to receive one-half of the warrants which LTCO would otherwise be entitled to receive from Illinois Superconductor Corporation (the “Company”) pursuant to Section 2(a)(1) of that certain engagement agreement between us dated December 12, 2000 in connection with, and only in connection with, warrants which LTCO will otherwise become entitled to receive pursuant to draw downs from the equity draw down facility expected to be entered into between the Company and Paul Revere Capital Partners Ltd. All other terms and conditions of our agreement dated December 12, 2000 shall remain in full force and effect.


	Very truly yours,

	LADENBURG THALMANN & CO. INC

	By: /s/ Joseph A. Smith
	Joseph A. Smith Managing Director

EX-10.5 7 c61784ex10-5.htm AMR ABDELMONEM EMPLOYMENT AGREEMENT Employment Agreement

Exhibit 10.5

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (this “Agreement”) is made as of the first day of January, 2001, by and between Illinois Superconductor Corporation, a Delaware corporation (the “Company”), and Amr Abdelmonem (the “Employee”).

W I T N E S S E T H :

WHEREAS, the Employee is now employed by the Company as the Chief Technology Officer;

WHEREAS, the Company wishes to ensure that it will continue to have the benefits of the Employee’s services on the terms and conditions hereinafter set forth; and

WHEREAS, the Employee desires to continue to work for the Company on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants hereinafter contained, the parties hereto hereby agree as follows:

1. Employment; Term. The Company hereby employs the Employee, and the Employee hereby accepts employment with the Company, in accordance with and subject to the terms and conditions set forth herein. The term of this Agreement shall commence on the date hereof (the “Effective Date”) and, unless earlier terminated in accordance with Paragraph 5, shall end on December 31, 2003, with the term of employment being that period between the Effective Date and December 31, 2003 (that period, as extended pursuant to the following sentence, the “Term”). As of January 1, 2004, and as of each subsequent January 1st, (each an “Automatic Renewal Date”), unless either party shall have given to the other written notice of non-extension at least sixty (60) days prior to such Automatic Renewal Date, the Term shall, unless earlier terminated in accordance with Paragraph 5, extend automatically for a period of one (1) year to the anniversary of the then otherwise scheduled expiration date of this Agreement. If there is a “Change of Control” (as defined in Paragraph 6(e) below), the Term shall, unless earlier terminated in accordance with Paragraph 5, extend automatically to the second anniversary of the date of the Change of Control, provided that the second anniversary of the date of the Change of Control is later than the last day of the Term as determined without regard to the Change of Control. Certain provisions of this Agreement shall continue in effect after the Term as specifically set forth herein.

2. Employment.

(a) The Employee shall serve as the Company’s Chief Technology Officer. The Employee shall report to the Chief Executive Officer of the Company.

(b) The Employee shall have such authority and responsibility as may reasonably be assigned by the Chief Executive Officer or the Board of Directors of the Company (the “Board”).

(c) During the period the Employee is employed by the Company, the Employee shall devote the Employee’s normal full business time and attention to the business and affairs of the Company and use the Employee’s best efforts to perform faithfully the duties and responsibilities of the Employee’s position as described herein.

3. Compensation.

(a) The Company shall pay the Employee a base salary (the “Base Salary”) of not less than Two Hundred Thousand Dollars ($200,000) per annum, payable at least monthly, in accordance with the Company’s payroll practices less such deductions as shall be required to be withheld by applicable law and regulations. The Board shall conduct an annual review of the Employee’s Base Salary and Bonus (as defined in Paragraph 3(b)below), but in no event shall the Base Salary be decreased without the consent of the Employee. Any increase in the Base Salary or change in the Bonus shall be in the sole discretion of the Board.

(b) Subject to Paragraph 6(c) hereof, for each calendar year completed during the Term, the Employee shall be eligible to receive a bonus (the “Bonus”) of an amount up to 50% of the Base Salary for such year. The amount of the Bonus payable to the Employee for a particular year, if any, shall be based on the accomplishment of corporate and individual performance goals as determined by the Board. The corporate and individual performance goals referenced in the preceding sentence shall be established by the Board and communicated to the Employee before the end of the first quarter of the applicable year. In the event of a disagreement over the attainment of such goals and objectives, the Compensation Committee of the Board shall have final authority to determine the award of the Bonus. The Bonus payable for a particular year, if any, shall be paid no later than March 15th of the following year and may be paid in cash, Company stock or a combination of the two as determined by the Board in its sole discretion.

4. Benefits.

(a) The Company agrees to reimburse the Employee for all reasonable and necessary travel, business entertainment and other business expenses incurred by the Employee in connection with the performance of the Employee’s duties under this Agreement. Such reimbursements shall be made by the Company within a reasonable time after submission

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by the Employee of vouchers in accordance with the Company’s standard policies and procedures.

(b) The Employee shall be entitled to participate in any and all medical insurance, group health, disability insurance, pension and other similar benefit plans which are made generally available by the Company to its senior executives, which shall not be less favorable than those available to any other group of employees of the Company. The Company, in its sole discretion, may at any time amend or terminate its benefit plans or programs.

(c) The Employee shall be entitled to receive four (4) weeks of annual paid vacation in accordance with the Company’s vacation policy for its senior executives. The Employee shall be entitled to all paid holidays the Company makes available to its employees.

5. Termination. The Employee’s employment hereunder may be terminated prior to the end of the Term under the following circumstances:

(a) Death. The Employee’s employment hereunder shall terminate upon the Employee’s death.

(b) Total Disability. The Company may terminate the Employee’s employment hereunder at any time after the Employee’s “Total Disability.” “Total Disability” means (i) the Employee becomes entitled to receive disability benefits under the Company’s long-term disability plan, or, in the absence of such a plan, (ii) the Employee’s inability to perform the duties and responsibilities contemplated under this Agreement for a period of more than one hundred eighty (180) consecutive days due to physical or mental incapacity or impairment. Such termination shall become effective five (5) business days after the Company gives notice of such termination to the Employee, or to the Employee’s spouse or legal representative (in case of mental incapacitation).

(c) Termination by the Company With or Without Cause. The Company may terminate the Employee’s employment hereunder with or without Cause at any time after the Company provides thirty (30) days’ written notice (or a shorter period of time, to be determined in good faith by the Board to be essential to prevent serious damage to the Company) to the Employee to such effect. The term “Cause” shall mean any of the following: (i) willful malfeasance or willful misconduct by the Employee in connection with the Employee’s employment; (ii) the Employee’s gross negligence in performing any of the Employee’s duties under this Agreement; (iii) the Employee’s conviction of, or entry of a plea of guilty to, or entry of a plea of nolo contendere with respect to any crime other than a traffic violation or infraction which is a misdemeanor; (iv) the Employee’s willful and continuing breach of any written policy applicable to all employees adopted by the Company concerning

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conflicts of interest, political contributions, standards of business conduct or fair employment practices, procedures with respect to compliance with securities laws or any similar matters, or adopted pursuant to the requirements of any government contract or regulation; or (v) any other material breach by the Employee of this Agreement after the Company provides written notification to the Employee of such breach and the Employee fails within five (5) days of receipt of such notification to cure the circumstances which gave rise to such breach.

