<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1996.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONDUCTUS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3679 77-0162388
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
--------------------------
969 W. MAUDE AVENUE
SUNNYVALE, CA 94086
(408) 523-9950
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
CHARLES E. SHALVOY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONDUCTUS, INC.
969 W. MAUDE AVENUE
SUNNYVALE, CA 94086
(408) 523-9950
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT V. GUNDERSON, JR., ESQ. HOWARD S. ZEPRUN, ESQ.
BROOKS STOUGH, ESQ. THEODORE C. CHEN, ESQ.
RENEE L. BARTON, ESQ. BRETT D. BYERS, ESQ.
WILLIAM E. GROWNEY, JR., ESQ. Wilson Sonsini Goodrich & Rosati, P.C.
Gunderson Dettmer Stough 650 Page Mill Road
Villeneuve Franklin & Hachigian, LLP Palo Alto, California 94304
600 Hansen Way, Second Floor (415) 493-9300
Palo Alto, California 94304
(415) 843-0500
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
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, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2)
<S> <C> <C> <C>
Common Stock, $.0001 par value............ 1,150,000 $15.00 $17,250,000
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, $.0001 par value............ $5,948.28
</TABLE>
(1) Includes 150,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CONDUCTUS, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 REGISTRATION STATEMENT HEADING HEADING OR LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Forepart of the Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Underwriting
9. Description of Securities to be Registered........... Outside Front Cover Page; Prospectus Summary;
Capitalization; Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters
11. Information with Respect to the Registrant........... Inside and Outside Cover Pages; Prospectus Summary;
Risk Factors; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal
Stockholders; Description of Capital Stock; Shares
Eligible for Future Sale; Experts; Additional
Information; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT 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 NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION; DATED MAY 15, 1996
PROSPECTUS
1,000,000 SHARES
[CONDECTUS LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by
Conductus, Inc. (the "Company"). The Common Stock is quoted on the Nasdaq
National Market under the symbol "CDTS." On May 14, 1996, the last reported sale
price for the Common Stock was $15.125 per share. See "Price Range of Common
Stock and Dividend Policy."
-------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-----------------
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.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total (3)................................ $ $ $
</TABLE>
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTION OF EXPENSES ESTIMATED TO BE $400,000, PAYABLE BY THE
COMPANY.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP
TO A MAXIMUM OF 150,000 ADDITIONAL SHARES OF COMMON STOCK TO COVER
OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL
"PRICE TO PUBLIC," "UNDERWRITING DISCOUNT" AND "PROCEEDS TO COMPANY" WILL BE
$ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
---------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in Boston, Massachusetts, on
or about , 1996.
TUCKER ANTHONY PENNSYLVANIA MERCHANT GROUP LTD
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
<TABLE>
<S> <C> <C>
COMMUNICATIONS
Conductus designs and The filters are incorporated Conductus filter subsystems
fabricates compact into integrated subsystems are designed for use in
superconducting that include a self- cellular and PCS base
communications filters. contained cryogenic stations.
refrigerator.
"Filter" "Filter Subsystem" "Cellular base station"
Rural PCS Switching
HEALTHCARE
Conductus designs and The receiver coils are Conductus probes are
fabricates superconducting incorporateded into designed for use in NMR
receiver coils for nuclear integrated probe subsystems spectrometer and MRI
magnetic resonance that include a cryogenic scanners.
instruments. refrigerator.
NMR Spectroscopy coil "Probe Subsystem" "NMR spectrometer"
NMR Spectroscopy System MRI Probes NMR Spectroscopy Coil
INSTRUMENTATION
Conductus designs and The sensors are combined Conductus sensor subsystems
fabricates superconducting with specialized control are designed for
magnetic sensors. electronics and analysis application, geophysics,
software. medicine and nondestructive
testing.
"SQUID Sensor" "IMAG system" "console"
Laboratory Geophysical Medical
</TABLE>
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN
ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE
10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS."
