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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1997
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REGISTRATION NO. 333-___________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
ILLINOIS SUPERCONDUCTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3688459
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
451 KINGSTON COURT, MT. PROSPECT, ILLINOIS 60056, (847) 391-9400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------
EDWARD W. LAVES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ILLINOIS SUPERCONDUCTOR CORPORATION
451 KINGSTON COURT, MT. PROSPECT, ILLINOIS 60056, (847) 391-9400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH COPIES TO:
LAWRENCE D. LEVIN, ESQ. BRUCE A. ZIVIAN, ESQ.
Katten Muchin & Zavis Eilenberg & Zivian
525 West Monroe Street 20 North Wacker Drive, Suite 3230
Chicago, Illinois 60661 Chicago, Illinois 60606
(312) 902-5200 (312) 917-9900
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / / _____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE COMBINED
PROSPECTUS CONTAINED IN THIS REGISTRATION STATEMENT ALSO RELATES TO THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3 (REG. NO. 333-29797), WHICH
REGISTERED 715,488 SHARES OF THE REGISTRANT'S COMMON STOCK AND WAS DECLARED
EFFECTIVE BY THE COMMISSION ON JUNE 30, 1997.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM PROPOSED MAXIMUM
TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE
REGISTERED REGISTERED PER SHARE OFFERING PRICE AMOUNT OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value
(including preferred stock
purchase rights) 715,488 shares (1) $9.63 (2) $6,890,149 (2) $2,088 (3)
Common Stock, $.001 par value
(including preferred stock
purchase rights) 468,572 shares $7.84 (4) $3,673,604 (4) $1,114
---------------- ----- ---------- ------
Total 1,184,060 shares -- -- $3,202
---------------- ----- ---------- ------
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</TABLE>
(1) REPRESENTS THE NUMBER OF SHARES OF COMMON STOCK WHICH WERE REGISTERED ON
THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3 (REG. NO. 333-29797).
(2) ESTIMATED SOLELY FOR PURPOSES OF CALCULATING THE REGISTRATION FEE
PURSUANT TO RULE 457(c) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, ON
THE BASIS OF THE AVERAGE OF THE HIGH AND LOW PRICES OF THE COMMON STOCK AS
REPORTED BY THE NASDAQ NATIONAL MARKET ON JUNE 16, 1997.
(3) THIS FEE HAS ALREADY BEEN PAID BY THE REGISTRANT.
(4) SAME AS (2) ABOVE, EXCEPT CALCULATED ON THE BASIS OF THE AVERAGE OF THE
HIGH AND LOW PRICES OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET ON
SEPTEMBER 16, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECTD TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOR CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOT SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion, Dated September 22, 1997
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
1,184,060 SHARES
[ILLINOIS SUPERCONDUCTOR CORPORATION LOGO]
COMMON STOCK
------------
The shares (the "Shares") of Common Stock, $.001 par value (including
preferred stock purchase rights) (the "Common Stock"), of Illinois
Superconductor Corporation (the "Company") covered by this Prospectus may be
sold from time to time by the stockholder specified in this Prospectus or its
pledgees, donees, transferees or other successors in interest (the "Selling
Stockholder"). See "Selling Stockholder." Of the Shares to which this
Prospectus relates, (i) 637,061 are Shares which may in the future be issued to
the Selling Stockholder upon the conversion of outstanding shares of the
Company's Series B Convertible Preferred Stock held by the Selling Stockholder
(the "Series B Stock"), (ii) 457,143 are Shares which may in the future be
issued to the Selling Stockholder upon the conversion of shares of the
Company's Series C Convertible Preferred Stock (the "Series C Stock"), (iii)
15,927 are Shares which may be issued to the Selling Stockholder as accrued
dividends for one year on the Series B Stock, (iv) 11,429 are Shares which may
be issued to the Selling Stockholder as accrued dividends for one year on the
Series C Stock and (v) 62,500 are Shares which may in the future be issued to
the Selling Stockholder upon the exercise of an outstanding warrant held by the
Selling Stockholder (the "Warrant"). The Company will not receive any of the
proceeds from the sale of the Shares by the Selling Stockholder, but the
Company will receive the proceeds from the exercise of the Warrant by the
Selling Stockholder.
The Common Stock is traded on the Nasdaq National Market (the "NNM") under
the symbol "ISCO." On September 19, 1997, the closing price of the Common
Stock as reported on the NNM was $7.9375 per share. The Selling Stockholder
may, from time to time during the effectiveness of this registration, sell the
Shares on the NNM, in privately negotiated transactions or otherwise, at fixed
prices that may be changed, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. See "Plan of
Distribution."
AN INVESTMENT IN THE SHARES OFFERED HEREBY ENTAILS A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
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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.
------------
The date of this Prospectus is , 1997
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information concerning the Company may be inspected and
copied at the public reference facilities maintained by the Commission at the
Commission's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World
Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained upon written request addressed to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 at prescribed rates. Copies of reports, proxy statements and other
information regarding registrants that file electronically are available on the
Commission's Web site at http://www.sec.gov. The Common Stock is traded on the
NNM, and such reports, proxy statements and other information concerning the
Company can also be inspected at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments, exhibits and schedules thereto,
referred to as the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement which may be inspected
and copied in the manner and at the sources described above. Any statements
contained herein concerning the provisions of any document filed as an Exhibit
to the Registration Statement or otherwise filed with the Commission are not
necessarily complete and, in each instance, reference is made to the copy of
such document so filed. Each such statement is qualified in its entirety by
such reference.
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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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<PAGE> 9
could come from a variety of sources, including future competition, new
technologies or regulatory decisions, could affect the competitive position of
wireless systems. Any adverse developments in the wireless telecommunications
market during the foreseeable future would have a material adverse effect on the
Company's business, operating results and financial condition.
The Federal Communications Commission ("FCC") has adopted rules that
provide preferential licensing treatment for parties that develop new
communications services and technologies. These developments and further
technological advances may make available other alternatives to cellular or PCS
service, thereby creating additional sources of competition. There can be no
assurance that competition to cellular or PCS technologies will not adversely
affect the market for the Company's products, or result in changes in the
Company's development and manufacturing programs.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
To date, the Company's marketing and sales efforts have focused on major
cellular service providers in retrofit applications and, to a lesser extent, on
PCS operators and cellular and PCS OEMs. The Company expects that if its RF
filter products achieve market acceptance, a limited number of wireless service
providers and OEMs will account for a substantial portion of its revenue during
any period. Sales of many of the Company's RF filter products depend in
significant part upon the decision of prospective customers and current
customers to adopt and expand their use of the Company's products. Wireless
service providers and the Company's other customers are significantly larger
than, and are able to exert a high degree of influence over, the Company.
Customers' orders are affected by a variety of factors such as new product
introductions, regulatory approvals, end user demand for wireless services,
customer budgeting cycles, inventory levels, customer integration requirements,
competitive conditions and general economic conditions. The loss of one or
more of the Company's customers or the failure to attract new customers would
have a material adverse effect on the Company's business, operating results and
financial condition.
LENGTHY SALES CYCLES
Wireless service providers and the Company's other customers are
significantly larger than, and are able to exert a high degree of influence
over, the Company. Prior to selling its products to these customers, the
Company must generally undergo lengthy approval and purchase processes.
Technical and business evaluation by potential customers can take up to a year
or more for products based on new technologies such as HTS. The length of the
approval process is affected by a number of factors, including, among others,
the complexity of the product involved, priorities of the customers, budgets
and regulatory issues affecting customers. There can be no assurance that the
Company will obtain the necessary approvals or that ensuing sales of such
products will occur. There can also be no assurance that the length of its
customers' approval process or delays will not have a material adverse effect
on the Company's business, operating results and financial condition.
DEPENDENCE ON LIMITED SOURCES OF SUPPLY
Certain parts and components used in the Company's RF filter products,
including substrates and cryogenic refrigerators, are purchased from a single
source or are only currently available from a limited number of sources. The
Company's reliance on these sole or limited source suppliers exposes the
Company to certain risks and uncertainties, including the possibility of a
shortage or discontinuation of certain key components and reduced control over
delivery schedules, manufacturing capabilities, quality and costs. Any reduced
availability of such parts or components when required could materially impair
the Company's ability to manufacture and deliver its products on a timely basis
and result in the cancellation of orders, which could have material adverse
effect on the Company's business, operating results and financial condition.
In addition, the purchase of certain key components involves long lead times
and, in the event of unanticipated increases in demand for the Company's
products, the Company may not be able to manufacture products in a quantity
sufficient to meet its customers' demand in any
8
<PAGE> 10
particular period. The Company has no guaranteed supply arrangements with its
sole or limited source suppliers, does not maintain an extensive inventory of
parts or components, and customarily purchases parts and components pursuant to
purchase orders placed from time to time in the ordinary course of business.