(d) Termination by the Employee With or Without Good Reason. The Employee’s employment hereunder may be terminated by the Employee as specified below with, or upon thirty (30) days’ prior notice without, Good Reason. For purposes of this Agreement, “Good Reason” means any of the following, without the consent of the Employee: (i) any change in, or diminution of, the Employee’s duties or responsibilities that is inconsistent in any material and adverse respect with the Employee’s duties and responsibilities as contemplated under Section 2 of this Agreement, provided that changes in reporting relationships of other employees to the Employee, including those which occur as a result of strategic business developments such as the sale of a business unit or the outsourcing of a business function, shall not be construed as “adverse” to the Employee for purposes of determining whether Good Reason exists; (ii) any reduction of the Employee’s Base Salary or maximum Bonus level; (iii) any other material breach by the Company of this Agreement after the Employee provides written notification to the Company of such breach and the Company fails within thirty (30) days of receipt of such notification to cure the circumstances which gave rise to such breach, or (iv) any requirement by the Company that the Employee relocate the Employee’s principal office (currently located in Mount Prospect, Illinois) to a location more than thirty-five (35) miles from the Employee’s principal office at the time the Company makes such request. Notwithstanding the foregoing, no act or omission by the Company shall constitute Good Reason hereunder unless the Employee gives the Company written notice thereof within thirty (30) days after he has actual knowledge of such act or omission, and the Company fails to remedy such act or omission within thirty (30) days after receiving such notice.

6. Compensation Following Termination Prior to the End of the Term. In the event that the Employee’s employment hereunder is terminated prior to the end of the Term, the Employee shall be entitled only to the following compensation and benefits upon such termination:

(a) Termination by Reason of Death or Total Disability. In the event that the Employee’s employment is terminated prior to the expiration of the Term by reason of the Employee’s death or Total Disability, pursuant to Paragraph 5(a) or 5(b) hereof, respectively, the Employee (or the Employee’s spouse or estate, as the case may be) shall be entitled to the following amounts or benefits:

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(b) Termination by the Company Without Cause or Termination by the Employee With Good Reason. In the event that the Employee’s employment is terminated by the Company without Cause pursuant to Paragraph 5(c) hereof, or by the Employee with Good Reason pursuant to Paragraph 5(d) hereof, the Employee shall be entitled to the following amounts or benefits:

     i. any accrued but unpaid Base Salary (as determined pursuant to Paragraph 3(a) hereof) for services rendered to the date of termination in accordance with the Company’s standard payroll practices and any unpaid Bonus previously awarded by the Board pursuant to Paragraph 3(b) hereof;

     ii. any incurred but unreimbursed expenses required to be reimbursed pursuant to Paragraph 4(a) hereof;

     iii. subject to Paragraph 6(e) hereof, continued payment of the Base Salary (as determined under Paragraph 3(a) hereof) in accordance with the Company’s standard payroll practices for one (1) year following the date of such termination; provided that such continued payments shall be offset by any salary, wage, or similar payments paid or payable, directly or indirectly, to the Employee during the year following the date of termination from another employer or recipient of the Employee’s services (such payments being determined without regard to any individual waivers or other similar arrangements).

     iv. the benefits to which the Employee and/or the Employee’s family may be entitled upon such termination pursuant to the plans, programs and arrangements referred to in Paragraph 4 hereof, as determined and paid in accordance with the terms of such plans, programs and arrangements; and

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v. subject to Paragraph 6(e) hereof, continuation of health and insurance benefits (other than disability insurance benefits) for one (1) year following the date of such termination on the same terms and conditions as in effect immediately prior to the termination; provided that the Company shall not be required to provide benefits otherwise required by this clause (v) after such time as the Employee becomes entitled to receive benefits of the same type from another employer or recipient of the Employee’s services (such entitlement being determined without regard to any individual waivers or other similar arrangements).

(c) Termination by the Company for Cause or Termination by the Employee Without Good Reason. In the event that the Employee’s employment is terminated prior to the expiration of the Term of this Agreement by the Company for Cause pursuant to Paragraph 5(c) hereof or by the Employee without Good Reason pursuant to Paragraph 5(d) hereof, the Employee shall be entitled to the following amounts or benefits:

     i. any accrued but unpaid Base Salary (as determined pursuant to Paragraph 3(a) hereof) for services rendered to the date of termination in accordance with the Company’s standard payroll practices;

     ii. any incurred but unreimbursed expenses required to be reimbursed pursuant to Paragraph 4(a) hereof; and

     iii. the benefits to which the Employee and/or the Employee’s family may be entitled upon such termination pursuant to the plans, programs and arrangements referred to in Paragraph 4 hereof, as determined and paid in accordance with the terms of such plans, programs and arrangements.

Notwithstanding the foregoing, in no event shall any unpaid Bonus previously awarded by the Board pursuant to Paragraph 3(b) hereof be paid following a termination by the Company for Cause pursuant to Paragraph 5(c) hereof or by the Employee without Good Reason pursuant to Paragraph 5(d) hereof.

(d) Termination due to Company’s Notice of Non-Extension. In the event that during the Term the Company provides the Employee with a notice of non-extension as described in Section 1 hereof, upon the termination of the Employee’s employment by the Company pursuant to such notice, the Employee shall be entitled to the following amounts or benefits:

i. any accrued but unpaid Base Salary (as determined pursuant to Paragraph 3(a) hereof) for services rendered to the date of termination in accordance with the

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     Company’s standard payroll practices and any unpaid Bonus previously awarded by the Board pursuant to Paragraph 3(b) hereof;

     ii. any incurred but unreimbursed expenses required to be reimbursed pursuant to Paragraph 4(a) hereof;

     iii. continued payment of the Base Salary (as determined under Paragraph 3(a) hereof) in accordance with the Company’s standard payroll practices for six (6) months following the date of such termination; provided that such continued payments shall be offset by any salary, wage, or similar payments paid or payable, directly or indirectly, to the Employee during the year following the date of termination from another employer or recipient of the Employee’s services (such payments being determined without regard to any individual waivers or other similar arrangements);

     iv. the benefits to which the Employee and/or the Employee’s family may be entitled upon such termination pursuant to the plans, programs and arrangements referred to in Paragraph 4 hereof, as determined and paid in accordance with the terms of such plans, programs and arrangements; and

     v. continuation of health and insurance benefits (other than disability insurance benefits) for six (6) months following the date of such termination on the same terms and conditions as in effect immediately prior to the termination; provided that the Company shall not be required to provide benefits otherwise required by this clause (v) after such time as the Employee becomes entitled to receive benefits of the same type from another employer or recipient of the Employee’s services (such entitlement being determined without regard to any individual waivers or other similar arrangements).