THE COMPANY
Conductus, Inc. ("Conductus" or the "Company") develops, manufactures and
markets electronic components and subsystems based on superconductors. The
unique properties of superconductors provide the basis for electronic products
with significant potential performance advantages over products based on
competing materials such as copper and semiconductors. Depending on the
application, these advantages include enhanced sensitivity, efficiency, speed
and operating frequency, as well as reduced power consumption, size, weight and
cost. Conductus is currently focusing significant development, manufacturing and
marketing efforts on applications for superconductors in the areas of
communications, healthcare and instrumentation.
Superconductors are materials that have the ability to transport electrical
energy with little or no loss when cooled below a "critical" temperature. Since
its founding in 1987, the Company has focused its product development efforts on
high-temperature superconducting ("HTS") materials discovered in the 1980s that
can be cooled more conveniently and economically than earlier-known
superconducting materials. Based upon publicly available information, Conductus
believes that its technologies are more advanced than those of other companies
or research laboratories. Conductus combines advanced HTS technology with
expertise in electronic device and component design, analog and digital
electronic engineering, cryogenic packaging, mechanical engineering and system
integration. Conductus believes that systems containing superconductive
electronic technology, if successfully commercialized, will offer performance
that is unavailable from competing technology, will reduce the costs of
performing desired functions, or, in many cases, will do both.
In the communications market, Conductus is developing filter subsystems for
cellular and personal communication services ("PCS") base stations. These
superconducting filter subsystems could provide significant benefits in base
station performance and reduce the size of the filter components. The Company is
developing and testing prototype integrated subsystems that are designed to be
easily integrated into new base stations or to allow cost-effective retrofitting
of existing base stations. Laboratory and initial field tests of Conductus'
cellular filter subsystems conducted by industry representatives have
demonstrated performance improvements over conventional technology, including
enhanced base station receiver range. Conductus expects to make its first
shipments of cellular filter subsystems in late 1996. For the PCS market,
Conductus is developing an integrated filter subsystem under a joint development
agreement with Lucent Technologies, Inc. ("Lucent"). The first field test of the
initial prototype of the receiver portion of the Conductus subsystem has been
conducted by Lucent. The Company believes that providing its technology at the
subsystem level to selected OEM systems manufacturers such as Lucent will allow
it to most rapidly and efficiently expand both its product line and its customer
base.
In the healthcare market, Conductus is developing and testing prototype
superconductive receiver subsystems for several types of magnetic resonance
instruments. Conductus is developing a family of probe subsystems for nuclear
magnetic resonance ("NMR") spectroscopy systems for Varian Associates
("Varian"), a leading manufacturer of these systems. In March 1996, Conductus
began manufacturing and selling two NMR probe types through Varian. The Company
anticipates that it will introduce a third NMR probe type for commercial sale by
the end of 1996. Conductus also is developing receiver subsystems for magnetic
resonance imaging ("MRI") scanners under a joint development agreement with
Siemens AG ("Siemens").
In the instrumentation market, Conductus currently manufactures and sells
superconducting sensors called Superconducting Quantum Interference Devices
("SQUIDs"), which can be used in electronic instruments to detect and precisely
locate extremely weak magnetic signals. Conductus is also marketing and
developing a variety of electronic components and instruments based upon SQUID
technology.
Conductus has leveraged its resources by developing superconductive products
in collaboration with corporate partners that are market and technology leaders,
research laboratories and government agencies. Since its inception, the Company
has received approximately $25.5 million in external funding for research and
development, primarily from agencies of the U.S. government, and currently has
approximately $5.6 million in contracts and grants and $7.8 million in awards
for future research and development.
Conductus was incorporated in Delaware in 1987. Its principal offices are
located at 969 W. Maude Avenue, Sunnyvale, California 94086, and its telephone
number is (408) 523-9950.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company............... 1,000,000 shares
Common Stock to be outstanding after the 6,732,989 shares (1)
Offering.........................................
Use of proceeds................................... For general corporate purposes, including working
capital, acquisition of manufacturing equipment,
product development and repayment of indebtedness.
See "Use of Proceeds."
