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PROSPECTUS
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1,184,060 SHARES
[ILLINOIS SUPERCONDUCTOR CORPORATION LOGO]
COMMON STOCK
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The shares (the "Shares") of Common Stock, $.001 par value (including
preferred stock purchase rights) (the "Common Stock"), of Illinois
Superconductor Corporation (the "Company") covered by this Prospectus may be
sold from time to time by the stockholder specified in this Prospectus or its
pledgees, donees, transferees or other successors in interest (the "Selling
Stockholder"). See "Selling Stockholder." Of the Shares to which this
Prospectus relates, (i) 637,061 are Shares which may in the future be issued to
the Selling Stockholder upon the conversion of outstanding shares of the
Company's Series B Convertible Preferred Stock held by the Selling Stockholder
(the "Series B Stock"), (ii) 457,143 are Shares which may in the future be
issued to the Selling Stockholder upon the conversion of shares of the
Company's Series C Convertible Preferred Stock (the "Series C Stock"), (iii)
15,927 are Shares which may be issued to the Selling Stockholder as accrued
dividends for one year on the Series B Stock, (iv) 11,429 are Shares which may
be issued to the Selling Stockholder as accrued dividends for one year on the
Series C Stock and (v) 62,500 are Shares which may in the future be issued to
the Selling Stockholder upon the exercise of an outstanding warrant held by the
Selling Stockholder (the "Warrant"). The Company will not receive any of the
proceeds from the sale of the Shares by the Selling Stockholder, but the
Company will receive the proceeds from the exercise of the Warrant by the
Selling Stockholder.
The Common Stock is traded on the Nasdaq National Market (the "NNM") under
the symbol "ISCO." On September 26, 1997, the closing price of the Common
Stock as reported on the NNM was $8.938 per share. The Selling Stockholder
may, from time to time during the effectiveness of this registration, sell the
Shares on the NNM, in privately negotiated transactions or otherwise, at fixed
prices that may be changed, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. See "Plan of
Distribution."
AN INVESTMENT IN THE SHARES OFFERED HEREBY ENTAILS A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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The date of this Prospectus is September 26, 1997
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information concerning the Company may be inspected and
copied at the public reference facilities maintained by the Commission at the
Commission's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World
Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained upon written request addressed to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 at prescribed rates. Copies of reports, proxy statements and other
information regarding registrants that file electronically are available on the
Commission's Web site at http://www.sec.gov. The Common Stock is traded on the
NNM, and such reports, proxy statements and other information concerning the
Company can also be inspected at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments, exhibits and schedules thereto,
referred to as the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement which may be inspected
and copied in the manner and at the sources described above. Any statements
contained herein concerning the provisions of any document filed as an Exhibit
to the Registration Statement or otherwise filed with the Commission are not
necessarily complete and, in each instance, reference is made to the copy of
such document so filed. Each such statement is qualified in its entirety by
such reference.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the
Commission pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K, for the fiscal year ended
December 31, 1996;
2. The Company's Quarterly Reports on Form 10-Q, for the quarterly periods
ended March 31, 1997 and June 30, 1997;
3. The Company's Current Reports on Form 8-K, dated April 14, 1997, May 1,
1997, June 10, 1997, July 8, 1997, July 16, 1997, August 4, 1997 and September
2, 1997;
4. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed August 23, 1993 pursuant to Section 12
of the Exchange Act and all amendments thereto and reports filed for the
purpose of updating such description; and
5. The description of the preferred stock purchase rights contained in the
Company's Registration Statement on Form 8-A filed February 12, 1996 pursuant
to Section 12 of the Exchange Act and all amendments thereto and reports filed
for the purpose of updating such description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated herein by reference shall be
deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in any subsequently filed document which is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of such person, a
copy of any or all of the documents incorporated herein by reference (other
than exhibits thereto, unless such exhibits are specifically incorporated by
reference into the information that this Prospectus incorporates). Written or
telephone requests for such copies should be directed to the Company's
principal executive office: Illinois Superconductor Corporation, 451 Kingston
Court, Mt. Prospect, Illinois 60056, Attention: Secretary (telephone: (847)
391-9400).
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RISK FACTORS
Because the Company wants to provide investors with more meaningful and
useful information, this Prospectus contains, and incorporates by reference,
certain forward-looking statements (as such term is defined in the rules
promulgated pursuant to the Securities Act) that reflect the Company's current
expectations regarding the future results of operations and performance and
achievements of the Company. Such forward-looking statements are subject to
the safe harbor created by the Private Securities Litigation Reform Act of
1995. The Company has tried, wherever possible, to identify these
forward-looking statements by using words such as "anticipate," "believe,"
"estimate," "expect" and similar expressions. These statements reflect the
Company's current beliefs and are based on information currently available to
it. Accordingly, these statements are subject to certain risks, uncertainties
and assumptions, including the factors set forth in the following Risk Factors,
which could cause the Company's future results, performance or achievements to
differ materially from those expressed in, or implied by, any of these
statements. The Company undertakes no obligation to release publicly the
results of any revisions to any such forward-looking statements that may be
made to reflect events or circumstances after the date of this Prospectus or to
reflect the occurrence of unanticipated events.
An investment in the Shares offered hereby entails a high degree of risk.
In addition to the other information in this Prospectus, or incorporated by
reference herein, prospective investors should carefully consider the following
Risk Factors before purchasing any of the Shares offered hereby.