(e) Termination Upon or Following a Change of Control. If there is a “Change of Control” (as defined below) and the Employee’s employment is terminated by the Company without Cause or by the Employee with Good Reason prior to the expiration of the Term of this Agreement and within two (2) years following a Change of Control, the words “two (2) years” shall replace the words “one (1) year” in clauses (iii) and (v) of Paragraph 6(b). For purposes of this Agreement, a Change of Control shall be deemed to have occurred if:

i. the stock of the Company ceases to be registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended; or

ii. the stockholders of the Company approve a definitive agreement (A) to merge or consolidate the Company with or into another corporation other than a majority-

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owned subsidiary of the Company, pursuant to which (x) the Company is not the surviving or resulting entity or (y) the persons who were the members of the Board prior to such approval do not represent a majority of the directors of the surviving, resulting or acquiring entity or the parent thereof, or (B) to sell or otherwise dispose of all or substantially all of the Company’s assets; or

iii. during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board.

(f) No Other Benefits or Compensation. Except as may be specifically provided under this Agreement or under the terms of any incentive compensation, employee benefit or fringe benefit plan applicable to the Employee at the time of the termination of the Employee’s employment prior to the end of the Term, the Employee shall have no right to receive any other compensation, or to participate in any other plan, arrangement or benefit, with respect to any future period after such termination.

(g) Waiver of Personal Liability. To the extent permitted by applicable law, Executive hereby acknowledges that he shall have recourse only to the Company (and its successors-in-interest) with respect to any claims he may have for compensation or benefits arising in connection with his employment, whether or not under this Agreement or under any other plan, program, or arrangement, including, but not limited to any agreement relating to the grant or exercise of stock options or other equity rights in the Company. To the extent permitted by applicable law, the Executive hereby waives any such claims for compensation, benefits and equity rights against officers, directors, stockholders or other representatives in their personal or separate capacities.

7. Confidentiality, Ownership, and Covenants of Non-Competition and Non-Solicitation.

(a) Confidentiality. The Employee recognizes that the Company’s business interests require the fullest practical protection and confidential treatment of all information not generally known within the relevant trade group or by the public, including all documents, writings, memoranda, business plans, illustrations, designs, plans, processes, programs, inventions, computer software, reports, sources of supply, customer lists, supplier lists, trade secrets and all other valuable or unique information and techniques acquired, developed or used by the Company relating to its businesses, operations, employees and

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customers (hereinafter collectively termed “Protected Information”). The Employee expressly acknowledges and agrees that Protected Information constitutes trade secrets and confidential and proprietary business information of the Company. No Protected Information shall include information which is or becomes part of the public domain through no breach of this Agreement by the Employee. The Employee agrees that Protected Information is essential to the success of the Company’s business, and it is the policy of the Company to maintain as secret and confidential Protected Information which gives the Company a competitive advantage over those who do not know the Protected Information and is expressly and implicitly protected by the Company from unauthorized disclosure. Accordingly, the Employee agrees to keep secret Protected Information and to treat confidentially and not to knowingly permit any other entity to, directly or indirectly, appropriate, divulge, disclose or otherwise disseminate to any other entity nor use in any manner for the Employee, and not to intentionally use or aid others in using any such Protected Information in competition with the Company or its Affiliates except to the extent that disclosure is required by law; provided, however, that the Employee shall provide the Company with notice as far in advance of any required disclosure as is practicable in order for the Company to obtain an order for the assurance that any information required to be disclosed will be treated as Protected Information and the Employee shall use all reasonable efforts to cooperate with the Company in connection therewith and in furtherance thereof. The obligation of non-disclosure of information shall continue to exists for so long as such information remains Protected Information. For purposes of this Agreement, trade secrets are subject to the protection of the Illinois Trade Secret Act. The provisions of this Paragraph 7(a) are not intended to supersede or limit the effect of any prior confidentiality or proprietary rights agreements previously executed by the Employee including the Confidential Information, Proprietary Rights and Non-Competition Agreement between the Company and the Employee, a copy of which is attached hereto as Exhibit B. However, if there is any conflict between the terms and conditions of this Agreement and the Confidential Information, Proprietary Rights and Non-Competition Agreement attached hereto as Exhibit B, then the terms and conditions of this Agreement, as interpreted by the Board, shall govern.

(b) Ownership. The Employee hereby assigns to the Company all of the Employee’s right (including patent rights, copyrights, trade secret rights, and all other rights throughout the world), title and interest in and to Inventions, whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by the Employee, either alone or jointly with others, during the course of the performance of services for the Company. The Employee shall also assign to, or as directed by, the Company, all of the Employee’s right, title and interest in and to any and all Inventions, the full title to which is required to be in the United States government by a contract between the Company and the United States government or any of its agencies. For the purpose of this Agreement, the term “Inventions” collectively refers to any and all inventions, trade secrets, improvements, ideas, processes, formulas, source and object codes, data, programs, other works

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of authorship, know-how, improvements, discoveries, developments, designs, and techniques regarding any of the foregoing. The provisions of this Paragraph 7(b) are not intended to supersede or limit the effect of any prior confidentiality or proprietary rights agreements previously executed by the Employee including the Confidential Information, Proprietary Rights and Non-Competition Agreement between the Company and the Employee, a copy of which is attached hereto as Exhibit B. However, if there is any conflict between the terms and conditions of this Agreement and the Confidential Information, Proprietary Rights and Non-Competition Agreement attached hereto as Exhibit B, then the terms and conditions of this Agreement, as interpreted by the Board, shall govern.

(c) Covenants of Non-Competition and Non-Solicitation. The Employee acknowledges that the Employee’s services pursuant to this Agreement are unique and extraordinary, that the Company will be dependent upon the Employee for the development and growth of its business and related functions, and that the Employee will continue to develop personal relationships with significant customers of the Company and to have control of confidential information concerning, and lists of customers of, the Company. The Employee further acknowledges that the business of the Company is international in scope and cannot be confined to any particular geographic area of the United States. For the foregoing reasons, the Employee covenants and agrees that at no time during the Restriction Period (as defined below) shall the Employee either alone or as a stockholder, partner, consultant, owner, agent, creditor, co-venturer of any other entity or in any other capacity, directly or indirectly, engage in the Business (as defined below); provided that nothing herein shall prohibit the Employee from being an owner of not more than 5% of the outstanding stock of any class of a corporation which is publicly traded, so long as the Employee does not actively participate in the business of such corporation. For the purpose of this Paragraph 7(c), the “Business” means the business of developing, manufacturing and marketing high temperature superconductivity products designed to enhance the quality, capacity, coverage and flexibility of cellular, personal communication services and other wireless telecommunications services.

For the reasons acknowledged by the Employee at the beginning of this Paragraph 7(c), the Employee additionally acknowledges, covenants, and agrees that at no time during the Term nor during the period commencing on the date of termination of the Employee’s employment with the Company and ending the day following the first anniversary of the date of termination of the Employee’s employment with the Company for any reason, shall the Employee, directly or indirectly, either alone or as a stockholder, partner, consultant, adviser, owner, agent, creditor, co-venturer of any other entity, or in any other capacity, (i) knowingly sell to or solicit sales of products produced in the Business to any customer or account which was a customer or account of the Company during the Employee’s employment with the Company, or (ii) (other than through general, non targeted advertisements) intentionally solicit, hire, knowingly attempt to solicit or hire, or knowingly participate in any attempt to solicit or

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hire any person who was an employee of the Company or any of its Affiliates during the Employee’s employment with the Company.