Nasdaq National Market Symbol..................... CDTS
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 (2) 1992 (2) 1991 (2)
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract................................. $ 2,214 $ 1,644 $ 8,148 $ 7,048 $ 5,070 $ 2,233 $ 740
Product sales............................ 397 369 2,434 1,588 1,409 438 158
--------- --------- --------- --------- --------- --------- ---------
Total revenues......................... 2,611 2,013 10,582 8,636 6,479 2,671 898
--------- --------- --------- --------- --------- --------- ---------
Loss from operations....................... $ (1,395) $ (1,558) $ (4,423) $ (4,876) $ (4,070) $ (3,132) $ (3,290)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss................................... $ (1,379) $ (1,570) $ (4,422) $ (4,544) $ (4,122) $ (3,215) $ (3,130)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share (3).............. $ (0.24) $ (0.29) $ (0.80) $ (0.85) $ (1.40) $ (1.91) $ (1.79)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing per share
amounts................................... 5,706 5,397 5,543 5,323 2,940 1,680 1,753
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED (4)
--------- ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................................... $ 3,074 $ 16,774
Total assets............................................................................. 8,937 22,637
Long-term debt, net of current portion................................................... 1,258 1,258
Total stockholders' equity............................................................... 4,469 18,169
</TABLE>
- --------------------------
(1) Based on the number of shares outstanding as of March 31, 1996. Excludes
1,167,026 shares of Common Stock issuable upon exercise of outstanding
options as of March 31, 1996 with a weighted average exercise price of $5.04
per share, and 21,177 shares of Common Stock that may be issuable under the
Company's Employee Stock Purchase Plan upon the expiration of the current
purchase period. See "Management -- 1992 Stock Option/Stock Issuance Plan,"
"-- Employee Stock Purchase Plan" and Note 13 of Notes to Financial
Statements.
(2) Excluding results of operations for Tristan Technologies, Inc. ("Tristan")
prior to its acquisition by Conductus on May 28, 1993.
(3) See Note 2 of Notes to Financial Statements.
(4) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $15.00 per share,
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Description of Capital Stock."
---------------------
Conductus owns the United States registered trademarks "CONDUCTUS," the
Conductus logo, "Mr. SQUID" and "iMAG," and claims the rights to the trademark
"xMAG."
-------------------
EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS PROSPECTUS (I) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) DOES NOT REFLECT
THE EXERCISE OF OPTIONS OR WARRANTS AFTER MARCH 31, 1996.
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS INHERENT IN AND AFFECTING
THE BUSINESS OF THE COMPANY. THE DISCUSSION IN THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
EARLY STAGE OF THE SUPERCONDUCTIVE ELECTRONICS MARKET. Conductus was
founded in September 1987 and to date has been engaged principally in research
and development activities. Although Conductus has introduced a number of
superconductive electronic products, most of Conductus' revenues to date have
been derived from research and development contracts. See "Risk Factors -- High
Degree of Dependence upon Government Contracts." The superconductive electronics
market is new, with limited product commercialization to date. There can be no
assurance that Conductus will successfully introduce any products currently
under development, that Conductus will be able to manufacture adequate
quantities of any products it introduces at commercially acceptable costs or on
a timely basis or that any such products will offer sufficient price/performance
advantages to achieve market acceptance. The Company's failure to successfully
develop, manufacture and commercialize products that offer sufficient
price/performance advantages to achieve significant market acceptance on a
timely and cost-effective basis would have a material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ACCUMULATED DEFICIT; UNCERTAINTY OF FINANCIAL RESULTS; QUARTERLY
FLUCTUATIONS. As of March 31, 1996, the Company had accumulated net losses of
approximately $25.6 million. Conductus expects to incur substantial additional
losses at least during 1996 as it expands operations. Continued development of
the Company's products may require the commitment of substantial resources to
research and development, establishment of additional pilot and commercial-scale
fabrication processes and facilities and development of enhanced quality
control, marketing, sales and administrative capabilities. In order to achieve
profitability, Conductus, on its own or with collaborative partners, must
successfully develop, manufacture, introduce and market its potential products.