Business disruption, production shortfalls or financial difficulties of a sole
or limited source supplier could materially and adversely effect the Company by
increasing product costs or reducing or eliminating the availability of such
parts or components. In such events, the inability of the Company to develop
alternative sources of supply quickly and on a cost-effective basis could
materially impair the Company's ability to manufacture and deliver its products
on a timely basis and could have a material adverse effect on its business,
operating results and financial condition.
INTELLECTUAL PROPERTY AND PATENTS
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and to
operate without infringing upon the patent or other proprietary rights of
others and without breaching or otherwise losing rights in the technology
licenses upon which any Company products are based. As of September 1, 1997,
the Company has been issued eight U.S. patents, has purchased two U.S. patents
from another company and has filed and is actively pursuing applications for 25
other U.S. patents, and is the licensee of 9 patents and patent applications
held by others. One of the Company's patents is jointly owned with Lucent
Technologies, Inc., formerly a subsidiary of AT&T. The Company believes that,
since the discovery of HTS materials in 1986, a large number of patent
applications have been filed worldwide and many patents have been granted in
the U.S. relating to HTS materials. The claims in those patents often appear
to overlap and there are interference proceedings pending in the United States
Patent and Trademark Office (not currently involving the Company) regarding
rights to inventions claimed in some of the HTS materials patent applications.
The Company also believes there are a large number of patents and patent
applications covering RF filter products and other products and technologies
that the Company is pursuing. Accordingly, the patent positions of companies
using HTS materials technologies and RF technologies, including the Company,
are uncertain and involve complex legal and factual questions. No assurance
can be given that the patent applications filed by the Company or by the
Company's licensors will result in issued patents or that the scope and breadth
of any claims allowed in any patents issued to the Company or its licensors
will exclude competitors or provide competitive advantages to the Company. In
addition, there can be no assurance that any patents issued to the Company or
its licensors will be held valid if subsequently challenged or that others will
not claim rights in the patents and other proprietary technologies owned or
licensed by the Company or that others have not developed or will not develop
similar products or technologies without violating any of the Company's
proprietary rights. Furthermore, the Company's loss of any license to
technology that it now has or acquires in the future may have a material
adverse effect on the Company's business, operating results and financial
condition.
Some of the patents and patent applications owned or licensed by the
Company are subject to non-exclusive, royalty-free licenses held by various
governmental units. These licenses permit these U.S. government units to
select vendors other than the Company to produce products for the U.S.
Government which would otherwise infringe the Company's patent rights which are
subject to the royalty-free licenses. In addition, the U.S. Government has the
right to require the Company to grant licenses (including exclusive licenses)
under such patents and patent applications or other inventions to third parties
in certain instances.
Patent applications in the U.S. are currently maintained in secrecy until
patents are issued and in foreign countries this secrecy is maintained for a
period of time after filing. Accordingly, publication of discoveries in the
scientific literature or of patents themselves or laying open of patent
applications in foreign countries tends to lag behind actual discoveries and
filing of related patent applications. Due to this factor and the large number
of patents and patent applications related to HTS materials, RF technologies
and other products and technologies that the Company is pursuing, comprehensive
9
<PAGE> 11
patent searches and analyses associated with HTS materials, RF technologies and
other products and technologies that the Company is pursuing are often
impractical or not cost-effective. As a result, the Company's patent and
literature searches cannot fully evaluate the patentability of the claims in the
Company's patent applications or whether materials or processes used by the
Company for its planned products infringe or will infringe upon existing
technologies described in U.S. patents or may infringe upon claims in patent
applications made available in the future. Because of the volume of patents
issued and patent applications filed relating to HTS materials, RF technologies
and other products and technologies that the Company is pursuing, the Company
believes there is a significant risk that current and potential competitors and
other third-parties have filed or will file patent applications for, or have
obtained or will obtain, patents or other proprietary rights relating to
materials, products or processes used or proposed to be used by the Company. In
any such case, to avoid infringement, the Company would have to either license
such technologies or design around any such patents. There can be no assurance
that the Company will be able to obtain licenses to such technologies or that,
if obtainable, such licenses would be available on terms acceptable to the
Company or that the Company could successfully design around these third-party
patents.
Participation in litigation or patent office proceedings in the U.S. or
other countries, which could result in substantial cost to and diversion of
effort by the Company, may be necessary to enforce patents issued or licensed
to the Company, to defend the Company against infringement claims made by
others or to determine the ownership, scope or validity of the proprietary
rights of the Company and others. An adverse outcome in any such proceedings
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties and/or require the Company to
cease using certain technologies, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company believes that a number of patent applications, including
applications filed by International Business Machines Corporation, Lucent
Technologies, Inc., and other potential competitors of the Company are pending
that may cover the useful compositions and uses of certain HTS materials
including yttrium barium copper oxide ("YBCO"), the principal HTS material used
by the Company in its present and currently proposed products. Therefore,
there is a substantial risk that one or more third parties may be granted
patents covering YBCO and other HTS materials and their uses, in which case the
Company could not use these materials without an appropriate license. As with
other patents, the Company has no assurance that it will be able to obtain
licenses to any such patents for YBCO or other HTS materials or their uses or
that such licenses would be available on commercially reasonable terms. Any of
these problems would have a material adverse effect on the Company's business,
operating results and financial condition.
GOVERNMENT REGULATIONS
Although the Company believes that its wireless telecommunications
products themselves would not be subject to licensing by, or approval
requirements of, the FCC, the operation of base stations is subject to FCC
licensing and the radio equipment into which the Company's products would be
incorporated is subject to FCC approval. Base stations and the equipment
marketed for use therein must meet specified technical standards. The
Company's ability to sell its wireless telecommunications products will be
dependent on the ability of wireless base station equipment manufacturers and
wireless base station operators to obtain and retain the necessary FCC
approvals and licenses. In order for them to be acceptable to base station
equipment manufacturers and to base station operators, the characteristics,
quality and reliability of the Company's base station products must enable them
to meet FCC technical standards. Any failure to meet such standards or delays
by base station equipment manufacturers and wireless base station operators in
obtaining the necessary approvals or licenses could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, HTS
10
<PAGE> 12
RF filters are on the U.S. Department of Commerce's export regulation list
and therefore exportation of such RF filters to certain countries may be
restricted or subject to export licenses.
The Company uses certain hazardous materials in its research, development
and manufacturing operations. As a result, the Company is subject to stringent
federal, state and local regulations governing the storage, use and disposal of
such materials. It is possible that current or future laws and regulations
could require the Company to make substantial expenditures for preventive or
remedial action, reduction is in material compliance with all environmental
regulations and to date the Company has not had to incur significant
expenditures for preventive or remedial action with respect to the use of
hazardous materials. However, there can be no assurance that the operations,
business or assets of the Company will not be materially and adversely affected
by the interpretation and enforcement of current or future environmental laws
and regulations. In addition, although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, there is the risk of
accidental contamination or injury from these materials. In the event of an
accident, the Company could be held liable for any damages that result.
Furthermore, the use and disposal of hazardous materials involves the risk that
the Company could incur substantial expenditures for such preventive or remedial
actions. The liability in the event of an accident or the costs of such actions
could exceed the Company's resources or otherwise have a material adverse effect
on the Company's business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in large part upon its ability to
attract and retain highly qualified management, manufacturing, marketing, sales
and R&D personnel. Due to the specialized nature of the Company's business, it
may be difficult to locate and hire qualified personnel. The loss of services
of one of its executive officers or other key personnel, or the failure of the
Company to attract and retain other executive officers or key personnel, could
have a material adverse effect on the Company's business, operating results and
financial condition.
BUSINESS INTERRUPTIONS AND DEPENDENCE ON A SINGLE U.S. FACILITY
The Company's primary operations, including engineering, manufacturing,
research, distribution and general administration, are housed in a single
facility in Mount Prospect, Illinois. Any material disruption in the Company's
operations, whether due to fire, natural disaster, power loss or otherwise,
could have a material adverse effect on the Company's business, operating
results and financial condition.
SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE
On June 6, 1997 and August 29, 1997, the Company sold 600 shares of Series
B Stock and 300 shares of Series C Stock, respectively, to the Selling
Stockholder in private placements pursuant to the Purchase Agreement. Each
share of Series B Stock and Series C Stock is convertible at any time into a
number of shares of Common Stock determined by dividing $5,000, plus any
accrued but unpaid dividends to be paid in Common Stock, by the lesser of (i)
the average closing bid price for the five consecutive trading days immediately
preceding the date of issuance of the Series B Stock or the Series C Stock, as
the case may be, and (ii) 101% of the average of the lowest closing bid prices
for five consecutive trading days during the 60 consecutive trading days
immediately preceding the date of conversion of the Series B Stock or the
Series C Stock, as the case may be. No shares of Series B Stock or Series C
Stock have been converted into shares of Common Stock as of the date hereof.