For purposes of this Agreement, the Restriction Period means the Term and the period commencing on the date of termination of the Employee’s employment with the Company and ending the day following the first anniversary of the date of termination of the Employee’s employment with the Company for any reason; provided that the Company may elect to extend the Restriction Period for up to one (1) year beyond the first anniversary of the date of termination of the Employee’s employment with the Company if (A) the Company provides written notice of its intent to so extend the Restriction Period at least six (6) months prior to the date on which the Restriction Period would otherwise expire and (B) the Company pays to the Employee the Base Salary, without offset for salary, wages or similar payments from another employer during such extended period, at the rate such Base Salary was being paid to the Employee at the time of termination, for one (1) year beyond the period for which the Company would otherwise be obligated to continue the Base Salary pursuant to this Agreement in the absence of the extension of the Restriction Period.

(d) Equitable Remedies. The Employee acknowledges, covenants and agrees that, in the event the Employee shall violate any provisions of this Section 8, the Company will have the right to enforce this Agreement by all remedies that may be available at law or in equity.

8. Assignability; Binding Effect. This Agreement is a personal contract calling for the provision of unique services by the Employee, and the Employee’s rights and obligations hereunder may not be sold, transferred, assigned or pledged. In the event of any attempted assignment or transfer of rights hereunder by the Employee contrary to the provisions hereof (other than as may be required by law), the Company will have no further liability for payments hereunder. The rights and obligations of the Company hereunder will be binding upon and run in favor of the successors and assigns of the Company and, in connection therewith, and notwithstanding any other provision of this Agreement to the contrary, in the event that there is such a successor or assign, on and after the date of such succession or assignment, “Company” shall thereupon instead refer to such successor or assign, as the case may be. This Agreement does not create, and shall not be interpreted or construed to create, any rights enforceable by any person not a party to this Agreement, except as specifically provided herein.

9. Entire Agreement. This Agreement represents the entire agreement between the parties concerning the Employee’s employment with the Company and supersedes all prior negotiations, discussions, understandings and agreements, whether written or oral, between the Employee and the Company relating to the subject matter of this Agreement. All prior employment agreements, between the Company and the Employee shall remain in full

-11-

force and effect with respect all matters addressed in such prior employment agreements occurring on or before the effective date of this Agreement.

10. Amendment or Modification, Waiver. No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing signed by the Employee and by a duly authorized officer of the Company other that the Employee. No waiver by any party to this Agreement of any breach by another party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time.

11. Notices. All notices, demands or other communications of any kind to be given or delivered under this Agreement shall be in writing and shall be deemed to have been properly given if (a) delivered by hand, (b) delivered by a nationally recognized overnight courier service, (c) sent by registered or certified United States Mail, return receipt requested and first class postage prepaid, or (d) facsimile transmission followed by a confirmation copy delivered by a nationally recognized overnight courier service. Such communications shall be sent to the parties at their respective addresses as follows:


If to the Employee		Mr. Amr Abdelmonem




		1746 Hintz Road




		Arlington Heights, IL 60004
















If to the Company:		Illinois Superconductor Corporation




		451 Kingston Court




		Mount Prospect, IL 60056




		Attention: Vice President of Human Resources
















with a copy to:		Barry M. Abelson, Esquire




		Pepper Hamilton LLP




		3000 Two Logan Square




		18th & Arch Streets




		Philadelphia, PA 19103-2799




		FAX: 215-981-4750

Either party may change such address for delivery to the other party by delivery of a notice in conformity with the provisions of this Section specifying such change. Notice shall be deemed to have been properly given (i) on the date of delivery, if delivery is by hand, (ii) three (3) days after the date of mailing if sent by certified or registered mail, (iii) one (1) day after date of

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delivery to the overnight courier if sent by overnight courier, or (iv) the next business day after the date of transmission by facsimile.

12. Severability. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable shall not be affected, and each provision of this Agreement shall be validated and shall be enforced to the fullest extent permitted by law. If for any reason any provision of this Agreement containing restrictions is held to cover an area or to be for a length of time that is unreasonable or in any other way is construed to be too broad or to any extent invalid, such provision shall not be determined to be entirely null, void and of no effect; instead, it is the intention and desire of both the Company and the Employee that, to the extent that the provision is or would be valid or enforceable under applicable law, any court of competent jurisdiction shall construe and interpret or reform this Agreement to provide for a restriction having the maximum enforceable area, time period and such other constraints or conditions (although not greater than those currently contained in this Agreement) as shall be valid and enforceable under the applicable law.

13. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

14. Headings. All descriptive headings of sections and paragraphs in this Agreement are intended solely for convenience of reference, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph.

15. Withholding Taxes. All salary, benefits, reimbursements and any other payments to the Employee under this Agreement shall be subject to all applicable payroll and withholding taxes and deductions required by any law, rule or regulation of any federal, state or local authority.

[THIS SPACE INTENTIONALLY LEFT BLANK]

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16. Applicable Law/Jurisdiction. The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this Agreement, without reference to rules relating to conflicts of law. The parties select and irrevocably submit to the exclusive jurisdiction of a court of competent jurisdiction located in the State of Illinois for any action to enforce, construe or interpret this Agreement. The Employee and the Company each hereby waives any objection to venue in such state on the basis of forum non-conveniens.

IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written.


	ILLINOIS SUPERCONDUCTOR CORPORATION


	By: /s/ George Calhoun GEORGE CALHOUN Chief Executive Officer

	/s/ Amr Abdelmonem AMR ABDELMONEM

-14- EX-23.1 8 c61784ex23-1.htm CONSENT OF GRANT THORTON LLP Consent of Grant Thorton LLP

Exhibit 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated January 12, 2001, except for the final section of Note 12 and for Note 13, as to which the dates are February 26, 2001, and March 19, 2001, respectively, on the consolidated balance sheet of Illinois Superconductor Corporation and subsidiaries as of December 31, 2000, and the related statements of operations, changes in stockholders’ equity, and cash flows of Illinois Superconductor Corporation for the year ended December 31, 2000, included in its Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission. We hereby consent to the incorporation by reference of our report in this Registration Statements on Form S-3.

	/s/ GRANT THORNTON LLP

	GRANT THORNTON LLP

Chicago, Illinois
April 20, 2001 EX-23.2 9 c61784ex23-2.htm CONSENT OF ERNST & YOUNG LLP Consent of Ernst & Young LLP

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm the caption "Experts" and to the use of our report dated February 25, 2000, with respect to the financial statements and schedule of Illinois Superconductor Corporation incorporated by reference in the Registration Statement (Form S-3 No. 333-XXXXX) and related Prospectus of Illinois Superconductor Corporation for the registration of 1,818,182 shares of its common stock.

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP

Chicago, Illinois
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	(i)	To include any prospectus required by Section 10(a)(3) the Securities Act;


	(ii)	To reflect in the prospectus any facts or events which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increases or decreases in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and


	(iii)	To include any additional or changed 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; provided, however, that paragraphs (a)(1)(i); and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those clauses is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in this Registration Statement.

			(a) Organization, Good Standing and Power. The Company is a corporation duly incorporated validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate authority to own, lease and operate its properties and assets and to carry on its business as now being conducted. The Company does not own more than fifty percent (50%) of or control any other business entity except as set forth in the SEC Documents. The Company is duly qualified to do business and is in good standing as a foreign corporation in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not have a Material Adverse Effect.