UNCERTAIN MARKET ACCEPTANCE OF SUPERCONDUCTING TELECOMMUNICATIONS PRODUCTS
The Company's radio frequency ("RF") filter products have not been sold in
significant quantities and there is no assurance that a substantial market will
develop for the Company's products. The Company's customers establish
demanding specifications for performance and reliability. There can be no
assurance that the Company's RF filter products will continue to pass product
performance and reliability tests by cellular and Personal Communications
Services ("PCS") service providers. There can also be no assurance that the
Company's products will operate reliably on a long-term basis, that the Company
will be able to manufacture adequate quantities of any products it develops at
commercially acceptable costs or on a timely basis or that any of the Company's
current or future products will achieve market acceptance. The Company has
experienced, and may continue to experience, quarterly fluctuations in its
results of operations as its RF filter products attempt to gain market
acceptance while being subject to the lengthy approval and purchase processes
of customers. Failure to successfully develop, manufacture and commercialize
products on a timely and cost-effective basis will have a material adverse
effect on the Company's business, operating results and financial condition.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; AND UNCERTAINTY OF FINANCIAL
RESULTS
The Company was founded in October 1989 and to date has been engaged
principally in research and development ("R&D"), product testing, manufacturing
and marketing activities. The Company has only recently begun to generate
limited revenues from the sale of its RF filter products. Prior to the
commencement of these sales, the majority of the Company's revenues were
derived from R&D contracts, primarily from the U.S. government. The Company
does not expect revenues to increase dramatically until it ships a significant
amount of its RF products. Accordingly, the Company has only a limited
operating history upon which an evaluation of the Company and its prospects can
be based. The Company must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stages of
development.
The Company has incurred substantial net losses in each year since its
inception and as of June 30, 1997 had an accumulated deficit of approximately
$32.7 million. The Company expects to continue to incur operating losses
through at least early 1998 as it continues to devote significant financial
resources to its product development, manufacturing, marketing and sales
efforts. Even if the Company is able to overcome the significant remaining
manufacturing and marketing hurdles necessary to sell
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significant quantities of its RF filter products, there can be no assurance
that the Company will ever achieve a profitable level of operations or, if
profitability is achieved, that it can be sustained.
FUTURE CAPITAL NEEDS
To date, the Company has financed its operations primarily through public
and private equity financings that have raised approximately $43.4 million, net
of related expenses. Although the Company believes that its current funds,
including the $1.5 million of proceeds from its sale of the Series C Stock to
the Selling Stockholder on August 29, 1997, are sufficient to finance the
Company's operations as planned through at least the middle of November 1997,
the Company will require additional funds to finance its product development,
manufacturing and marketing activities thereafter. Pursuant to the Convertible
Preferred Stock Purchase Agreement dated as of June 6, 1997, by and between the
Company and the Selling Stockholder (the "Purchase Agreement"), the Company has
the option to issue up to $10.5 million of additional convertible preferred
stock (the "Additional Preferred Stock") to the Selling Stockholder in up to
three additional tranches, if certain conditions, including, without
limitation, maintaining certain price levels for the Common Stock, no material
adverse change in the Company's business and no significant changes in the
Company's senior management, are satisfied by the Company or waived by the
Selling Stockholder. Notwithstanding the foregoing, the Company and the
Selling Stockholder have agreed that of the remaining $10.5 million of
Additional Preferred Stock, the Company may issue $1.5 million of additional
Series C Stock at such time or times as the parties may agree, which issuance
would not be considered one of the three additional tranches. There can be no
assurance, however, that the Company will receive any or all of the remaining
$10.5 million, or when such funds will be received, because there can be no
assurance that or when the conditions will be satisfied by the Company or
waived by the Selling Stockholder. If the conditions are not satisfied or
waived, there can be no assurance that additional funds will be available on
acceptable terms to the Company, or at all. In addition, the Company has
granted a right of first refusal to Brown Simpson, LLC to participate in any
future private placement of equity securities, which is exercisable within six
months of the closing of any tranche of financing under the Purchase Agreement.
This right of first refusal could adversely impair the Company's ability to
obtain additional equity financings. If any of the Additional Preferred Stock
is issued, or if additional funds are raised by issuing other equity
securities, further dilution to existing or future stockholders is likely to
result. If adequate funds are not available on acceptable terms when needed,
the Company may be required to delay, scale-back or eliminate the
manufacturing, marketing or sales of one or more of its products or research
and development programs, or to obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates or potential products
that the Company would not otherwise relinquish. Inadequate funding also could
impair the Company's ability to compete in the marketplace. In particular, if
during the fourth quarter of 1997 the Company is unable to secure adequate
additional financing through the issuance of Additional Preferred Stock or from
other sources, it will have to reduce its operating plans in order to continue
its operations through the end of 1997. The Company regularly examines
opportunities to expand its technology base and product line through means such
as licenses, joint ventures and acquisitions of assets or ongoing businesses,
and may issue securities in connection with such transactions. However, no
commitments to enter into or pursue any such transactions have been made at
this time, and there can be no assurance that any such discussions will result
in any such transaction being concluded.
In December 1996, the Company received an aggregate of approximately
$4,400,000 from the exercise of warrants that were issued in the Company's
private placement completed in November 1995, approximately $1,100,000 of which
was in the form of promissory notes. Approximately $716,000 in principal amount
of these promissory notes was due on April 30, 1997, of which approximately
$699,000 remains outstanding as of the date hereof. The Company has filed a
lawsuit to collect repayment of these promissory notes, including accrued
interest. There can be no assurance, however, when or if such
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promissory notes will be repaid and a further delay or failure in repayment
could adversely effect the Company's cash flow and liquidity.