In connection with the issuance of the Series B Stock, the Warrant exercisable
for 62,500 shares of Common Stock was also issued to the Selling Stockholder.
The Warrant has not been exercised for shares of Common Stock as of the date
hereof.
11
<PAGE> 13
Pursuant to the Purchase Agreement, the Company has the option to issue
up to 2,100 shares of Additional Preferred Stock to the Selling Stockholder in
up to three additional tranches, if certain conditions are satisfied or waived;
provided, however, that the Company and the Selling Stockholder have agreed
that of such 2,100 shares of Additional Preferred Stock, the Company may issue
300 additional shares of Series C Stock at such time or times as the parties
may agree, which issuance would not be considered one of the three additional
tranches. The Company may also issue additional warrants exercisable for up to
62,500 shares of Common Stock if and when certain of the Additional Preferred
Stock is sold. The Company may also issue additional capital stock, warrants
and/or other securities to raise capital in the future. In order to attract and
retain key personnel, the Company may also issue additional securities,
including stock options, in connection with its employee benefit plans. During
the terms of such options, warrants, Series B Stock, Series C Stock and
Additional Preferred Stock, if any, the holders thereof are given the
opportunity to benefit from a rise in the market price of the Common Stock.
The sale of a substantial number of shares of Common Stock by the Company
or any of its significant stockholders, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock.
In June 1997, the Company's Registration Statement on Form S-3 (Reg. No.
333-29797) was declared effective by the Commission, registering for public
resale 715,488 Shares of which (i) 637,061 are Shares which may in the future
be issued to the Selling Stockholder upon the conversion of outstanding shares
of Series B Stock, (ii) 15,927 are Shares which may be issued to the Selling
Stockholder as accrued dividends for one year on the Series B Stock and (iii)
62,500 are Shares which may in the future be issued to the Selling Stockholder
upon the exercise of the Warrant. In connection with the Registration
Statement of which this Prospectus is a part, an additional 468,572 Shares are
being registered by the Company for public resale, of which (i) 457,143 are
Shares which may in the future be issued to the Selling Stockholder upon the
conversion of outstanding shares of Series C Stock and (ii) 11,429 are Shares
which may be issued to the Selling Stockholder as accrued dividends for one
year on the Series C Stock. A total of 1,184,060 Shares are being registered
under the two registration statements. The Company may be obligated to
register additional shares of Common Stock for public resale prior to or upon
conversion of the Series B Stock and the Series C Stock depending on, among
other factors, the future market price of the Common Stock. The increase in
the number of outstanding shares of Common Stock that are available for sale
without restriction due to the registration of the Shares and the perception
that a substantial number of the Shares may be sold by the Selling Stockholder,
or the actual sale of a substantial number of the Shares by the Selling
Stockholder, could adversely affect the market price of the Common Stock. The
Company is unable to make any prediction as to the effect, if any, that future
sales of Common Stock or the availability of Common Stock for sale may have on
the market price of the Common Stock prevailing from time to time. In
addition, any such sale or such perception could make it more difficult for the
Company to sell equity securities in the future at a time and price that the
Company deems appropriate.
The Company currently has outstanding warrants to purchase 599,993 shares
of Common Stock at a weighted average exercise price of $9.36 per share and
options to purchase 775,728 shares of Common Stock at a weighted average
exercise price of $13.56 per share (673,174 of which have not yet vested)
issued to employees, directors and consultants pursuant to the Company's
Amended and Restated 1993 Stock Option Plan and individual agreements with
management and directors of the Company.
DILUTION AND DIVIDEND POLICY
The conversion of Series B Stock, Series C Stock or Additional Preferred
Stock, if any, or the exercise of options and warrants, including the Warrant,
as well as the sale by the Company of additional securities, including the
Additional Preferred Stock, and/or rights to purchase such securities, would
likely have an adverse or dilutive effect on the market value of the Common
Stock, including the shares of Common Stock being offered hereby. The Series B
Stock and Series C Stock may be converted into
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<PAGE> 14
shares of Common Stock at a discount to the market price of the Common Stock
on the particular date of conversion. The Company also may in the future offer
equity participation in connection with the obtaining of non-equity financing,
such as debt or leasing arrangements accompanied by warrants to purchase equity
securities of the Company. This could also have a dilutive effect upon the
holders of Common Stock.
The Company has never paid a cash dividend on its Common Stock and does
not expect to do so in the foreseeable future. Dividends on the Series B Stock
and Series C Stock are payable at the rate of 5% per annum and are payable in
cash or shares of Common Stock at the option of the Company. While the Series
B Stock and Series C Stock is outstanding, the Company is limited in its
ability to pay dividends on the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company has certain provisions which may be deemed to have a potential
"anti-takeover" effect in that such provisions may delay, defer or prevent a
change of control of the Company. In February 1996, the Board of Directors of
the Company (the "Board of Directors") adopted a stockholders rights plan (the
"Rights Plan"). By causing substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the Board of
Directors, the Series A Rights and Series B Rights of the Rights Plan may
interfere with certain acquisitions, including acquisitions that may offer a
premium over market price to some or all of the Company's stockholders. In
addition, the Company's Certificate of Incorporation and Bylaws contain
provisions that include (i) a requirement that stockholder action may be taken
only at stockholders meetings; (ii) the authority of the Board of Directors to
issue series of the Company's preferred stock with such voting rights and other
powers as the Board of Directors may determine; (iii) notice requirements in
the Bylaws relating to nominations to the Board of Directors and to the raising
of business matters at stockholders meetings; and (d) the classification of the
Board of Directors into three classes, each serving for staggered three-year
terms.
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<PAGE> 15
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by
the Selling Stockholder. If and when all or a portion of the Warrant is
exercised and up to 62,500 Shares are issued to the Selling Stockholder, the
Company will receive the proceeds from the sale of such Shares to the Selling
Stockholder. If the Warrant is exercised in full, the Company will receive
$925,781. Such amount is intended to be used by the Company for working
capital and other general corporate purposes, including funding of its product
development programs, expansion of its sales and marketing efforts, and
acquisition of manufacturing equipment.
SELLING STOCKHOLDER
The following table sets forth, as of September 22, 1997, certain
information regarding the beneficial ownership of the outstanding Common Stock
by the Selling Stockholder, consisting of the Shares which the Selling
Stockholder may be issued upon conversion of the Series B Stock and Series C
Stock, the Shares which the Selling Stockholder may be issued as accrued
dividends on the Series B Stock and Series C Stock and the Shares which the
Selling Stockholder may acquire upon exercise of the Warrant, both before the
offering of the Shares and as adjusted to reflect the sale of the Shares.
<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> 16
PLAN OF DISTRIBUTION
Pursuant to the Registration Rights Agreement dated as of June 6, 1997, by
and between the Company and the Selling Stockholder (the "Registration Rights
Agreement"), the Company has previously filed a Registration Statement on Form
S-3 (Reg. No. 333-29797) which registers for public resale 715,488 Shares, of
which (i) 637,061 are Shares which may in the future be issued to the Selling
Stockholder upon the conversion of outstanding shares of Series B Stock, (ii)
15,927 are Shares which may be issued to the Selling Stockholder as accrued
dividends for one year on the Series B Stock and (iii) 62,500 are Shares which
may in the future be issued to the Selling Stockholder upon the exercise of the
Warrant. Such registration statement was declared effective by the Commission
in June 1997. Pursuant to the Registration Rights Agreement, the Company also
agreed to file with the Commission by the 30th day following the issuance of
the Series C Stock a registration statement registering for public resale
additional shares of Common Stock which may in the future be issued to the
Selling Stockholder upon the conversion of the outstanding shares of Series C
Stock and/or as accrued dividends for one year on the Series C Stock. The
Company also agreed to use its best efforts to cause such registration
statement to be declared effective as promptly as possible after the filing
thereof, but in any event prior to the 90th day following the issuance of the
Series C Stock. The Registration Statement of which this Prospectus is a part
has been filed with the Commission pursuant to the Registration Rights
Agreement. The Selling Stockholder may sell all or a portion of the Shares
held by it from time to time while the applicable registration statements
remain effective. The Company has agreed that it will use all reasonable
efforts to keep the registration statements effective for a period of three
years commencing on the effective date of the applicable registration statement
(or a shorter period if all of the Shares registered under the applicable
registration statement have been sold or may be sold without volume
restrictions pursuant to Rule 144 under the Securities Act prior to the
expiration of the three-year period). The aggregate proceeds to the Selling
Stockholder from the sale of Shares offered by the Selling Stockholder hereby
will be the prices at which such securities are sold, less any commissions.
There is no assurance that the Selling Stockholder will sell any or all of the
Shares offered hereby.