			(b) Authorization, Enforcement. (i) The Company has the requisite corporate power and corporate authority to enter into and perform its obligations under the Transaction Documents and to issue the Draw Down Shares pursuant to their respective terms, (ii) the execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required, other than approval of each Draw Down by the Board of Directors or a pricing committee thereof, and (iii) the Transaction Documents have been duly executed and delivered by the Company and at the Initial Closing shall constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application. The Company has duly and validly authorized and reserved for issuance shares of Common Stock sufficient in number for the issuance of the Draw Down Shares.

			(c) Capitalization. The authorized capital stock of the Company consists of 250,000,000 shares of Common Stock of which 107,719,307 shares are issued and outstanding and 300,000 shares of preferred stock, none of which are issued and outstanding. All of the outstanding shares of the Company’s Common Stock have been duly and validly authorized and are fully paid and non-assessable. Except as set forth in this Agreement or on Schedule 2.1(c) hereto, no shares of Common Stock are entitled to preemptive rights or registration rights and there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company. Furthermore, except as set forth in this Agreement or on Schedule 2.1(c), there are no

			contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of the capital stock of the Company or options, securities or rights convertible into shares of capital stock of the Company. Except as set forth on Schedule 2.1(c), the Company is not a party to any agreement granting registration rights to any person with respect to any of its equity or debt securities. Except as set forth on Schedule 2.1(c), the Company is not a party to, and it has no knowledge of, any agreement restricting the voting or transfer of any shares of the capital stock of the Company. Except as set forth on Schedule 2.1(c) hereto, the offer and sale of all capital stock, convertible securities, rights, warrants, or options of the Company issued prior to the date hereof complied with all applicable federal and state securities laws, and no stockholder has a right of rescission or damages with respect thereto which would have a Material Adverse Effect on the Company’s financial condition or operating results. The Company has made available to the Purchaser true and correct copies of the Company’s articles or certificate of incorporation as in effect on the date hereof (the “Charter”), and the Company’s bylaws as in effect on the date hereof (the “Bylaws”). The Company has not received any notice from the Principal Market questioning or threatening the continued inclusion of the Common Stock on such market.

			(d) [INTENTIONALLY DELETED]

			(e) No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated herein do not and will not, (i) violate any provision of the Company’s Charter or Bylaws, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company is a party, (iii) create or impose a lien, charge or encumbrance on any property of the Company under any agreement or any commitment to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, or (iv) result in a violation of any federal, state, local or other foreign statute, rule, regulation, order, judgment or decree (including any federal or state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries are bound or affected, except, in all cases, for such conflicts, defaults, termination, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect. The business of the Company and its subsidiaries is not being conducted in violation of any laws, ordinances or regulations of any governmental entity, except for possible violations which singularly or in the aggregate do not and will not have a Material Adverse Effect. The Company is not required under any federal law, rule or regulation of the United States, or any law, rule or regulation of a state or locality thereof to obtain any consent, authorization or order of, or make any filing or registration with, any court or United States governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement, or issue and sell the Shares in accordance with the terms hereof (other than any filings which may be required to be made by the Company with the SEC, the Principal Market or U.S. state securities

			administrators subsequent to the date hereof); provided that, for purpose of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Purchaser herein.

			(f) SEC Documents, Financial Statements.

			(i) The Company meets the requirements for use of Form S-3 under the Securities Act in connection with the offering pursuant to the Registration Statement. The Registration Statement has remained in effect since it was originally declared effective by the SEC on January 26, 2001. The Registration Statement covers, among other securities, the registration under the Securities Act of the offering and sale of the Shares to the Purchaser and will be amended to cover the Plan of Distribution of the Purchaser, and upon such amendment, the Registration Statement and the sale of the Shares hereunder will meet the requirements set forth in Rules 415(a)(1)(x) and (a)(4).

			(ii) The Company has not distributed and, prior to each Settlement Date, shall not have distributed, any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prospectus or other materials, if any, permitted by the Securities Act.

			(iii) The Common Stock of the Company is registered pursuant to Section 12(b) or Section 12(g) of the Exchange Act, and, except as disclosed on Schedule 2.1(f) hereto, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange Act at least since December 31, 1998. The Company has not provided to the Purchaser any information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed, other than with respect to the transactions contemplated by this Agreement. As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act or the Securities Act, as applicable, and the rules and regulations of the SEC promulgated thereunder applicable to such documents, and, as of their respective filing dates, none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared by management in accordance with GAAP applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), and fairly

			(g) Subsidiaries. The SEC Documents or Schedule 2.1(g) hereto sets forth each subsidiary of the Company, showing the jurisdiction of its incorporation or organization and showing the percentage of the Company’s ownership of the outstanding stock or other interests of such subsidiary. For the purposes of this Agreement, “subsidiary” shall mean any corporation or other entity of which at least a majority of the securities or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by the Company and/or any of its other subsidiaries. All of the issued and outstanding shares of capital stock of each subsidiary have been duly authorized and validly issued, and are fully paid and non-assessable. There are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon any subsidiary for the purchase or acquisition of any shares of capital stock of any subsidiary or any other securities convertible into, exchangeable for or evidencing the rights to subscribe for any shares of such capital stock. Neither the Company nor any subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of the capital stock of any subsidiary or any convertible securities, rights, warrants or options of the type described in the preceding sentence. Neither the Company nor any subsidiary is a party to, nor has any knowledge of, any agreement restricting the voting or transfer of any shares of the capital stock of any subsidiary.

			(h) No Material Adverse Effect. Since the date of the financial statement contained in the Company’s most recently filed Form 10-Q or Form 10-K, whichever is most current, no Material Adverse Effect has occurred or exists with respect to the Company, except as disclosed on Schedule 2.1(h) hereto.

			(i) No Undisclosed Liabilities. Except as disclosed on Schedule 2.1(i) hereto, neither the Company nor any of its subsidiaries has any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) that would be required to be disclosed on a balance sheet of the Company or any subsidiary (including the notes thereto) in conformity with GAAP which are not disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company’s or its subsidiaries’ respective businesses since such

			date and which, individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company or its subsidiaries.

			(j) No Undisclosed Events or Circumstances. Since the date of the financial statement contained in the Company’s most recently filed Form 10-Q or Form 10-K, whichever is most current, except as disclosed in Schedule 2.1(j), no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the SEC Documents.

			(k) Indebtedness. The SEC Documents or Schedule 2.1(k) hereto sets forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any subsidiary, or for which the Company or any subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” shall mean (A) any liabilities for borrowed money or amounts owed in excess of $500,000 (other than trade accounts payable incurred in the ordinary course of business), (B) all guaranties, endorsements and contingent obligations in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (C) the present value of any lease payments in excess of $500,000 due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any subsidiary is in default with respect to any Indebtedness.

			(l) Title to Assets. Each of the Company and the subsidiaries has good and marketable title to all of its real and personal property reflected in the SEC Documents, free of any mortgages, pledges, charges, liens, security interests or other encumbrances, except for those indicated on Schedule 2.1(1) hereto or such that do not cause a Material Adverse Effect. All said leases of the Company and each of its subsidiaries are valid and subsisting and in full force and effect.