VOLATILITY OF COMMON STOCK PRICE
The market price of the Common Stock, like that of many other
high-technology companies, has fluctuated significantly and is likely to
continue to fluctuate in the future. Announcements by the Company or others
regarding the receipt of customer orders, quarterly variations in operating
results, additional equity financings, changes in recommendations of securities
analysts, results of customer field trials, scientific discoveries,
technological innovations, litigation, product developments, patent or
proprietary rights, government regulation and general market conditions may
have a significant impact on the market price of the Common Stock.
LIMITED EXPERIENCE IN MANUFACTURING, MARKETING AND SALES
For the Company to be financially successful, it must manufacture its
products in substantial quantities, at acceptable costs and on a timely basis.
Although the Company to date has produced limited quantities of its products
for commercial installations and for use in development and customer field
trial programs, production of large quantities at competitive costs presents a
number of technological and engineering challenges for the Company, and there
can be no assurance that the Company will be able to manufacture such products
in sufficient volume. The Company has limited experience in manufacturing, and
substantial costs and expenses may be incurred in connection with attempts to
manufacture substantial quantities of the Company's products. No assurance can
be given that the Company will be able to make the transition to full
commercial production successfully.
The Company's marketing and sales experience to date is very limited. The
Company will be required to further develop its marketing and sales force in
order to effectively demonstrate the advantages of its products over more
traditional products, as well as competitive superconductive products. The
Company may also elect to enter into agreements or relationships with third
parties regarding the commercialization or marketing of its products. If the
Company enters into such agreements or relationships, it will be substantially
dependent upon the efforts of others in deriving commercial benefits from its
products. There can be no assurance that the Company will be able to establish
adequate sales and distribution capabilities, that it will be able to enter
into marketing agreements or relationships with third parties on financially
acceptable terms or that any third parties with whom it enters into such
arrangements will be successful in marketing the Company's products.
COMPETITION
The wireless telecommunications equipment market is very competitive. The
Company's products compete directly with products which embody existing and
future competing commercial technologies. In particular, in cellular
telecommunications applications, the Company competes with conventional RF
component manufacturers whose products are currently in use by the Company's
potential customers. Many of these companies have substantially greater
financial resources, larger R&D staffs and greater manufacturing and marketing
capabilities than the Company. Other emerging wireless technologies may also
provide protection from RF interference and offer enhanced range to cellular
and PCS service providers at lower prices and may therefore compete with the
Company's products. There can be no assurance that high performance RF filters
will become a preferred technology to address the needs of cellular and PCS
service providers. Failure of the Company's products to improve performance
sufficiently or at an acceptable price or to achieve commercial acceptance or
otherwise compete with conventional technologies will have a material adverse
effect on the Company's business, operating results and financial condition.
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Although the market for superconductive electronics currently is small and
in the early stages of development, the Company believes it will become
intensely competitive, especially if products with significant market potential
are successfully developed. In addition, if the superconducting industry
develops, additional competitors with significantly greater resources are
likely to enter the field. In order to compete successfully, the Company must
develop and maintain technologically advanced products, attract and retain
highly qualified personnel, obtain additional patent or other protection for
its technology and products and manufacture and market its products, either
alone or with third parties. There can be no assurance that the Company will
be able to achieve these objectives. Failure to do so would have a material
adverse effect on the Company's business, operating results and financial
condition.
MANAGEMENT OF GROWTH
The Company's growth to date has caused, and will continue to cause, a
significant strain on its management, operational, financial and other
resources. The Company's ability to manage its growth effectively will require
it to implement and improve its operational, financial, manufacturing and
management information systems and expand, train, manage and motivate its
employees. These demands may require the addition of new management personnel
and the development of additional expertise by management. Any increase in
resources devoted to product development and marketing and sales efforts could
have an adverse effect on the Company's performance in the next several
quarters. If the Company were to receive substantial orders, the Company may
have to expand its current facility, which could cause an additional strain on
the Company's management personnel and development resources. The failure of
the Company's management team to effectively manage growth could have a
material adverse effect on the Company's business, operating results and
financial condition.
RAPID TECHNOLOGICAL CHANGE; POSSIBLE PURSUIT OF OTHER MARKET OPPORTUNITIES
The field of superconductivity is characterized by rapidly advancing
technology. The success of the Company will depend in large part upon its
ability to keep pace with advancing superconducting technology, high
performance RF filter design and efficient, low cost cryogenic technologies.
Rapid changes have occurred, and are likely to continue to occur, in the
development of superconducting materials and processes. The Company will have
to continue to improve its ability to fabricate thick-film HTS devices, design
high performance RF filters and efficient cryogenic subsystems and produce
significant quantities of products based on these improvements. There can be
no assurance that the Company's development efforts will not be rendered
obsolete by the adoption of alternative solutions to current wireless operator
problems or by technological advances made by others, or that other materials
or processes, including other superconducting materials or fabrication
processes, will not prove more advantageous for the commercialization of high
performance wireless products than the materials and processes selected by the
Company.
Because HTS product development is a new and emerging field, there may in
the future be new opportunities that are more attractive than those initially
identified by the Company for its targeted markets. As a result, there is no
assurance that the Company will not elect in the future to commit its resources
to such other potentially more attractive market opportunities. Such election
may require the Company to limit or abandon its current focus on developing,
manufacturing, marketing and selling HTS products for cellular, PCS and other
telecommunications markets. The risks associated with other markets may be
different from the risks associated with the cellular, PCS and other wireless
telecommunications markets.