The Selling Stockholder may, from time to time, sell all or a portion of
the Shares on the NNM, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated prices. The
Shares may be sold by the Selling Stockholder by one or more of the following
methods, without limitation: (a) block trades in which the broker or dealer so
engaged will attempt to sell the Shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction, (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus, (c) an exchange distribution in accordance
with the rules of such exchange, (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers, (e) privately negotiated
transactions, (f) short sales and (g) a combination of any such methods of
sale. In effecting sales, brokers and dealers engaged by the Selling
Stockholder may arrange for other brokers or dealers to participate. Brokers
or dealers may receive commissions or discounts from the Selling Stockholder
(or, if any such broker-dealer acts as agent for the purchaser of such shares,
from such purchaser) in amounts to be negotiated which are not expected to
exceed those customary in the types of transactions involved. Broker-dealers
may agree with the Selling Stockholder to sell a specified number of such
Shares at a stipulated price per share, and, to the extent such broker-dealer
is unable to do so acting as agent for a Selling Stockholder, to purchase as
principal any unsold Shares at the price required to fulfill the broker-dealer
commitment to the Selling Stockholder. Broker-dealers who acquire Shares as
principal may thereafter resell such Shares from time to time in transactions
(which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such Shares commissions as described above.
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<PAGE> 17
The Selling Stockholder may also sell the Shares in accordance with Rule 144
under the Securities Act, rather than pursuant to this Prospectus.
The Selling Stockholder and any broker-dealers or agents that participate
with the Selling Stockholder in sales of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the Shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
From time to time the Selling Stockholder may engage in short sales, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives thereof, and may sell and deliver the Shares in
connection therewith. If the Selling Stockholder engages in such transactions,
the Conversion Price may be affected. From time to time the Selling
Stockholder may pledge its shares pursuant to the margin provisions of its
customer agreements with its brokers. Upon a default by the Selling
Stockholder, the broker may offer and sell the pledged shares of Common Stock
from time to time.
The Company is required to pay all fees and expenses incident to the
offering and sale of the Shares, including fees and disbursements (not to
exceed $5,000) of counsel to the Selling Stockholder. The Company has agreed
to indemnify the Selling Stockholder against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Shares will be
passed upon for the Company by Katten Muchin & Zavis, a partnership including
professional corporations, Chicago, Illinois.
EXPERTS
The financial statements and schedule of the Company appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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<PAGE> 18
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the shares
of Common Stock to which it relates or an offer to, or a solicitation of, any
person in any jurisdiction where such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of the Company since the date hereof or that the information
contained herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
PAGE
----
Available Information............................ 2
Incorporation of Certain Documents by
Reference....................................... 3
Risk Factors..................................... 4
Use of Proceeds.................................. 14
Selling Stockholder.............................. 14
Plan of Distribution............................. 15
Legal Matters.................................... 16
Experts.......................................... 16
[ILLINOIS SUPERCONDUCTOR CORPORATION LOGO]
1,184,060 Shares
Common Stock
PROSPECTUS
, 1997
<PAGE> 19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Company in connection with the issuance and distribution of the Common Stock
pursuant to the Prospectus contained in this Registration Statement. The
Company will pay all of these expenses. All amounts are estimates except the
Securities and Exchange Commission registration fee and the Nasdaq National
Market listing fee.
<TABLE>
APPROXIMATE
AMOUNT
<S> <C> <C>
Securities and Exchange Commission registration
fee............................................... $ 1,114
Nasdaq National Market listing fee................. 4,800
Accountants' fees and expenses..................... 2,500
Legal fees and expenses............................ 15,000
Miscellaneous expenses............................. 1,586
-------
Total............................................ $25,000
-------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 9 of the Company's Certificate of Incorporation provides that the
Company shall indemnify its directors to the full extent permitted by the
General Corporation Law of the State of Delaware and may indemnify its officers
and employees to such extent, except that the Company shall not be obligated to
indemnify any such person (i) with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by way of defense,
or (ii) for any amounts paid in settlement of an action indemnified against by
the Company without the prior written consent of the Company. The Company has
entered into indemnity agreements with each of its directors. These agreements
may require the Company, among other things, to indemnify such directors
against certain liabilities that may arise by reason of their status or service
as directors, to advance expenses to them as they are incurred, provided that
they undertake to repay the amount advanced if it is ultimately determined by a
court that they are not entitled to indemnification and to obtain directors'
liability insurance if available on reasonable terms.
In addition, Article 8 of the Company's Certificate of Incorporation
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of his or her
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for willful or negligent conduct in paying
dividends or repurchasing stock out of other than lawfully available funds or
(iv) for any transaction from which the director derives an improper personal
benefit.
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware which provides for indemnification of directors and officers
in certain circumstances.
The Company has obtained a directors' and officers' liability insurance
policy which entitles the Company to be reimbursed for certain indemnity
payments it is required or permitted to make to its directors and officers.
Under the Registration Rights Agreement, the Company has agreed to
indemnify the Selling Stockholder and the Selling Stockholder has agreed to
indemnify the Company and its directors, its
II-1
<PAGE> 20
officers, and certain control persons against certain liabilities and expenses
incurred in connection with the Registration Statement, including with respect
to their respective obligations under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
3.3* Certificate of Amendment of Certificate of Incorporation of the Registrant.
4.1* Specimen stock certificate representing Common Stock.
4.2** Certificate of Designation, Preferences and Rights relating to the Company's Series B
Convertible Preferred Stock.
4.3** Convertible Preferred Stock Purchase Agreement dated as of June 6, 1997, by and between the
Company and Southbrook International Investments, Ltd.
4.4** Registration Rights Agreement dated as of June 6, 1997, by and between the Company and
Southbrook International Investments, Ltd.
4.5** Warrant dated June 6, 1997 issued to Southbrook International Investments, Ltd.
4.6 Rights Agreement dated as of February 9, 1996, by and between the Company and LaSalle
National Trust, N.A., filed as the Exhibit to the Company's Registration Statement on Form
8-A, filed February 12, 1996, and incorporated herein by reference.
4.7 Certificate of Designation, Preferences and Rights relating to the Company's Series C
Convertible Preferred Stock
5 Opinion of Katten Muchin & Zavis as to the legality of the securities being registered
(including consent).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Katten Muchin & Zavis (contained in its opinion filed as Exhibit 5 hereto).
24 Power of Attorney (included on the signature page hereto).
</TABLE>
- ---------------
* Incorporated by reference from the same exhibit number to the Company's
Registration Statement on Form S-1 dated August 20, 1993, Reg. No.
33-67756.
** Incorporated by reference from the same exhibit number to the Company's
Registration Statement on Form S-3 dated June 23, 1997, Reg. No.
333-29797.
II-2
<PAGE> 21
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to
include any material information with respect to the plan of distribution
not previously disclosed in the Registration Statement or any material
change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended (the "Securities Act"), each such
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the Company's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offer therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the Company in thee
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mt. Prospect, State of Illinois on the 22nd day of
September, 1997.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /S/ EDWARD W. LAVES
-------------------------------------
Edward W. Laves,
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Edward W. Laves, Ora E. Smith and Stephen G. Wasko and each of them his true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his behalf, individually and in each capacity stated below, all amendments
and post-effective amendments to this Registration Statement on Form S-3
(including registration statements filed pursuant to Rule 462(b) under the
Securities Act of 1933, and all amendments thereto) and to file the same, with
all exhibits thereto and any other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully and to all intents and purposes as each might or
could do in person, hereby ratifying and confirming each act that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on
September 22, 1997 in the capacities indicated.
SIGNATURE TITLE
- --------------------------- -------------------------------------------
/S/ EDWARD W. LAVES President, Chief Executive Officer
- --------------------------- (Principal Executive Officer) and Director
Edward W. Laves
/S/ STEPHEN G. WASKO Vice President, Chief Financial Officer,
- --------------------------- Treasurer and Secretary (Principal
Stephen G. Wasko Financial and Accounting Officer)
/S/ PETER S. FUSS
- ---------------------------
Peter S. Fuss Director
/S/ STEVEN LAZARUS
- ---------------------------
Steven Lazarus Director
/S/ TOM L. POWERS
- ---------------------------
Tom L. Powers Director
/S/ ORA E. SMITH
- ---------------------------
Ora E. Smith Chairman of the Board and Director
II-4
<PAGE> 23
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ----------- ----------------------------------------------------------
4.7 Certificate of Designation, Preferences and Rights
relating to the Company's Series C Convertible Preferred
Stock.
5 Opinion of Katten Muchin & Zavis as to the legality of
the securities being registered (including consent).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Katten Muchin & Zavis (contained in its
opinion filed as Exhibit 5 hereto).
24 Power of Attorney (included on the signature page hereto).
<PAGE> 1
EXHIBIT 4.7
CERTIFICATE OF DESIGNATION OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
ILLINOIS SUPERCONDUCTOR CORPORATION
The undersigned, Edward W. Laves and Stephen G. Wasko, hereby certify
that:
I. They are the duly elected and acting President and Secretary,
respectively, of Illinois Superconductor Corporation, a Delaware corporation
(the "Company").