			(m) Actions Pending. There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any subsidiary which questions the validity of this Agreement or the transactions contemplated hereby or any action taken or to be taken pursuant hereto or thereto. Except as set forth on Schedule 2.1(m) hereto, there is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened, against or involving the Company, any subsidiary or any of their respective properties or assets which individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any subsidiary.

			(n) Necessary Authorizations. The Company and each of its subsidiaries have all franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of their respective businesses as now being conducted by them under applicable law, including but not limited to, any environmental laws, unless the failure to possess such franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

			(o) Taxes. The Company and each subsidiary has filed all Tax Returns which it is required to file under applicable laws; all such Tax Returns are true and accurate and have been prepared in compliance with all applicable laws; the Company has paid all Taxes due and owing by it or any subsidiary (whether or not such Taxes are required to be shown on a Tax Return) and has withheld and paid over to the appropriate taxing authorities all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third parties; and since December 31, 1999, the charges, accruals and reserves for Taxes with respect to the Company (including any provisions for deferred income taxes) reflected on the books of the Company are adequate to cover any Tax liabilities of the Company if its current tax year were treated as ending on the date hereof.

			No claim has been made by a taxing authority in a jurisdiction where the Company does not file tax returns that the Company or any subsidiary is or may be subject to taxation by that jurisdiction. Except as set forth on Schedule 3(o) hereto, there are no foreign, federal, state or local tax audits or administrative or judicial proceedings pending or being conducted with respect to the Company or any subsidiary; no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority; and no written notice indicating an intent to open an audit or other review has been received by the Company or any subsidiary from any foreign, federal, state or local taxing authority. There are no material unresolved questions or claims concerning the Company’s Tax liability. The Company (A) has not executed or entered into a closing agreement pursuant to § 7121 of the Internal Revenue Code or any predecessor provision thereof or any similar provision of state, local or foreign law; and (B) has not agreed to or is required to make any adjustments pursuant to § 481 (a) of the Internal Revenue Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by the Company or any of its subsidiaries or has any knowledge that the IRS has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of the Company. The Company has not been a United States real property holding corporation within the meaning of § 897(c)(2) of the Internal Revenue Code during a period of five (5) years from the date hereof.

			The Company has not made an election under § 341(f) of the Internal Revenue Code. The Company is not liable for the Taxes of another person that is not a subsidiary of the Company under (A) Treas. Reg. § 1.1502-6 (or comparable provisions

			of state, local or foreign law), (B) as a transferee or successor, (C) by contract or indemnity or (D) otherwise. The Company is not a party to any tax sharing agreement with any person other than a subsidiary of the Company. The Company has not made any payments, is not obligated to make payments nor is it a party to an agreement that could obligate it to make any payments that would not be deductible under § 280G of the Internal Revenue Code.

			For purposes of this Section 2.1(o):

			“Internal Revenue Code” means the Internal Revenue Code of 1986, as amended.

			“IRS” means the United States Internal Revenue Service.

			“Tax” or “Taxes” means federal, state, county, local, foreign, or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not.

			“Tax Return” means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof.

			(p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto, no brokers, finders or financial advisory fees or commissions will be payable by the Company or any subsidiary with respect to the transactions contemplated by this Agreement.

			(q) Disclosure. Neither this Agreement or the Schedules hereto nor any other documents, certificates or instruments furnished to the Purchaser by or on behalf of the Company or any subsidiary in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made herein or therein, in the light of the circumstances under which they were made herein or therein, not misleading.

			(r) Operation of Business. Except as set forth on Schedule 2.1(r) hereto, the Company and each of the subsidiaries has sufficient right, title or interest in the patents, trademarks, service marks, trade names, copyrights, licenses and authorizations (collectively, “Intellectual Property”) necessary for the conduct of its business as now conducted. To the best of the Company’s knowledge, the conduct of the business of the Company and each of the subsidiaries as presently conducted does not violate, conflict with or infringe the Intellectual Property rights of any third party.

			(s) Insurance. Except as disclosed on Schedule 2.1(s) hereto, the Company carries or will have the benefit of insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaging in similar businesses and similar industries.

			(t) Books and Records. The records and documents of the Company and its subsidiaries accurately reflect in all material respects the information relating to the business of the Company and the subsidiaries, the location and collection of their assets, and the nature of all transactions giving rise to the obligations or accounts receivable of the Company or any subsidiary.

			(u) Material Agreements. Except as set forth on Schedule 2.1(u) hereto, neither the Company nor any subsidiary is a party to any written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement, a copy of which would be required to be filed with the SEC as an exhibit to a registration statement on Form S-1 or other applicable form (collectively, “Material Agreements”) if the Company or any subsidiary were registering securities under the Securities Act. Except as set forth on Schedule 2.1(u), the Company and each of its subsidiaries has in all material respects performed all the obligations required to be performed by them to date under the foregoing agreements, have received no notice of default and are not in default under any Material Agreement now in effect, the result of which could cause a Material Adverse Effect. No written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement of the Company or of any subsidiary limits or shall limit the payment of dividends on the Company’s Common Stock.

			(v) Transactions with Affiliates. Except as set forth on Schedule 2.1(v) hereto, there are no loans, leases, agreements, contracts, royalty agreements, management contracts or arrangements or other continuing transactions exceeding $100,000 between (A) the Company, any subsidiary or any of their respective customers or suppliers on the one hand, and (B) on the other hand, any officer, employee, consultant or director of the Company, or any of its subsidiaries, or any person owning 5% or more of the capital stock of the Company or any subsidiary or any member of the immediate family of such officer, employee, consultant, director or stockholder or any corporation or other entity controlled by such officer, employee, consultant, director or stockholder, or a member of the immediate family of such officer, employee, consultant, director or stockholder.

			(w) Accuracy of Registration Statement. The Registration Statement and the Prospectus do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading in light of the circumstances under which they were made; provided, however, the Company makes no representations or warranties as to the information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with the information furnished in writing to the Company by the Purchaser specifically for inclusion in the Registration Statement.

			(x) Employees. Neither the Company nor any subsidiary has any collective bargaining arrangements or agreements covering any of its employees, except as set forth on Schedule 2.1(x) hereto. Except as set forth on Schedule 2.1(x) hereto, neither the Company nor any subsidiary is in breach of any employment contract, agreement regarding proprietary information, noncompetition agreement, nonsolicitation agreement, confidentiality agreement, or any other similar contract or restrictive covenant, relating to the right of any officer, employee or consultant to be employed or engaged by the Company or such subsidiary. Since the date of the financial statement in the Company’s most recently filed Form 10-K, no officer, consultant or key employee of the Company or any subsidiary whose termination, either individually or in the aggregate, could have a Material Adverse Effect, has terminated or, to the knowledge of the Company, has any present intention of terminating his or her employment or engagement with the Company or any subsidiary.