FOCUS ON WIRELESS TELECOMMUNICATIONS MARKET; CURRENT AND FUTURE COMPETITIVE
TECHNOLOGIES
The Company has selected the wireless telecommunications market, in
particular the cellular and PCS markets, as the first principal target market
for its superconductor-based products. The devotion of substantial resources
to the wireless telecommunications market makes the Company vulnerable to
adverse changes in this market. Adverse developments in the wireless
telecommunications market, which
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could come from a variety of sources, including future competition, new
technologies or regulatory decisions, could affect the competitive position of
wireless systems. Any adverse developments in the wireless telecommunications
market during the foreseeable future would have a material adverse effect on the
Company's business, operating results and financial condition.
The Federal Communications Commission ("FCC") has adopted rules that
provide preferential licensing treatment for parties that develop new
communications services and technologies. These developments and further
technological advances may make available other alternatives to cellular or PCS
service, thereby creating additional sources of competition. There can be no
assurance that competition to cellular or PCS technologies will not adversely
affect the market for the Company's products, or result in changes in the
Company's development and manufacturing programs.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
To date, the Company's marketing and sales efforts have focused on major
cellular service providers in retrofit applications and, to a lesser extent, on
PCS operators and cellular and PCS OEMs. The Company expects that if its RF
filter products achieve market acceptance, a limited number of wireless service
providers and OEMs will account for a substantial portion of its revenue during
any period. Sales of many of the Company's RF filter products depend in
significant part upon the decision of prospective customers and current
customers to adopt and expand their use of the Company's products. Wireless
service providers and the Company's other customers are significantly larger
than, and are able to exert a high degree of influence over, the Company.
Customers' orders are affected by a variety of factors such as new product
introductions, regulatory approvals, end user demand for wireless services,
customer budgeting cycles, inventory levels, customer integration requirements,
competitive conditions and general economic conditions. The loss of one or
more of the Company's customers or the failure to attract new customers would
have a material adverse effect on the Company's business, operating results and
financial condition.
LENGTHY SALES CYCLES
Wireless service providers and the Company's other customers are
significantly larger than, and are able to exert a high degree of influence
over, the Company. Prior to selling its products to these customers, the
Company must generally undergo lengthy approval and purchase processes.
Technical and business evaluation by potential customers can take up to a year
or more for products based on new technologies such as HTS. The length of the
approval process is affected by a number of factors, including, among others,
the complexity of the product involved, priorities of the customers, budgets
and regulatory issues affecting customers. There can be no assurance that the
Company will obtain the necessary approvals or that ensuing sales of such
products will occur. There can also be no assurance that the length of its
customers' approval process or delays will not have a material adverse effect
on the Company's business, operating results and financial condition.
DEPENDENCE ON LIMITED SOURCES OF SUPPLY
Certain parts and components used in the Company's RF filter products,
including substrates and cryogenic refrigerators, are purchased from a single
source or are only currently available from a limited number of sources. The
Company's reliance on these sole or limited source suppliers exposes the
Company to certain risks and uncertainties, including the possibility of a
shortage or discontinuation of certain key components and reduced control over
delivery schedules, manufacturing capabilities, quality and costs. Any reduced
availability of such parts or components when required could materially impair
the Company's ability to manufacture and deliver its products on a timely basis
and result in the cancellation of orders, which could have material adverse
effect on the Company's business, operating results and financial condition.
In addition, the purchase of certain key components involves long lead times
and, in the event of unanticipated increases in demand for the Company's
products, the Company may not be able to manufacture products in a quantity
sufficient to meet its customers' demand in any
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particular period. The Company has no guaranteed supply arrangements with its
sole or limited source suppliers, does not maintain an extensive inventory of
parts or components, and customarily purchases parts and components pursuant to
purchase orders placed from time to time in the ordinary course of business.
Business disruption, production shortfalls or financial difficulties of a sole
or limited source supplier could materially and adversely effect the Company by
increasing product costs or reducing or eliminating the availability of such
parts or components. In such events, the inability of the Company to develop
alternative sources of supply quickly and on a cost-effective basis could
materially impair the Company's ability to manufacture and deliver its products
on a timely basis and could have a material adverse effect on its business,
operating results and financial condition.
INTELLECTUAL PROPERTY AND PATENTS
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and to
operate without infringing upon the patent or other proprietary rights of
others and without breaching or otherwise losing rights in the technology
licenses upon which any Company products are based. As of September 1, 1997,
the Company has been issued eight U.S. patents, has purchased two U.S. patents
from another company and has filed and is actively pursuing applications for 25
other U.S. patents, and is the licensee of 9 patents and patent applications
held by others. One of the Company's patents is jointly owned with Lucent
Technologies, Inc., formerly a subsidiary of AT&T. The Company believes that,
since the discovery of HTS materials in 1986, a large number of patent
applications have been filed worldwide and many patents have been granted in
the U.S. relating to HTS materials. The claims in those patents often appear
to overlap and there are interference proceedings pending in the United States
Patent and Trademark Office (not currently involving the Company) regarding
rights to inventions claimed in some of the HTS materials patent applications.
The Company also believes there are a large number of patents and patent
applications covering RF filter products and other products and technologies
that the Company is pursuing. Accordingly, the patent positions of companies
using HTS materials technologies and RF technologies, including the Company,
are uncertain and involve complex legal and factual questions. No assurance
can be given that the patent applications filed by the Company or by the
Company's licensors will result in issued patents or that the scope and breadth
of any claims allowed in any patents issued to the Company or its licensors
will exclude competitors or provide competitive advantages to the Company. In
addition, there can be no assurance that any patents issued to the Company or
its licensors will be held valid if subsequently challenged or that others will
not claim rights in the patents and other proprietary technologies owned or
licensed by the Company or that others have not developed or will not develop
similar products or technologies without violating any of the Company's
proprietary rights. Furthermore, the Company's loss of any license to
technology that it now has or acquires in the future may have a material
adverse effect on the Company's business, operating results and financial
condition.