II. The Certificate of Incorporation of the Company authorizes 100,000
shares of preferred stock, par value $.001 per share, 600 shares of which are
currently issued and outstanding.
III. The following is a true and correct copy of resolutions duly adopted
by the Board of Directors of the Company (the "Board of Directors") at a
meeting duly held on June 4, 1997, which constituted all requisite action on
the part of the Company for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors is authorized to provide for the issuance
of the shares of preferred stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designations, relative rights, qualifications, limitations or restrictions of
the shares of each such series.
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares
constituting such series and fixes the rights, preferences, privileges and
restrictions relating to such series as follows:
Section 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as the Series C Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 600 (which
shall not be subject to increase without the consent of the holders of a
majority of the then outstanding Preferred Stock hereof). Each share of
Preferred Stock shall have a par value of $.001 per share and a stated value of
$5,000 per share (the "Stated Value").
<PAGE> 2
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors out of funds legally available therefor, and
the Company shall pay, cumulative dividends at the rate per share (as a
percentage of the Stated Value per share) equal to 5% per annum, payable, in
cash or shares of Common Stock (as defined in Section 7) at the option of the
Company, quarterly in arrears, but in no event later than the Conversion Date
(as hereinafter defined) applicable to such share of Preferred Stock in
accordance with the delivery terms hereof. Dividends on the Preferred Stock
shall be calculated on the basis of a 360-day year, shall accrue daily
commencing the Original Issue Date (as defined in Section 7), and shall be
deemed to accrue on such date whether or not earned or declared and whether or
not there are profits, surplus or other funds of the Company legally available
for the payment of dividends. The party that holds the Preferred Stock of
record on an applicable record date for any dividend payment will be entitled
to receive such dividend payment and any other accrued and unpaid dividends
which accrued prior to such dividend payment date, without regard to any sale
or disposition of such Preferred Stock subsequent to the applicable record date
but prior to the applicable dividend payment date. Except as otherwise
provided herein, if at any time the Company pays less than the total amount of
dividends then accrued on account of the Preferred Stock, such payment shall be
distributed ratably among the holders of the Preferred Stock based upon the
number of shares held by each holder. Payment of dividends on the Preferred
Stock is further subject to the provisions of Section 5(c)(i). Notwithstanding
anything to the contrary contained herein, the Company may not, without the
written consent of the holders of a majority of the then outstanding Preferred
Stock, pay dividends in cash on the Preferred Stock unless both the payment
thereof and the retention of such paid cash by the holders is consented to in
writing free of any subordination prior thereto by all lenders and debt holders
of the Company or by all holders of any class of securities of the Company who
by agreement have the right to consent to or force the subordination of such
payment.
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends (and must
deliver cash in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held as treasury stock, is
insufficient to issue such dividends to be paid in shares of Common Stock;
(ii) such shares are not registered for resale pursuant to an
effective registration statement that names the recipient of such dividend as a
selling stockholder thereunder and may not be sold without volume restrictions
pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), as determined by counsel to the Company pursuant to a
written opinion letter, addressed to the Company's transfer agent, in the form
and substance reasonably acceptable to the holder;
-2-
<PAGE> 3
(iii) such shares are not listed on the Nasdaq National Market, The
Nasdaq SmallCap Market, the New York Stock Exchange, the American Stock
Exchange and any other exchange or quotation system on which the Common Stock
is then listed for trading; or
(iv) the issuance of such shares would result in the recipient thereof
beneficially owning, in accordance with Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended, more than 4.999% of the issued and
outstanding shares of Common Stock.
(c) So long as any Preferred Stock shall remain outstanding, neither the
Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities (as defined in Section 7), nor
shall the Company directly or indirectly pay or declare any dividend or make
any distribution (other than a dividend or distribution described in Section 5)
in excess, of in the aggregate, $250,000 upon, nor shall any distribution be
made in respect of, any Junior Securities, nor shall any monies in excess, of
in the aggregate, $1,000,000 be set aside for or applied to the purchase or
redemption (through a sinking fund or otherwise) of any Junior Securities.
Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the holders of a majority of the
shares of the Preferred Stock then outstanding, (a) alter or change adversely
the powers, preferences or rights given to the Preferred Stock, (b) alter or
amend this Certificate of Designation or (c) authorize or create any class of
stock ranking as to dividends or distribution of assets upon a Liquidation (as
defined in Section 4) senior to, prior to or pari passu with the Preferred
Stock, except for any other series of Preferred Stock issued and sold in
accordance with the Purchase Agreement.
Section 4. Liquidation. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the holders
of Preferred Stock shall be entitled to receive out of the assets of the
Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid
dividends per share, whether declared or not, before any distribution or
payment shall be made to the holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the holders of Preferred Stock shall be
distributed among the holders of Preferred Stock ratably in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full. A sale, conveyance or disposition of all or
substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than
50% of the voting power of the Company is disposed of, or a consolidation or
merger of the Company with or into any other company or companies shall not be
treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall
-3-
<PAGE> 4
mail written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock shall be convertible into shares of
Common Stock (subject to reduction pursuant to Section 5(a)(ii) and Section
5(a)(iii) below and Section 3.8 of the Purchase Agreement (as defined in
Section 7)) at the Conversion Ratio (as defined in Section 7) at the option of
the holder in whole or in part at any time after the Original Issue Date. The
holder shall effect conversions by surrendering the certificate or certificates
representing the shares of Preferred Stock to be converted to the Company,
together with a fully executed notice of conversion in the form of conversion
notice attached hereto as Exhibit A (the "Conversion Notice"). Each Conversion
Notice shall specify the number of shares of Preferred Stock to be converted
and the date on which such conversion is to be effected, which date may not be
prior to the date such Conversion Notice is delivered hereunder (the
"Conversion Date"). If no Conversion Date is specified in a Conversion Notice,
the Conversion Date shall be the date that the Conversion Notice is deemed
delivered pursuant to Section 5(i). Subject to Sections 5(b), 5(a)(ii) hereof
and Section 3.8 of the Purchase Agreement, each Conversion Notice, once given,
shall be irrevocable. If the holder is converting less than all shares of
Preferred Stock represented by the certificate or certificates tendered by the
holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall promptly deliver to such
holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.
(ii) Certain Regulatory Approval. If on the Conversion Date
applicable to any conversion under this Section 5(a), (A) the Common Stock is
then listed for trading on the Nasdaq National Market or if the rules of The
Nasdaq Stock Market, Inc. are hereafter amended to extend Rule 4460(i)
promulgated thereby (or any successor or replacement provision thereof) to The
Nasdaq SmallCap Market or the American Stock Exchange and the Company's Common
Stock is then listed for trading on such market or exchange, (B) the Conversion
Price then in effect is such that the aggregate number of shares of Common
Stock that would then be issuable upon conversion of all outstanding shares of
Preferred Stock, together with any shares of Common Stock previously issued
upon conversion of Preferred Stock and in respect of payment of dividends
hereunder, would equal or exceed 20% of the number of shares of Common Stock
outstanding on the Original Issue Date (the "Issuable Maximum"), and (C) the
Company has not previously obtained Shareholder Approval (as defined below),
then the Company shall issue to the holder so requesting conversion of
Preferred Stock an amount of shares of Common Stock equal to the Issuable
Maximum and, with respect to any shares of Common Stock that otherwise would
have been issuable to such holder in respect of the Conversion Notice at issue
or in respect of payment of dividends hereunder in excess of the Issuable
Maximum, the holder shall have the option to require the Company to either (1)
as promptly as possible, but in no event later than 60 days after such
Conversion Date, convene a meeting of the holders of the Common Stock and use
its best efforts to obtain the Stockholder Approval or (2) redeem, from funds
legally available therefor at the time of such redemption,
-4-
<PAGE> 5
the balance of the Preferred Stock subject to such Conversion Notice at
a price per share equal to the product of (i) the average Per Share Market
Value for the five (5) Trading Days immediately preceding (1) the Conversion
Date or (2) the date of payment in full by the Company of such redemption
price, whichever is greater, and (ii) the Conversion Ratio calculated on the
Conversion Date; provided, however, that if the holder has requested that the
Company obtain Stockholder Approval under paragraph (1) above and the Company
fails for any reason to obtain such Stockholder Approval within the time period
set forth in (1) above, the Company shall be obligated to redeem the Preferred
Stock not converted as a result of the provisions of this Section in accordance
with the provisions of paragraph (2) above, and in such case the interest
contemplated by the immediately succeeding sentence shall be deemed to accrue
from the Conversion Date. If the holder has requested that the Company redeem
shares of Preferred Stock pursuant to this Section and the Company fails for
any reason to pay the redemption price under (2) above within seven days after
the Conversion Date, the Company will pay interest on such redemption price at
a rate of 15% per annum to the converting holder of Preferred Stock, accruing
from the Conversion Date until the redemption price plus any accrued interest
thereon is paid in full. The entire redemption price, including interest
thereon, shall be paid in cash. "Stockholder Approval" means the approval by a
majority of the total votes cast on the proposal, in person or by proxy, at a
meeting of the shareholders of the Company held in accordance with the
Company's Certificate of Incorporation and by-laws, of the issuance by the
Company of shares of Common Stock exceeding the Issuable Maximum as a
consequence of the conversion of Preferred Stock into Common Stock at a price
less than the greater of the book or market value on the Original Issue Date as
and to the extent required pursuant to Rule 4460(i) of The Nasdaq Stock Market,
Inc. or Rule 713 of the American Stock Exchange (or any successor or
replacement provision thereof), as applicable.