There can be no assurance that the Company will ever be able to achieve
profitable operations or, if profitability is achieved, that it can be
sustained. In addition, the Company's operating results have varied
substantially on a quarterly basis and such fluctuations are expected to
continue and perhaps increase in future periods as the Company seeks to
commercialize its products. Factors that may affect the Company's operating
results include the timing of government funding awards, the timing and market
acceptance of new products or technological advances by the Company and its
competitors, the timing of significant orders from and shipments to customers,
changes in pricing policies by the Company and its competitors, the mix of
distribution channels through which the Company's products are sold, the
accuracy of resellers' forecasts of end user demand, regulatory changes, the
ability of the Company and its subcontractors to obtain sufficient supplies of
limited- or sole-source components for the Company's products and general
economic conditions both domestically and internationally. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
HIGH DEGREE OF DEPENDENCE UPON OTHER COMPLEMENTARY TECHNOLOGIES; LIMITED- OR
SOLE-SOURCE SUPPLIERS. Commercial uses of superconductive products will depend
generally on the commercial availability of a number of other technologies such
as specialized mechanical refrigeration systems, cryogenically-cooled
semiconductor technology and large-area compatible wafer substrates, some of
which are in the development stage. Conductus currently does not intend to
devote significant effort or resources to developing these technologies, and is
dependent on the development activities of third parties in these areas. There
can be no assurance that these technologies will be successfully developed and
commercialized, or that they will achieve market acceptance. Moreover, certain
components of Conductus' subsystems, including cryocoolers, are currently
obtained from a single source or a limited number of suppliers. Although the
Company does not believe that it is ultimately dependent upon any supplier of
these components as a sole source or limited source for any critical components,
the inability of the Company to develop alternative sources, if required,
5
<PAGE>
an inability to meet demand, a prolonged interruption in supply or a significant
increase in price of one or more components would have a material adverse effect
on the Company's business, operating results and financial condition.
FOCUS ON DEVELOPMENT OF COMPONENTS AND SUBSYSTEMS. Many of Conductus'
potential products, if successfully developed, are likely to be used as
components or subsystems in systems manufactured and sold by third party systems
manufacturers. There can be no assurance that these third parties will elect to
incorporate superconductive electronic products in these systems or, if they do,
that related system requirements, such as data processing software and hardware
capabilities, can or will be successfully developed. Failure of third parties to
successfully commercialize complementary technologies or to incorporate the
Company's products into their systems would have a material adverse effect on
Conductus' business, operating results and financial condition.
EXTENSIVE RELIANCE ON COLLABORATIVE RELATIONSHIPS. Conductus has
established and continues to seek to establish collaborative arrangements with
corporate partners, government agencies and public and private research
institutions to develop, manufacture and market superconductive electronic
products. Conductus' success will depend in large part on the development of
successful collaborative arrangements with third parties, their strategic
interest in the potential products under development and their willingness to
purchase any such products. There can be no assurance that Conductus will be
able to enter into collaborative arrangements on commercially reasonable terms,
that these arrangements, if established, will result in successful programs to
develop, manufacture or market superconductive electronic products or, if these
programs are successful, that Conductus' collaborative partners will not seek to
manufacture jointly developed products themselves or obtain them from
alternative sources. In addition, these programs may require Conductus to share
control over its development, manufacturing and marketing programs and
relinquish rights to its technology, may be subject to unilateral termination by
the Company's collaborative partners and may restrict Conductus' ability to
engage in certain areas of product development, manufacturing and marketing. See
"Business -- Strategic Alliances and Development Agreements."
RAPID TECHNOLOGICAL CHANGE. The field of superconductivity is characterized
by rapidly advancing technology. The future success of the Company will depend
in large part upon its ability to keep pace with advancing superconductive
technology, including superconducting materials and processes, and industry
standards. The Company has focused its development efforts to date principally
on yttrium barium copper oxide ("YBCO"). There can be no assurance that YBCO
will ultimately prove commercially competitive against other currently known
materials or materials that may be discovered in the future. The Company will
have to continue to develop and integrate advances in technology for the
fabrication of electronic circuits and devices and manufacture of commercial
quantities of its products. The Company will also need to continue to develop
and integrate advances in complementary technologies. There can be no assurance
that the Company's development efforts will not be rendered obsolete by research
efforts and technological advances made by others or that materials other than
those currently used by Conductus will not prove more advantageous for the
commercialization of superconductive electronic products.