Some of the patents and patent applications owned or licensed by the
Company are subject to non-exclusive, royalty-free licenses held by various
governmental units. These licenses permit these U.S. government units to
select vendors other than the Company to produce products for the U.S.
Government which would otherwise infringe the Company's patent rights which are
subject to the royalty-free licenses. In addition, the U.S. Government has the
right to require the Company to grant licenses (including exclusive licenses)
under such patents and patent applications or other inventions to third parties
in certain instances.
Patent applications in the U.S. are currently maintained in secrecy until
patents are issued and in foreign countries this secrecy is maintained for a
period of time after filing. Accordingly, publication of discoveries in the
scientific literature or of patents themselves or laying open of patent
applications in foreign countries tends to lag behind actual discoveries and
filing of related patent applications. Due to this factor and the large number
of patents and patent applications related to HTS materials, RF technologies
and other products and technologies that the Company is pursuing, comprehensive
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patent searches and analyses associated with HTS materials, RF technologies and
other products and technologies that the Company is pursuing are often
impractical or not cost-effective. As a result, the Company's patent and
literature searches cannot fully evaluate the patentability of the claims in the
Company's patent applications or whether materials or processes used by the
Company for its planned products infringe or will infringe upon existing
technologies described in U.S. patents or may infringe upon claims in patent
applications made available in the future. Because of the volume of patents
issued and patent applications filed relating to HTS materials, RF technologies
and other products and technologies that the Company is pursuing, the Company
believes there is a significant risk that current and potential competitors and
other third-parties have filed or will file patent applications for, or have
obtained or will obtain, patents or other proprietary rights relating to
materials, products or processes used or proposed to be used by the Company. In
any such case, to avoid infringement, the Company would have to either license
such technologies or design around any such patents. There can be no assurance
that the Company will be able to obtain licenses to such technologies or that,
if obtainable, such licenses would be available on terms acceptable to the
Company or that the Company could successfully design around these third-party
patents.
Participation in litigation or patent office proceedings in the U.S. or
other countries, which could result in substantial cost to and diversion of
effort by the Company, may be necessary to enforce patents issued or licensed
to the Company, to defend the Company against infringement claims made by
others or to determine the ownership, scope or validity of the proprietary
rights of the Company and others. An adverse outcome in any such proceedings
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties and/or require the Company to
cease using certain technologies, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company believes that a number of patent applications, including
applications filed by International Business Machines Corporation, Lucent
Technologies, Inc., and other potential competitors of the Company are pending
that may cover the useful compositions and uses of certain HTS materials
including yttrium barium copper oxide ("YBCO"), the principal HTS material used
by the Company in its present and currently proposed products. Therefore,
there is a substantial risk that one or more third parties may be granted
patents covering YBCO and other HTS materials and their uses, in which case the
Company could not use these materials without an appropriate license. As with
other patents, the Company has no assurance that it will be able to obtain
licenses to any such patents for YBCO or other HTS materials or their uses or
that such licenses would be available on commercially reasonable terms. Any of
these problems would have a material adverse effect on the Company's business,
operating results and financial condition.
GOVERNMENT REGULATIONS
Although the Company believes that its wireless telecommunications
products themselves would not be subject to licensing by, or approval
requirements of, the FCC, the operation of base stations is subject to FCC
licensing and the radio equipment into which the Company's products would be
incorporated is subject to FCC approval. Base stations and the equipment
marketed for use therein must meet specified technical standards. The
Company's ability to sell its wireless telecommunications products will be
dependent on the ability of wireless base station equipment manufacturers and
wireless base station operators to obtain and retain the necessary FCC
approvals and licenses. In order for them to be acceptable to base station
equipment manufacturers and to base station operators, the characteristics,
quality and reliability of the Company's base station products must enable them
to meet FCC technical standards. Any failure to meet such standards or delays
by base station equipment manufacturers and wireless base station operators in
obtaining the necessary approvals or licenses could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, HTS
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<PAGE> 11
RF filters are on the U.S. Department of Commerce's export regulation list
and therefore exportation of such RF filters to certain countries may be
restricted or subject to export licenses.
The Company uses certain hazardous materials in its research, development
and manufacturing operations. As a result, the Company is subject to stringent
federal, state and local regulations governing the storage, use and disposal of
such materials. It is possible that current or future laws and regulations
could require the Company to make substantial expenditures for preventive or
remedial action, reduction is in material compliance with all environmental
regulations and to date the Company has not had to incur significant
expenditures for preventive or remedial action with respect to the use of
hazardous materials. However, there can be no assurance that the operations,
business or assets of the Company will not be materially and adversely affected
by the interpretation and enforcement of current or future environmental laws
and regulations. In addition, although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, there is the risk of
accidental contamination or injury from these materials. In the event of an
accident, the Company could be held liable for any damages that result.
Furthermore, the use and disposal of hazardous materials involves the risk that
the Company could incur substantial expenditures for such preventive or remedial
actions. The liability in the event of an accident or the costs of such actions
could exceed the Company's resources or otherwise have a material adverse effect
on the Company's business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in large part upon its ability to
attract and retain highly qualified management, manufacturing, marketing, sales
and R&D personnel. Due to the specialized nature of the Company's business, it
may be difficult to locate and hire qualified personnel. The loss of services
of one of its executive officers or other key personnel, or the failure of the
Company to attract and retain other executive officers or key personnel, could
have a material adverse effect on the Company's business, operating results and
financial condition.