(iii) If on any Conversion Date applicable to a conversion under
Section 5(a) or a redemption pursuant to Section 6, the average Per Share
Market Value for the five Trading Days immediately preceding such Conversion
Date exceeds the Initial Conversion Price (defined in Section 5(c(i)) by more
than 50%, the Conversion Price otherwise applicable to such conversion or
repayment shall be increased by an amount equal to 50% of the difference
between (A) the average Per Share Market Value for the five Trading Days
immediately preceding such Conversion Date, and (B) 150% of the Initial
Conversion Price.
(b) Not later than three Trading Days after the Conversion Date, the
Company will deliver to the holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number
of shares of Common Stock being acquired upon the conversion of shares of
Preferred Stock (subject to reduction pursuant to Sections 5(a)(ii), 5(a)(iii)
and Section 3.8 of the Purchase Agreement) and (ii) one or more certificates
representing the number of shares of Preferred Stock not converted, if any, and
(iii) a check drawn on the account of the Company and payable to the holder in
an amount equal to any accrued but unpaid dividends, if the Company
elects to pay such dividends in cash; provided, however, that the Company shall
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon conversion of any shares of Preferred Stock until certificates
evidencing such shares of Preferred
-5-
<PAGE> 6
Stock are either delivered for conversion to the Company for the Preferred
Stock or Common Stock, or the holder of such Preferred Stock notifies the
Company that such certificates have been lost, stolen or destroyed and provides
a bond (or other adequate security reasonably acceptable to the Company)
reasonably satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith. The Company shall, upon request of the
holder, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates, including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of
accrued but unpaid dividends hereunder, are not delivered to or as directed by
the applicable holder by the third Trading Day after the Conversion Date, the
holder shall be entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for
conversion. If the Company fails to deliver to the holder such certificate or
certificates pursuant to this Section, including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of
accrued but unpaid dividends hereunder, prior to the fifth Trading Day after
the Conversion Date, the Company shall pay to such holder, in cash, as
liquidated damages and not as a penalty, $1,500 for each Trading Day after such
fifth Trading Day until such certificates are delivered. If the Company fails
to deliver to the holder such certificate or certificates pursuant to this
Section prior to the 20th day after the Conversion Date, the Company shall, at
the holder's option (i) redeem, from funds legally available therefor at the
time of such redemption, such number of shares of Preferred Stock then held by
such holder, as requested by such holder, and (ii) pay all accrued but unpaid
dividends on account of the Preferred Stock for which the Company shall have
failed to issue Common Stock certificates hereunder, in cash. The redemption
price per share shall be equal to the sum of (i) the product of (A) the average
Per Share Market Value for the five (5) Trading Days immediately preceding (1)
the Conversion Date or (2) the date of payment in full by the Company of such
redemption price, whichever is greater, and (B) the Conversion Ratio calculated
on the Conversion Date and (ii) the aggregate of all accrued and unpaid
dividends and other amounts payable in respect of such shares. If the holder
has requested that the Company redeem shares of Preferred Stock pursuant to
this Section and the Company fails for any reason to pay the redemption price
above within seven days after such notice is deemed delivered pursuant to
Section 5(i), the Company will pay interest on the redemption price at a rate
of 15% per annum, in cash to such holder, accruing from such seventh day until
the redemption price and any accrued interest thereon is paid in full.
(c) (i) The conversion price ("Conversion Price") applicable to
conversions of Preferred Stock into Common Stock hereunder shall be determined
in accordance with this Section. Subject to adjustment as provided in this
paragraph (c)(i), for any conversions that occur prior to the earlier of (1)
the date the Securities and Exchange Commission (the "Commission") declares
effective an Underlying Shares Registration Statement (as defined below) or
(ii) the 89th day after the Original Issue Date (such period, the
"Pre-Effective Period"), the Conversion Price for each share of Preferred Stock
shall equal the average Per
-6-
<PAGE> 7
Share Market Value for the five (5) Trading Days immediately preceding the
Original Issue Date (the "Initial Conversion Price"). For all conversions
occurring after the Pre-Effective Period, subject to the immediately preceding
sentence, the Conversion Price shall be the lesser of (a) the Initial
Conversion Price or (b) 101% of the average of the lowest Per Share Market
Value for the five (5) consecutive Trading Days during the 60 Trading Days
immediately preceding such Conversion Date (which may not include the date that
any Conversion Notice is deemed delivered pursuant to Section 5(i) below);
provided, however, that in no event shall the Conversion Price be calculated
based on the Per Share Market Value for any five (5) consecutive Trading Day
period for which the Purchaser's or any of its Affiliates' volume of trading in
the Common Stock exceeds 20% of the trading volume in the Common Stock
(excluding any de minimis amount by which the Purchaser or any of its
Affiliates' inadvertently exceeds such 20% limitation) during such five (5)
consecutive Trading Day period as reported by the Nasdaq National Market, The
Nasdaq SmallCap Market, the New York Stock Exchange, the American Stock
Exchange or such other market or exchange on which the Common Stock is traded
(for example, if the Purchaser's or any of its Affiliates' volume in the Common
Stock exceeds such 20% level during Trading Days 10-14, but does not exceed
such level for Trading Days 11-15, then the Conversion Price may be calculated
based upon the Per Share Market Value for Trading Days 11-15 but not for
Trading Days 10-14). Notwithstanding the foregoing, (a) if the registration
statement contemplated by the Registration Rights Agreement, which among other
things, requires the Company to register the resale of the shares of Common
Stock issuable upon conversion of the Preferred Stock (the "Underlying Shares
Registration Statement") is not filed on or prior to the 30th day after the
Original Issue Date, or (b) the Company fails to file with the Commission a
request for acceleration in accordance with Rule 12d1-2 promulgated under the
Securities Exchange Act of 1934, as amended, within five (5) days of the date
that the Company is notified (orally or in writing, whichever is earlier) by
the Commission that an Underlying Shares Registration Statement will not be
"reviewed" or is advised that such Registration Statement is not subject to
further review or comment, or (c) if the Underlying Shares Registration
Statement is not declared effective by the Commission on or prior to the 90th
day after the Original Issue Date, or (d) if such Underlying Shares
Registration Statement is filed with and declared effective by the Commission
but thereafter ceases to be effective as to all Registrable Securities (as such
term is defined in the Registration Rights Agreement) at any time prior to the
expiration of the "Effectiveness Period" (as such term as defined in the
Registration Rights Agreement), without being succeeded within 10 Business Days
by a subsequent Underlying Shares Registration Statement filed with and
declared effective by the Commission, or (e) if trading in the Common Stock
shall be suspended for any reason for more than three consecutive Trading Days
or five Trading Days in the aggregate, or (f) if the conversion rights of the
holders of Preferred Stock hereunder are suspended for any reason, or (g) the
Company postpones or suspends the filing or effectiveness of any Registration
Statement in excess of 20 consecutive days or 60 days in the aggregate during
any twelve month period (any such failure being referred to as an "Event," and
for purposes of clauses (a), (c) and (f) the date on which such Event occurs,
or for purposes of clause (b) the date on which such five (5) day period is
exceeded, or for purposes of clause (d) the date which such 10 Business
Day-period is exceeded, or for purposes of clause (e) the date on which such
three Trading Day period is exceeded, or for purposes of clause (g) the date on
which such 20 consecutive day or 60 aggregate day period
-7-
<PAGE> 8
is exceeded, being referred to as "Event Date"), the Conversion Price shall be
decreased by 2.5% on each monthly anniversary of an Event Date until the
earlier to occur of the second month anniversary after the Event Date and such
time as the applicable Event is cured. Commencing the second month anniversary
after the Event Date, at the option of each holder for each applicable monthly
period either (a) the Company shall pay to the holders of the Preferred Stock
2.5% of the product of the number of outstanding shares of Preferred Stock and
the Stated Value (each holder being entitled to receive such portion of such
amount as equals its pro rata portion of the Preferred Stock then outstanding),
in cash or (b) the Conversion Price shall be decreased by 2.5% for each
additional such month (to be effective in full on the monthly applicable Event
Date) as liquidated damages, and not as a penalty on the first day of each
monthly anniversary of the Event Date in either case until such time as the
applicable Event, is cured. Any decrease in the Conversion Price pursuant to
this Section shall continue notwithstanding the fact that the Event causing
such decrease has been subsequently cured. The provisions of this Section are
not exclusive and shall in no way limit the Company's obligations under the
Registration Rights Agreement. Notwithstanding anything to the contrary set
forth herein, the Company may not, without the prior written consent of the
holders, pay liquidated damages hereunder in cash unless it shall have received
the prior written consent of all lenders, debt holders or holders of any class
of securities of the Company or its Affiliates that have the right to require
such consent or to subordinate any such cash payment, which consent shall
provide that the payment by the Company of any such liquidated damages
hereunder (and the retention of such sum by the receiving holder) is not
subject to any applicable subordination rights of such lender or holders of
such class of securities.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities payable in
shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a
larger number of shares, (c) combine outstanding shares of Common Stock into a
smaller number of shares, or (d) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, the Initial Conversion Price
shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding before
such event and of which the denominator shall be the number of shares of Common
Stock outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(ii) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights or warrants to all holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Per Share Market Value of Common Stock at the record
date mentioned below, the Initial Conversion Price shall be multiplied by a