			(y) Absence of Certain Developments. Except as provided in SEC Documents or on Schedule 2.1(y) hereto, since the date of the financial statement contained in the Company’s most recently filed Form 10-Q or Form 10-K, whichever is most current, neither the Company nor any subsidiary has:

			(i) issued any stock, bonds or other corporate securities or any rights, options or warrants with respect thereto;

			(ii) borrowed any amount or incurred or become subject to any liabilities (absolute or contingent) except current liabilities incurred in the ordinary course of business which are comparable in nature and amount to the current liabilities incurred in the ordinary course of business during the comparable portion of its prior fiscal year, as adjusted to reflect the current nature and volume of the Company’s or such subsidiary’s business;

			(iii) discharged or satisfied any lien or encumbrance or paid any obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business;

			(iv) declared or made any payment or distribution of cash or other property to stockholders with respect to its stock, or purchased or redeemed, or made any agreements so to purchase or redeem, any shares of its capital stock;

			(v) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business;

			(vi) sold, assigned or transferred any patent rights, trademarks, trade names, copyrights, trade secrets or other intangible assets or intellectual property rights, or disclosed any proprietary confidential information to any person except in each case, to customers in the ordinary course of business or to the Purchaser or its representatives;

			(vii) suffered any material losses (except for anticipated losses consistent with prior quarters) or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of prospective business;

			(viii) made any changes in employee compensation except in the ordinary course of business and consistent with past practices;

			(ix) made capital expenditures or commitments therefor that aggregate in excess of $500,000;

			(x) entered into any other material transaction, whether or not in the ordinary course of business;

			(xi) suffered any material damage, destruction or casualty loss, whether or not covered by insurance;

			(xii) experienced any material problems with labor or management in connection with the terms and conditions of their employment; or

			(xiii) effected any two or more events of the foregoing kind which in the aggregate would be material to the Company or its subsidiaries.

			(a) Organization and Standing of the Purchaser. The Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the British Virgin Islands.

			(b) Authorization and Power. The Purchaser has the requisite corporate power and corporate authority to enter into and perform the Transaction Documents and to purchase the Shares being, and to be sold to it hereunder. The execution, delivery and performance of the Transaction Documents by Purchaser and the

			consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action.

			(c) No Conflicts. The execution, delivery and performance of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby or relating hereto do not and will not (i) result in a violation of the Purchaser’s charter documents or bylaws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument to which the Purchaser is a party, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to the Purchaser or its properties (except for such conflicts, defaults and violations as would not, individually or in the aggregate, have a Material Adverse Effect on Purchaser). The Purchaser is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or to purchase the Shares in accordance with the terms hereof.

			(d) Information. The Purchaser and its advisors, if any, have access to the SEC Documents. The Purchaser has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Shares. The Purchaser understands that it (and not the Company) shall be responsible for its own tax liabilities that may arise as a result of this investment or the transactions contemplated by this Agreement.

			(a) Accuracy of the Purchaser’s Representations and Warranties. The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made, as of the Initial Closing, as though made at that time (except for representations and warranties that speak as of a particular date), and as of the Settlement Date as though made at that time, except for representations and warranties that speak as of a particular date.

			(b) Performance by the Purchaser. The Purchaser shall have performed, satisfied and complied in all material respects with all material covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser as of the Initial Closing and at or prior to the Settlement Date.

			(c) No Proceedings or Litigation. No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against the Purchaser or the Company or any subsidiary, or any of the officers, directors or affiliates of the Purchaser or the Company or any subsidiary seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

			(d) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

			(e) Amendment of Registration Statement. The Registration Statement shall be been amended to describe the Purchaser’s Plan of Distribution, and such amendment shall have been declared effective by the SEC.

			(a) Accuracy of the Company’s Representations and Warranties. Each of the representations and warranties of the Company shall be true and correct in all material respects as of the date when made as of the Initial Closing, as though made at that time (except for representations and warranties that speak as of a particular date), and as of the Settlement Date as though made at that time (except for representations and warranties that speak as of a particular date).

			(b) Performance by the Company. The Company shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company as of the Initial Closing and at or prior to the Settlement Date.

			(c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

			(d) No Proceedings or Litigation. No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against the Purchaser or the Company or any subsidiary, or any of the officers, directors or affiliates of the Purchaser or the Company or any subsidiary seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

			(e) Opinion of Counsel. At or prior to (i) the first Settlement Date, and (ii) any subsequent Settlement Date (if reasonably requested by the Purchaser due to a specific subsequent event identified to the Company by the Purchaser), the Purchaser shall have received the opinion of counsel to the Company in form and substance acceptable to Ladenburg Thalmann & Co. Inc., which shall also be addressed to the Purchaser, dated the date of the Initial Closing or the Settlement.

			(f) Effective Registration Statement. The Registration Statement, as amended to provide the Plan of Distribution of the Purchaser, registering the Shares and Warrants shall be effective.

			(g) No Suspension. Trading in the Company’s Common Stock shall not have been suspended by the SEC or the Principal Market (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be

			terminated prior to the next Settlement Date), and, at any time subsequent to the execution of this Agreement and prior to the commencement of any Settlement Period, trading in securities generally as reported on the Principal Market shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported on the Principal Market unless the general suspension or limitation shall have been terminated prior to the Initial Closing or commencement of the Settlement Period.

			(h) Material Adverse Effect. No Material Adverse shall have occurred, unless such Material Adverse Effect is publicly disclosed at least ten (10) Trading Days prior to the Initial Closing or Trading Day the Draw Down Notice is deemed delivered as applicable and the average VWAP or trading volume of the Common Stock on the Principal Market since such disclosure has not decreased by more than 20%.

			(i) Comfort Letter of Accountants. The Purchaser shall have received from the Company’s auditors, a copy of the letter, addressed to Ladenburg Thalmann & Co. Inc. and the Board of Directors of the Company (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, and (ii) stating, as of the date of the first Settlement (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the first Settlement Date), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants’ “comfort letters” to underwriters in connection with registered public offerings.

			(j) Officers’ Certificate. The Company shall furnish to the Purchaser as of the date hereof, at the Initial closing and shall have furnished to Purchaser on the date the Draw Down Notice is delivered, a certificate, dated such date, of its Chairman of the Board, its President or a Vice President and its Chief Financial Officer or Treasurer (the “Officers’ Certificate”) stating that:

			(i) The representations and warranties of the Company in this Agreement are true and correct in all material respects as if made at and of such date; provided, however, that in all cases any qualifications as to materiality shall be considered in the aggregate; the Company has in all material respects complied with all its agreements contained herein; and the Company will in all respects satisfy the conditions to the Initial Closing or Settlement on its part to be complied with or satisfied at such date; and

			(ii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion as of such date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary

			(a) The Company, may, in its sole discretion, issue and exercise up to eighteen (18) draw downs (a “Draw Down”) during the Commitment Period, which Draw Downs the Purchaser shall be obligated to accept.

			(b) Only one Draw Down shall be allowed in each Draw Down Pricing Period. The number of shares of Common Stock purchased by the Purchaser with respect to each Draw Down shall be determined as set forth in Section 5.1(e) herein and settled on:

			(i) as to the 1st through the 11th Trading Days after a Draw Down Pricing Period commences, on or before the 13th Trading Day after a Draw Down Pricing Period commences; and

			(ii) as to the 12th through the 22nd Trading Days after a Draw Down Pricing Period commences, on or before the 24th Trading Day after a Draw Down Pricing Period (such settlement periods and such settlement dates in subsection (i) and this subsection (ii) each referred to as a “Settlement Period” and a “Settlement Date”, respectively).