BUSINESS INTERRUPTIONS AND DEPENDENCE ON A SINGLE U.S. FACILITY
The Company's primary operations, including engineering, manufacturing,
research, distribution and general administration, are housed in a single
facility in Mount Prospect, Illinois. Any material disruption in the Company's
operations, whether due to fire, natural disaster, power loss or otherwise,
could have a material adverse effect on the Company's business, operating
results and financial condition.
SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE
On June 6, 1997 and August 29, 1997, the Company sold 600 shares of Series
B Stock and 300 shares of Series C Stock, respectively, to the Selling
Stockholder in private placements pursuant to the Purchase Agreement. Each
share of Series B Stock and Series C Stock is convertible at any time into a
number of shares of Common Stock determined by dividing $5,000, plus any
accrued but unpaid dividends to be paid in Common Stock, by the lesser of (i)
the average closing bid price for the five consecutive trading days immediately
preceding the date of issuance of the Series B Stock or the Series C Stock, as
the case may be, and (ii) 101% of the average of the lowest closing bid prices
for five consecutive trading days during the 60 consecutive trading days
immediately preceding the date of conversion of the Series B Stock or the
Series C Stock, as the case may be. No shares of Series B Stock or Series C
Stock have been converted into shares of Common Stock as of the date hereof.
In connection with the issuance of the Series B Stock, the Warrant exercisable
for 62,500 shares of Common Stock was also issued to the Selling Stockholder.
The Warrant has not been exercised for shares of Common Stock as of the date
hereof.
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<PAGE> 12
Pursuant to the Purchase Agreement, the Company has the option to issue
up to 2,100 shares of Additional Preferred Stock to the Selling Stockholder in
up to three additional tranches, if certain conditions are satisfied or waived;
provided, however, that the Company and the Selling Stockholder have agreed
that of such 2,100 shares of Additional Preferred Stock, the Company may issue
300 additional shares of Series C Stock at such time or times as the parties
may agree, which issuance would not be considered one of the three additional
tranches. The Company may also issue additional warrants exercisable for up to
62,500 shares of Common Stock if and when certain of the Additional Preferred
Stock is sold. The Company may also issue additional capital stock, warrants
and/or other securities to raise capital in the future. In order to attract and
retain key personnel, the Company may also issue additional securities,
including stock options, in connection with its employee benefit plans. During
the terms of such options, warrants, Series B Stock, Series C Stock and
Additional Preferred Stock, if any, the holders thereof are given the
opportunity to benefit from a rise in the market price of the Common Stock.
The sale of a substantial number of shares of Common Stock by the Company
or any of its significant stockholders, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock.
In June 1997, the Company's Registration Statement on Form S-3 (Reg. No.
333-29797) was declared effective by the Commission, registering for public
resale 715,488 Shares of which (i) 637,061 are Shares which may in the future
be issued to the Selling Stockholder upon the conversion of outstanding shares
of Series B Stock, (ii) 15,927 are Shares which may be issued to the Selling
Stockholder as accrued dividends for one year on the Series B Stock and (iii)
62,500 are Shares which may in the future be issued to the Selling Stockholder
upon the exercise of the Warrant. In connection with the Registration
Statement of which this Prospectus is a part, an additional 468,572 Shares are
being registered by the Company for public resale, of which (i) 457,143 are
Shares which may in the future be issued to the Selling Stockholder upon the
conversion of outstanding shares of Series C Stock and (ii) 11,429 are Shares
which may be issued to the Selling Stockholder as accrued dividends for one
year on the Series C Stock. A total of 1,184,060 Shares are being registered
under the two registration statements. The Company may be obligated to
register additional shares of Common Stock for public resale prior to or upon
conversion of the Series B Stock and the Series C Stock depending on, among
other factors, the future market price of the Common Stock. The increase in
the number of outstanding shares of Common Stock that are available for sale
without restriction due to the registration of the Shares and the perception
that a substantial number of the Shares may be sold by the Selling Stockholder,
or the actual sale of a substantial number of the Shares by the Selling
Stockholder, could adversely affect the market price of the Common Stock. The
Company is unable to make any prediction as to the effect, if any, that future
sales of Common Stock or the availability of Common Stock for sale may have on
the market price of the Common Stock prevailing from time to time. In
addition, any such sale or such perception could make it more difficult for the
Company to sell equity securities in the future at a time and price that the
Company deems appropriate.
The Company currently has outstanding warrants to purchase 599,993 shares
of Common Stock at a weighted average exercise price of $9.36 per share and
options to purchase 775,728 shares of Common Stock at a weighted average
exercise price of $13.56 per share (673,174 of which have not yet vested)
issued to employees, directors and consultants pursuant to the Company's
Amended and Restated 1993 Stock Option Plan and individual agreements with
management and directors of the Company.
DILUTION AND DIVIDEND POLICY
The conversion of Series B Stock, Series C Stock or Additional Preferred
Stock, if any, or the exercise of options and warrants, including the Warrant,
as well as the sale by the Company of additional securities, including the
Additional Preferred Stock, and/or rights to purchase such securities, would
likely have an adverse or dilutive effect on the market value of the Common
Stock, including the shares of Common Stock being offered hereby. The Series B
Stock and Series C Stock may be converted into
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<PAGE> 13
shares of Common Stock at a discount to the market price of the Common Stock
on the particular date of conversion. The Company also may in the future offer
equity participation in connection with the obtaining of non-equity financing,
such as debt or leasing arrangements accompanied by warrants to purchase equity
securities of the Company. This could also have a dilutive effect upon the
holders of Common Stock.