fraction, of which the denominator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance
of such rights or warrants plus the number of additional shares of Common Stock
offered for
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<PAGE> 9
subscription or purchase, and of which the numerator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration of
any right or warrant to purchase Common Stock the issuance of which resulted in
an adjustment in the Initial Conversion Price pursuant to this Section
5(c)(iii), if any such right or warrant shall expire and shall not have been
exercised, the Initial Conversion Price shall immediately upon such expiration
be recomputed and effective immediately upon such expiration be increased to
the price which it would have been (but reflecting any other adjustments in the
Initial Conversion Price made pursuant to the provisions of this Section 5
after the issuance of such rights or warrants) had the adjustment of the
Initial Conversion Price made upon the issuance of such rights or warrants been
made on the basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased upon the exercise of such rights or
warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
holders of Preferred Stock) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those referred
to in Sections 5(c)(ii) and (iii) above), then in each such case the Initial
Conversion Price at which each share of Preferred Stock shall thereafter be
convertible shall be determined by multiplying the Initial Conversion Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Per Share Market Value of Common Stock determined as
of the record date mentioned above, and of which the numerator shall be such
Per Share Market Value of the Common Stock on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to one outstanding share of Common
Stock as determined by the Board of Directors in good faith; provided, however,
that if the holders of a majority in interest of the shares of Preferred Stock
dispute such amount, such holders may select a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (an "Appraiser") paid for by the holders of
a majority in interest of the shares of Preferred Stock then outstanding, in
which case the fair market value shall be equal to the average of the
determinations by the Board of Directors and such Appraiser. In either case
the adjustments shall be described in a statement provided to the holders of
Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made
and shall become effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
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<PAGE> 10
(vi) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly mail to
each holder of Preferred Stock, a notice setting forth the Initial Conversion
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another previously
unaffiliated person, the sale or transfer of all or substantially all of the
assets of the Company or any compulsory share exchange pursuant to which the
Common Stock is converted into other securities, cash or property (each, a
"Business Combination"), the holders of the Preferred Stock then outstanding
shall have the right thereafter to, at their option, (A) convert such shares
only into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
Business Combination, and the holders of the Preferred Stock shall be entitled
upon such event to receive such amount of securities, cash or property as the
shares of the Common Stock of the Company into which such shares of Preferred
Stock could have been converted immediately prior to such Business Combination
would have been entitled or (B) require the Company to redeem, from funds
legally available therefor at the time of such redemption, its shares of
Preferred Stock then outstanding at a price per share equal to the sum of (x)
the product of (i) the average Per Share Market Value for the five (5) Trading
Days immediately preceding (1) the effective date or the date of the closing,
as the case may be, of the Business Combination, or the triggering of such
redemption right or (2) the date of payment in full by the Company of the
redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio
calculated on the date of the closing or the effective date, as the case may
be, of the Business Combination triggering such redemption right, as the case
may be and (y) the aggregate of all accrued and unpaid dividends and other
amounts payable in respect of such shares. The entire redemption price shall
be paid in cash, and the terms of payment of such redemption price shall be
subject to the provisions set forth in Section 6(b). The terms of any such
Business Combination shall include such terms so as to continue to give to the
holder of Preferred Stock the right to receive the securities, cash or property
set forth in this Section 5(c)(vii) upon any conversion or redemption following
such Business Combination. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(viii) If:
A. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
B. the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common
Stock; or
C. the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe for or
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<PAGE> 11
purchase any shares of capital stock of any class or
of any rights; or
D. the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is
a party, any sale or transfer of all or
substantially all of the assets of the Company, of
any compulsory share of exchange whereby the Common
Stock is converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up
of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Preferred Stock, and shall cause to be mailed
to the holders of Preferred Stock at their last addresses as they shall appear
upon the stock books of the Company, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however,
that the failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action required to be
specified in such notice. Holders are entitled to convert shares of Preferred
Stock during the 30-day period commencing the date of such notice to the
effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock and payment of dividends
on Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the holders of
Preferred Stock, not less than such number of shares of Common Stock as shall
(subject to any additional requirements of the Company as to reservation of
such shares set forth in the Purchase Agreement) be issuable (taking into
account the adjustments and restrictions of Section 5(c)) upon the conversion
of all outstanding shares of Preferred Stock and payment of dividends
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and freely tradeable.
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<PAGE> 12
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the holder of a
share of Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
preferred stock.
(h) Any and all notices or other communications or deliveries to be
provided by the holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the attention of the Chief Financial Officer of the Company at the facsimile
telephone number or address of the principal place of business of the Company
as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be
in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service or sent by certified or registered mail,
postage prepaid, addressed to each holder of Preferred Stock at the facsimile
telephone number or address of such holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the holder. Any notice or other communication
or deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
4:30 p.m. (Eastern Time), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified in this Section later than 4:30 p.m. (Eastern Time) on any
date and earlier than 11:59 p.m. (Eastern Time) on such date, (iii) four days
after deposit in the United States mails, (iv) the Business Day following the
date of mailing, if sent by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.
Section 6. Redemption. (a) The Company shall have the right,
exercisable at any time upon 5 Trading Days notice to the holders of the
Preferred Stock given at any time
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<PAGE> 13
on or after the third anniversary of the Original Issue Date to redeem, from
funds legally available therefor at the time of such redemption, all or any
portion of the shares of Preferred Stock which have not previously been
converted or redeemed, at a price per share equal to the sum of (x) the product
of (i) the average Per Share Market Value for the five (5) Trading Days
immediately preceding (1) the date of the redemption notice referenced above or
(2) the date of payment in full by the Company of the redemption price
hereunder, whichever is greater, and (ii) the Conversion Ratio calculated on
the date of such redemption notice and (y) the aggregate of all accrued but
unpaid dividends and other amounts payable in respect of such shares. The
entire redemption price shall be paid in cash. Holders of Preferred Stock may
convert any shares of Preferred Stock, including shares subject to a redemption
notice given under this Section, during the period from the date of such
redemption notice through the 4th Trading Day thereafter and the Company shall
honor all properly tendered Conversion Notices during such period. Any
redemption notice under this section shall indicate the number of shares of
Preferred Stock to be redeemed and the date (subject to the terms hereof) on
which such redemption is to occur. The holders of the Preferred Stock to be
redeemed shall tender by overnight mail, shares of Preferred Stock subject to
such redemption on the date prior to the redemption date. If the Company
intends to redeem less than all of the then outstanding Preferred Stock, it
shall do so on a pro rata basis among such holders in accordance with this
Section. If any portion of the applicable redemption price under this Section
6 shall not be paid by the Company within seven (7) calendar days after the
date due, interest shall accrue thereon at the rate of 15% per annum until the
redemption price plus all such interest is paid in full (which amount shall be
paid as liquidated damages and not as a penalty). In addition, if any portion
of such redemption price remains unpaid for more than 7 calendar days after the
date due, the holder of the Preferred Stock subject to such redemption may
elect, by written notice to the Company given within 30 days after the date
due, to either (i) demand conversion in accordance with the formula and the
time frame therefor set forth in Section 5 of all of the shares of Preferred
Stock for which such redemption price, plus accrued liquidated damages thereof,
has not been paid in full (the "Unpaid Redemption Shares"), in which event the
Per Share Market Price for such shares shall be the lower of the Per Share
Market Price calculated on the date such redemption price was originally due
and the Per Share Market Price as of the holder's written demand for
conversion, or (ii) invalidate ab initio such redemption, notwithstanding
anything herein contained to the contrary. If the holder elects option (i)
above, the Company shall within three (3) Trading Days of its receipt of such
election deliver to the holder the shares of Common Stock issuable upon
conversion of the Unpaid Redemption Shares subject to such holder conversion
demand and otherwise perform its obligations hereunder with respect thereto;
or, if the Holder elects option (ii) above, the Company shall promptly, and in
any event not later than three (3) Trading Days from receipt of holder's notice
of such election, return to the holder all of the Unpaid Redemption Shares.