			(c) In connection with each Draw Down Pricing Period, the Company may set the Threshold Price in the Draw Down Notice.

			(d) The minimum Investment Amount for any Draw Down shall be $100,000 and the maximum Investment Amount as to each Draw Down shall be the lesser of (i) $4,000,000, and (ii) 20% of the average of the VWAPs for the Common

			Stock for the twenty-two (22) Trading Day period immediately prior to the applicable Commencement Date (defined below) multiplied by the total trading volume in respect of the Common Stock for such period.

			(e) The number of Shares of Common Stock to be issued on each Settlement Date shall be a number of shares equal to the sum of the quotients (for each trading day within the Settlement Period) of (x) 1/22nd of the Investment Amount, and (y) the Purchase Price on each Trading Day within the Settlement Period, subject to the following adjustments:

			(i) if the VWAP on a given Trading Day is less than the Threshold Price, then the Investment Amount will be reduced by 1/22nd and that day shall be withdrawn from the Settlement Period; and

			(ii) if trading of the Common Stock on the Principal Market is suspended for more than three (3) hours, in the aggregate, on any Trading Day during the Settlement Period or if the Trading Day is shortened because of a public holiday or the Registration Statement or trading thereunder is suspended for more than three (3) hours in the aggregate in accordance with Section 3.5, the Investment Amount shall be reduced by 1/22nd and that day shall be withdrawn from the applicable Settlement Period.

			(f) The Company must inform the Purchaser by delivering a draw down notice, in the form of Exhibit B hereto (the “Draw Down Notice”), via facsimile transmission in accordance with Section 8.4 as to the amount of the Draw Down (the “Investment Amount”) the Company wishes to exercise, before the first day of the Draw Down Pricing Period (the “Commencement Date”). If the Commencement Date is to be the date of the Draw Down Notice, the Draw Down Notice must be delivered to and receipt confirmed by the Purchaser at least one hour before trading commences on such date. At no time shall the Purchaser be required to purchase more than the maximum Investment Amount for a given Draw Down Pricing Period so that if the Company chooses not to exercise the maximum Investment Amount in a given Draw Down Pricing Period the Purchaser is not obligated to and shall not purchase more than the scheduled maximum Investment Amount in a subsequent Draw Down Pricing Period.

			(g) On each Settlement Date, the Shares purchased by the Purchaser shall be delivered to The Depository Trust Company (“DTC”) on the Purchaser’s behalf. Upon the Company electronically delivering whole shares of Common Stock to the Purchaser or its designees via DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system by 1:00 p.m. ET, the Purchaser shall wire transfer immediately available funds to the Company’s designated account on such day, less any fees as set forth in the Escrow Agreement, which fees shall be wired as directed in the Escrow Agreement. Upon the Company electronically delivering whole shares of Common Stock to the Purchaser or its designees DTC account via DWAC after 1:00 p.m. ET, the Purchaser shall wire transfer next day available funds to the Company’s designated

			(a) This Agreement shall terminate upon one (1) Trading Day’s notice if (i) an event resulting in a Material Adverse Effect has occurred and the average VWAP or trading volume of the Common Stock decreases by more than 50% during the 30 calendar days after such Material Adverse Effect is disclosed, (ii) the Common Stock is de-listed from the OTC Bulletin Board, unless such de-listing is in connection with the Company’s subsequent listing of the Common Stock on the Nasdaq National Market, Nasdaq SmallCap Market, the American Stock Exchange or the New York Stock Exchange, or (iii) the Company files for protection from creditors under any applicable law.

			(b) The Company may terminate this Agreement (i) upon one (1) Trading Day’s notice if the Purchaser shall fail to fund more than one properly noticed Draw Down within five (5) Trading Days of the end of the applicable Settlement Period.

			(a) The Company agrees to indemnify and hold harmless the Purchaser (and its directors, officers, fund managers, affiliates, agents, successors and assigns and each person, if any, who controls the purchaser within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Purchaser as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Company herein or based upon, (i) any untrue statement or alleged untrue statement of a material fact contained, or incorporated by reference, in the Registration Statement, the Prospectus or supplements thereto, or (ii) the omission or alleged omission to state in the Registration Statement, the Prospectus or supplements thereto, or any document incorporated by reference therein, any material fact required to be stated herein or necessary to make the statements therein not misleading; provided, however, that the Company shall not be liable to the Purchaser for any losses, liabilities, deficiencies, costs, damages and expenses to the extent that it arises out of or is based upon information provided by the Purchaser for use in connection with the Registration Statement.

			(b) The Purchaser agrees to indemnify and hold harmless the Company and its directors, officers, affiliates, agents, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Company as result of any inaccuracy in or breach of the representations, warranties or covenants made by the Purchaser or based upon any untrue statement or alleged untrue statement of a material fact provided by the Purchaser for inclusion in the Registration Statement or the Prospectus. Notwithstanding anything to the contrary herein, the Purchaser shall be liable under this Section 7.1(b) for only that amount as does not exceed the net proceeds to such Purchaser as a result of the sale of Shares pursuant to the Registration Statement.

			(b) “Commitment Period” shall mean the period of 24 consecutive months commencing immediately after the date hereof.

			(c) “Common Stock” shall mean the Company’s common stock, $0.001 par value per share.

			(d) “Draw Down” shall have the meaning assigned to such term in Section 5.1(a) hereof.

			(e) “Draw Down Notice” shall have the meaning assigned to such term in Section 5.1(f) hereof.

			(f) “Draw Down Pricing Period” shall mean a period of twenty-two (22) consecutive Trading Days beginning on the date specified in the Draw Down Notice or such other period mutually agreed to at the time of such Draw Down Notice by the Purchaser; provided, however, the Draw Down Pricing Period shall not begin before the day on which receipt of such notice is confirmed by the Purchaser unless otherwise agreed to at the time of such Draw Down Notice by the Purchaser.

			(g) “Exchange Act” shall mean the Securities and Exchange Act of 1934, as amended.

			(h) “GAAP” shall mean the United States Generally Accepted Accounting Principles as those conventions, rules and procedures are determined by the Financial Accounting Standards Board and its predecessor agencies.

			(i) “Initial Closing” shall have the meaning assigned to such term in Section 1.2 hereof.

			(j) “Investment Amount” shall have the meaning assigned to such term in Section 5.1(f) hereof.

			(k) “Material Adverse Effect” shall mean any adverse effect on the business, operations, properties or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole and/or any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to perform any of its material obligations under this Agreement or to perform any of its obligations under any other material agreement.

			(l) “Pricing Supplement” shall mean the supplement to the Registration Statement which sets forth, with respect to a Settlement, the number of Shares purchased, the anticipated Settlement Date, and any other information mutually agreed to be included by the Company and the Purchaser.

			(m) “Principal Market” shall mean initially the OTC Bulletin Board and thereafter shall include the American Stock Exchange, Nasdaq National Market,