The Company has never paid a cash dividend on its Common Stock and does
not expect to do so in the foreseeable future. Dividends on the Series B Stock
and Series C Stock are payable at the rate of 5% per annum and are payable in
cash or shares of Common Stock at the option of the Company. While the Series
B Stock and Series C Stock is outstanding, the Company is limited in its
ability to pay dividends on the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company has certain provisions which may be deemed to have a potential
"anti-takeover" effect in that such provisions may delay, defer or prevent a
change of control of the Company. In February 1996, the Board of Directors of
the Company (the "Board of Directors") adopted a stockholders rights plan (the
"Rights Plan"). By causing substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the Board of
Directors, the Series A Rights and Series B Rights of the Rights Plan may
interfere with certain acquisitions, including acquisitions that may offer a
premium over market price to some or all of the Company's stockholders. In
addition, the Company's Certificate of Incorporation and Bylaws contain
provisions that include (i) a requirement that stockholder action may be taken
only at stockholders meetings; (ii) the authority of the Board of Directors to
issue series of the Company's preferred stock with such voting rights and other
powers as the Board of Directors may determine; (iii) notice requirements in
the Bylaws relating to nominations to the Board of Directors and to the raising
of business matters at stockholders meetings; and (d) the classification of the
Board of Directors into three classes, each serving for staggered three-year
terms.
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<PAGE> 14
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by
the Selling Stockholder. If and when all or a portion of the Warrant is
exercised and up to 62,500 Shares are issued to the Selling Stockholder, the
Company will receive the proceeds from the sale of such Shares to the Selling
Stockholder. If the Warrant is exercised in full, the Company will receive
$925,781. Such amount is intended to be used by the Company for working
capital and other general corporate purposes, including funding of its product
development programs, expansion of its sales and marketing efforts, and
acquisition of manufacturing equipment.
SELLING STOCKHOLDER
The following table sets forth, as of September 22, 1997, certain
information regarding the beneficial ownership of the outstanding Common Stock
by the Selling Stockholder, consisting of the Shares which the Selling
Stockholder may be issued upon conversion of the Series B Stock and Series C
Stock, the Shares which the Selling Stockholder may be issued as accrued
dividends on the Series B Stock and Series C Stock and the Shares which the
Selling Stockholder may acquire upon exercise of the Warrant, both before the
offering of the Shares and as adjusted to reflect the sale of the Shares.
<TABLE>
<CAPTION>
SHARES BENEFICIAL OWNERSHIP
BENEFICIALLY AFTER OFFERING(3)(4)
OWNED PRIOR NUMBER OF SHARES --------------------------
NAME OF SELLING STOCKHOLDER TO OFFERING(1) BEING OFFERED(1)(2) NUMBER OF SHARES PERCENT
- --------------------------------------- -------------- ------------------- ---------------- -------
<S> <C> <C> <C> <C>
Southbrook International Investments, Ltd. 1,184,060 1,184,060 -- --
</TABLE>
(1) The Selling Stockholder holds 600 shares of Series B Stock and 300 shares
of Series C Stock, each with a stated value of $5,000 per share, which may
be converted into shares of Common Stock from time to time at a conversion
price (the "Conversion Price") equal to the lesser of (i) the average
closing bid price for the five consecutive trading days immediately
preceding the date of issuance of the Series B Stock or Series C Stock, as
the case may be, and (ii) 101% of the average of the lowest closing bid
prices for five consecutive trading days during the 60 consecutive trading
days immediately preceding the date of conversion of the Series B Stock or
Series C Stock, as the case may be. The number of shares of Common Stock
shown in the table includes 637,061 shares of Common Stock, which
represents two times the number of shares of Common Stock into which the
full 600 shares of Series B Stock might have been converted on June 23,
1997 based on the then Conversion Price of $9.41825 per share and 457,143
shares of Common Stock, which represents two times the number of shares of
Common Stock into which the full 300 shares of Series C Stock might have
been converted on September 22, 1997 based on the then Conversion Price
of $6.5625 per share. Because the number of shares of Common Stock that
will be ultimately issued to the Selling Stockholder upon conversion of
the Series B Stock and Series C Stock is dependent upon the applicable
Conversion Price at the time of conversion, that number of shares of
Common Stock, and therefore the number of shares of Common Stock offered
hereby, cannot be determined at this time. The number of shares of Common
Stock shown in the table also includes 62,500 shares of Common Stock
issuable upon exercise of the presently exercisable Warrant. The number
of shares of Common Stock shown in the table also includes 15,927 shares
of Common Stock, which represents accrued dividends for one year on the
Series B Stock based on the Conversion Price of $9.41825 at June 23, 1997
and 11,429 shares of Common Stock, which represents accrued dividends for
one year on the Series C Stock based on the Conversion Price of $6.5625 at
September 22, 1997. Dividends on the Series B Stock and Series C Stock
are payable at the rate of 5% per annum and are payable in cash or shares
of Common Stock at the Company's option.
(2) Represents the maximum number of Shares that may be sold by the Selling
Stockholder pursuant to this Prospectus; provided, however, that the
Registration Statement of which this Prospectus is a part shall also
cover any additional shares of Common Stock which become issuable in
connection with the Shares registered for sale hereby by reason of any
stock dividend, stock split, recapitalization or other similar transaction
effected without the receipt of consideration which results in an increase
in the Company's number of outstanding shares of Common Stock.
(3) Assumes the Selling Stockholder sells all of its Shares offered hereby to
unaffiliated third parties pursuant to this Prospectus. The Selling
Stockholder may sell all or part of its Shares.