Notwithstanding anything to the contrary contained herein, the Company may not,
without the written consent of the holders of a majority in interest of the
then outstanding Preferred Stock, redeem shares of Preferred Stock unless both
the payment thereof and the retention of such paid cash by the holder is
consented to in writing free of any subordination prior thereto by all lenders
or holders of any class of securities of the Company who by agreement have the
right to consent to or force the subordination of such payment.
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<PAGE> 14
(b) The Company shall have the right, exercisable within 20 days
after the issuance of a press release disclosing the execution by the Company
of a definitive agreement for a Business Combination, to provide a notice of
redemption to the holders of the Preferred Stock as to all, but not less than
all, of the then outstanding shares of Preferred Stock. The aggregate
redemption price shall be paid in cash on the closing date for such Business
Combination. The redemption price per share shall equal the sum of (x) the
product of (i) the average Per Share Market Value for the five (5) Trading Days
immediately preceding the closing date for the Business Combination triggering
such redemption and (ii) the Conversion Ratio calculated on the date of such
redemption notice (provided, however, the Conversion Price for these purposes
shall not be based upon the Pre-Effective Period) and (y) the aggregate of all
accrued but unpaid dividends and other amounts payable in respect of such
shares. The definitive merger or purchase agreement for such Business
Combination shall include a provision by which the Company covenants to pay the
redemption price under this Section on the closing date therefor.
Section 7. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government action to close.
"Common Stock" means the common stock, $.001 par value per share, of
the Company and stock of any other class into which such shares may hereafter be
reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including any
accrued but unpaid interest thereon) but only to the extent to be paid in
shares of Common Stock in accordance with the terms hereof, and of which the
denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on The Nasdaq National
Market, Inc. or other stock exchange or quotation system on which the Common
Stock is then listed or if there is no such price on such date, then the
closing bid price on such exchange or quotation system on the date nearest
preceding such date, or (b) if the Common Stock is not listed then on The
Nasdaq
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<PAGE> 15
National Market, Inc. or any stock exchange or quotation system, the closing
bid price for a share of Common Stock in the over-the-counter market, as
reported by the Nasdaq Stock Market or in the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith and paid for
by the holders of a majority in interest of the shares of Preferred Stock;
provided, however, that the Company, after receipt of the determination by such
appraiser, shall have the right to select an additional Appraiser (which may be
the firm of independent accountants that regularly reviews the Company's
financial statements), in which case, the fair market value shall be equal to
the average of the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of June 6, 1997, between the Company and the original
holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of June 6, 1997, between the Company and the original
holder of Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is traded on
The Nasdaq National Market, Inc. or other stock exchange or market on which the
Common Stock has been listed, or (b) if the Common Stock is not listed on The
Nasdaq National Market, Inc. or any stock exchange or market, a day on which
the Common Stock is traded in the over-the-counter market, as reported by the
OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC
Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices).
"Underlying Shares" means the number of shares of Common Stock into
which the shares of Preferred Stock are convertible in accordance with the terms
hereof and the Purchase Agreement.
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<PAGE> 16
RESOLVED FURTHER, that the President and Secretary of the Company be,
and they hereby are, authorized and directed to prepare, execute, verify, and
file with the Secretary of State of Delaware, a Certificate of Designation in
accordance with these resolutions and as required by law.
IN WITNESS WHEREOF, Illinois Superconductor Corporation has caused its
corporate seal to be hereunto affixed and this certificate to be signed by
Edward W. Laves, its President, and attested by Stephen G. Wasko, its
Secretary, this 28th day of August, 1997.
ILLINOIS SUPERCONDUCTOR CORPORATION
By: /s/ EDWARD W. LAVES
-------------------------------
Name: Edward W. Laves
Title: President
Attest:
By: /s/ STEPHEN G. WASKO
-----------------------
Name: Stephen G. Wasko
Title: Secretary
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<PAGE> 17
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series C
Convertible Preferred Stock (the "Preferred Stock") indicated below, into
shares of Common Stock, par value $.001 per share (the "Common Stock"), of
Illinois Superconductor Corporation (the "Company") according to the conditions
hereof, as of the date written below. If shares are to be issued in the name
of a person other than undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance therewith. No
fee will be charged to the holder for any conversion, except for such transfer
taxes, if any.
Conversion calculations: ___________________________________________________
Date to Effect Conversion
___________________________________________________
Number of shares of Preferred Stock to be Converted
___________________________________________________
Number of shares of Common Stock to be Issued
(without taking into account any accrued but
unpaid dividends issuable upon this conversion, if
any)
___________________________________________________
Applicable Conversion Price
___________________________________________________
Signature
___________________________________________________
Name
___________________________________________________
Address
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested
hereby), notify the converting holder by facsimile of the number of shares of
Common Stock which would be issuable to the holder if the conversion requested
in this conversion notice were effected in full, whereupon, if the converting
holder determines that such conversion would result in it owning in excess of
4.999% of the outstanding shares of Common Stock on such date, such holder will
so notify the Company and the Company shall convert up to an amount equal to
4.999% of the outstanding shares of Common Stock and issue to the holder one or
more certificates representing shares of Preferred Stock which have not been
converted as a result of this provision.
<PAGE> 1
EXHIBIT 5
[KATTEN MUCHIN & ZAVIS LETTERHEAD]
September 22, 1997
Illinois Superconductor Corporation
451 Kingston Court
Mt. Prospect, Illinois 60056
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have acted as counsel for Illinois Superconductor Corporation, a
Delaware corporation (the "Company"), in connection with the preparation and
filing of a registration statement on Form S-3 (the "Registration Statement")
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended. The Registration Statement relates to 468,572 shares of the
Company's Common Stock, $.001 par value per share, of which (i) 457,143 shares
(the "Conversion Shares") may in the future be issued upon the conversion of
certain outstanding shares of the Company's Series C Convertible Preferred
Stock (the "Series C Stock") and (ii) 11,429 shares (the "Dividend Shares") may
in the future be issued as accrued dividends for one year on the Series C
Stock.
In connection with this opinion, we have relied as to matters of fact,
without investigation, upon certificates of public officials and others and
upon affidavits, certificates and written statements of directors, officers and
employees of, and the accountants and transfer agent for, the Company. We have
also examined originals or copies, certified or otherwise identified to our
satisfaction, of such instruments, documents and records as we have deemed
relevant and necessary to examine for the purpose of this opinion, including
(a) the Registration Statement, (b) the Certificate of Incorporation of the
Company, (c) the By-Laws of the Company, (d) the Certificate of Designation,
Preferences and Rights relating to the Series C Stock (the "Certificate of
Designation") and (e) resolutions adopted by the Board of Directors of the
Company.
In connection with this opinion, we have assumed the accuracy and
completeness of all documents and records that we have reviewed, the
genuineness of all signatures, the authenticity of the documents submitted to
us as originals and the conformity to authentic original documents of all
documents submitted to us as certified, conformed or reproduced copies. We
have further assumed that all natural persons involved in the transactions
contemplated by the Registration Statement (the "Offering") have sufficient
legal capacity to enter into and perform their respective obligations and to
carry out their roles in the Offering.
<PAGE> 2
Illinois Superconductor Corporation
September 22, 1997
Page 2
Based upon and subject to the foregoing, it is our opinion that:
(1) The Conversion Shares, when issued by the Company upon the conversion
of the Series C Stock in accordance with the terms of the Certificate of
Designation, will be validly issued, fully paid and non-assessable; and
(2) The Dividend Shares, if and when issued by the Company as accrued
dividends on the Series C Stock in accordance with the terms of the Certificate
of Designation, will be validly issued, fully paid and non-assessable.
We hereby consent to use of our name under the heading "Legal Matters" in
the Prospectus forming a part of the Registration Statement and to use of this
opinion for filing as Exhibit 5 to the Registration Statement.
Very truly yours,
/s/ KATTEN MUCHIN & ZAVIS
KATTEN MUCHIN & ZAVIS
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement and related Prospectus of Illinois Superconductor
Corporation for the registration of 468,572 shares of its common stock and to
the incorporation by reference therein of our report dated January 29, 1997,
except for paragraph 8 of Note 6, for which the date is March 7, 1997, with
respect to the financial statements and schedule of Illinois Superconductor
Corporation included in its Annual Report (Form 10-K) for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Chicago, Illinois
September 19, 1997