INTENSE COMPETITION. The market for electronic products is intensely
competitive. Although the market for superconductive electronics currently is
small and in the early stages of development, Conductus believes this market
will become intensely competitive if products with significant market potential
are successfully developed. A number of large American, Japanese and European
companies, many of which have substantially greater financial resources,
research and development staffs and manufacturing and marketing capabilities
than the Company, are engaged in programs to develop and commercialize
superconductive electronic technology and products. A number of smaller
companies are also engaged in various aspects of the development and
commercialization of superconductive electronic products. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations are engaged in development programs that may lead to competitive
arrangements for commercializing superconductive electronic products. In
addition, if the superconductor industry develops further, new competitors with
significantly greater resources are likely to enter the field. Conductus'
ability to compete successfully will require it to develop and maintain
technologically advanced products, attract and retain highly qualified
personnel, obtain patent or other protection for its technology and products and
manufacture and market its
6
<PAGE>
products, either on its own or with third parties. The Company's inability to
compete successfully would have a material adverse effect on the Company's
business, operating results and financial condition. See "Business --
Competition."
COMPETING TECHNOLOGIES. The Company's planned products, if successfully
developed, will compete directly with other existing and subsequently developed
products which use competing technologies. In wireless communications
applications, there are a number of competing approaches and technologies to
increase the capacity and improve the quality of wireless networks. These
approaches include increasing the number of base stations, increasing tower
heights, locating filters and amplifiers at the top of antennas and using
advanced antenna technology. In healthcare imaging and analysis applications,
alternative approaches and technologies in magnetic resonance instruments
include using more powerful magnets, and improving receiver sensitivity by
refrigerating conventional copper receiver coils. In magnetic sensing instrument
applications, alternative approaches and technologies may be available to
perform functions addressable by magnetic sensing technology. Improvements in
existing alternative approaches or the development and introduction of competing
approaches or technologies to the Company's potential products could have a
material adverse effect on the Company's business, operating results and
financial condition. Failure of the Company's potential products to compete
successfully with products using competing technologies would have a material
adverse effect on the Company's business, operating results and financial
condition.
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS; RISK OF
LITIGATION. Conductus has received 16 U.S. patents and one related foreign
patent with unexpired terms ranging from 15 to 18 years and has 17 patent
applications pending before the U.S. Patent and Trademark Office. International
counterparts of several of these issued patents or pending applications have
been filed under the Patent Cooperation Treaty with a number of applications
currently in various countries worldwide. The Company will continue to file
other U.S. and key international patent applications as part of its business
strategy to protect technology it considers important to providing a competitive
market advantage for its technologies but there can be no assurance that its
applications will result in issued patents. The Company also relies upon trade
secrets, unpatented know-how, continuing technological innovation, employee and
third-party non-disclosure agreements and the pursuit of licensing opportunities
in order to develop and enhance its competitive position. The Company's efforts
to protect its proprietary rights may not be successful, however, in preventing
their misappropriation or ensuring that these rights will provide the Company
with a competitive advantage. Additionally, certain of the issued patents and
patent applications are jointly owned by the Company and third parties. Any
party has the right to license rights under such patents and applications, which
could result in Conductus not having exclusive control over such inventions.
The Company believes that, since the discovery of high-temperature
superconductors ("HTS") in 1986, several thousand patent applications have been
filed worldwide and over a thousand patents have been granted in the U.S.
relating to superconductivity. There are interference proceedings pending
regarding rights to inventions claimed in some of the applications. Accordingly,
the patent positions of companies using HTS technology, including Conductus, are
uncertain and involve both complex legal and factual questions. Consequently,
there is significant risk that others, including competitors of the Company,
have obtained or will obtain patents relating to the Company's planned products
or technology.