(4) The Purchase Agreement limits the conversion and exercise rights of the
Selling Stockholder to the extent that the maximum number of shares of
Common Stock held by the Selling Stockholder and its affiliates after such
conversion of the Series B Stock and Series C Stock and/or exercise of
the Warrant would exceed 4.999% of the then issued and outstanding shares
of Common Stock following such conversion and/or exercise.
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<PAGE> 15
PLAN OF DISTRIBUTION
Pursuant to the Registration Rights Agreement dated as of June 6, 1997, by
and between the Company and the Selling Stockholder (the "Registration Rights
Agreement"), the Company has previously filed a Registration Statement on Form
S-3 (Reg. No. 333-29797) which registers for public resale 715,488 Shares, of
which (i) 637,061 are Shares which may in the future be issued to the Selling
Stockholder upon the conversion of outstanding shares of Series B Stock, (ii)
15,927 are Shares which may be issued to the Selling Stockholder as accrued
dividends for one year on the Series B Stock and (iii) 62,500 are Shares which
may in the future be issued to the Selling Stockholder upon the exercise of the
Warrant. Such registration statement was declared effective by the Commission
in June 1997. Pursuant to the Registration Rights Agreement, the Company also
agreed to file with the Commission by the 30th day following the issuance of
the Series C Stock a registration statement registering for public resale
additional shares of Common Stock which may in the future be issued to the
Selling Stockholder upon the conversion of the outstanding shares of Series C
Stock and/or as accrued dividends for one year on the Series C Stock. The
Company also agreed to use its best efforts to cause such registration
statement to be declared effective as promptly as possible after the filing
thereof, but in any event prior to the 90th day following the issuance of the
Series C Stock. The Registration Statement of which this Prospectus is a part
has been filed with the Commission pursuant to the Registration Rights
Agreement. The Selling Stockholder may sell all or a portion of the Shares
held by it from time to time while the applicable registration statements
remain effective. The Company has agreed that it will use all reasonable
efforts to keep the registration statements effective for a period of three
years commencing on the effective date of the applicable registration statement
(or a shorter period if all of the Shares registered under the applicable
registration statement have been sold or may be sold without volume
restrictions pursuant to Rule 144 under the Securities Act prior to the
expiration of the three-year period). The aggregate proceeds to the Selling
Stockholder from the sale of Shares offered by the Selling Stockholder hereby
will be the prices at which such securities are sold, less any commissions.
There is no assurance that the Selling Stockholder will sell any or all of the
Shares offered hereby.
The Selling Stockholder may, from time to time, sell all or a portion of
the Shares on the NNM, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated prices. The
Shares may be sold by the Selling Stockholder by one or more of the following
methods, without limitation: (a) block trades in which the broker or dealer so
engaged will attempt to sell the Shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction, (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus, (c) an exchange distribution in accordance
with the rules of such exchange, (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers, (e) privately negotiated
transactions, (f) short sales and (g) a combination of any such methods of
sale. In effecting sales, brokers and dealers engaged by the Selling
Stockholder may arrange for other brokers or dealers to participate. Brokers
or dealers may receive commissions or discounts from the Selling Stockholder
(or, if any such broker-dealer acts as agent for the purchaser of such shares,
from such purchaser) in amounts to be negotiated which are not expected to
exceed those customary in the types of transactions involved. Broker-dealers
may agree with the Selling Stockholder to sell a specified number of such
Shares at a stipulated price per share, and, to the extent such broker-dealer
is unable to do so acting as agent for a Selling Stockholder, to purchase as
principal any unsold Shares at the price required to fulfill the broker-dealer
commitment to the Selling Stockholder. Broker-dealers who acquire Shares as
principal may thereafter resell such Shares from time to time in transactions
(which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such Shares commissions as described above.
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<PAGE> 16
The Selling Stockholder may also sell the Shares in accordance with Rule 144
under the Securities Act, rather than pursuant to this Prospectus.
The Selling Stockholder and any broker-dealers or agents that participate
with the Selling Stockholder in sales of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the Shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
From time to time the Selling Stockholder may engage in short sales, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives thereof, and may sell and deliver the Shares in
connection therewith. If the Selling Stockholder engages in such transactions,
the Conversion Price may be affected. From time to time the Selling
Stockholder may pledge its shares pursuant to the margin provisions of its
customer agreements with its brokers. Upon a default by the Selling
Stockholder, the broker may offer and sell the pledged shares of Common Stock
from time to time.
The Company is required to pay all fees and expenses incident to the
offering and sale of the Shares, including fees and disbursements (not to
exceed $5,000) of counsel to the Selling Stockholder. The Company has agreed
to indemnify the Selling Stockholder against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Shares will be
passed upon for the Company by Katten Muchin & Zavis, a partnership including
professional corporations, Chicago, Illinois.
EXPERTS
The financial statements and schedule of the Company appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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<PAGE> 17
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the shares
of Common Stock to which it relates or an offer to, or a solicitation of, any
person in any jurisdiction where such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of the Company since the date hereof or that the information
contained herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
PAGE
----
Available Information............................ 2
Incorporation of Certain Documents by
Reference....................................... 3
Risk Factors..................................... 4
Use of Proceeds.................................. 14
Selling Stockholder.............................. 14
Plan of Distribution............................. 15
Legal Matters.................................... 16
Experts.......................................... 16
[ILLINOIS SUPERCONDUCTOR CORPORATION LOGO]
1,184,060 Shares
Common Stock
PROSPECTUS
September 26, 1997