A patent issue of particular importance to the Company relates to copper
oxides or "cuprates," that are used to make HTS products, including the YBCO
compound which is currently the basis for the Company's business and products.
Conductus has neither obtained any issued patents nor has it filed any patent
applications covering the composition of any cuprates or other HTS materials.
However, several U.S. and foreign patent applications filed by IBM, AT&T, the
University of Houston, the Naval Research Laboratory and others are pending
regarding the composition of YBCO and related HTS. See "Business -- Background
- -- Conductus Approach." The Company understands that several of such U.S.
applications are the subject of an interference proceeding currently pending in
the U.S. Patent and Trademark Office (Interference No. 101,981). Additionally,
E. I. du Pont de Nemours & Co. ("DuPont") has notified Conductus that it is the
exclusive licensee of patents issued in Israel, Sweden, Taiwan and the United
Kingdom covering the composition of YBCO and a method for using YBCO in
superconducting applications. DuPont has stated
7
<PAGE>
that, it is interested in sublicensing such patents to Conductus, and would
consider sublicensing to Conductus, as they issue, any other foreign and U.S.
patent applications licensed to DuPont by the University of Houston. The Company
anticipates that it will be required to obtain a license to use YBCO from one or
more of these parties in order to continue to develop and sell products based on
YBCO.
There can be no assurance that the Company would able to obtain licenses to
patents covering YBCO compositions, when issued, or to any other patents
applicable to the Company's business on commercially reasonable terms. In such
an event, the Company could be required to expend significant resources to
develop non-infringing technology alternatives or to obtain licenses to the
technology that the Company infringes or would infringe. There can be no
assurance that the Company would be able to successfully design around these
third party patents or to obtain licenses to technology that it may require.
Furthermore, there can be no assurance that the Company will not be obligated to
defend itself at substantial cost against allegations of infringement of third
party patents. An adverse outcome in such a suit could subject the Company to
significant liabilities to third parties, or require the Company to cease using
such technology. In addition, aside from the merits of a claim, the cost of
defending any such suit would constitute a major financial burden for the
Company that would have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Patents, Proprietary
Technology and Trademarks."
SUBSTANTIAL FUTURE CAPITAL NEEDS. The Company to date has received limited
revenues from product sales. The development of the Company's planned products
will require a commitment of substantial additional funds. Conductus anticipates
that its existing available cash, together with the estimated net proceeds from
this offering, should be adequate to fund the Company's operations through at
least the end of 1998. The Company's future capital requirements will depend on
many factors, including continued progress in its research and development
programs, the magnitude of these programs, the time and costs involved in
obtaining any required regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patents, successful completion of
technological, manufacturing and market requirements, changes in existing
research relationships, the availability of funding under government contracts,
the ability of the Company to establish collaborative arrangements and the cost
of manufacturing scale-up and the amount and timing of future revenues. If
adequate funds are not available, the Company may be required to delay,
scale-back or eliminate one or more of its research and development programs or
obtain funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies or
potential products that the Company would not otherwise relinquish. There can be
no assurance that additional financing will be available on acceptable terms or
at all, if and when required. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
LIMITED COMMERCIAL MANUFACTURING CAPABILITY. Conductus has established a
limited production facility. To date, Conductus has focused primarily on the
development of its fabrication processes and the production of limited
quantities of superconducting thin films and components. Although Conductus'
processing technology is derived principally from semiconductor manufacturing
technology, the fabrication of HTS components entails additional difficulties
because of specific properties unique to HTS materials. There can be no
assurance that Conductus can develop enhanced processing technology necessary to
develop more advanced superconducting devices and circuits, that the Company
will be able to attain commercial yields in the future, that the Company will
not suffer recurring yield problems caused by mask defects, impurities in
materials and other factors or that the Company can expand its processing,
production control, assembly, testing and quality assurance capabilities to
produce existing or planned superconductive electronic products in adequate
commercial quantities. The Company's failure to develop an adequate
manufacturing capacity would have a material adverse effect on the Company's
business, operating results and financial condition. See "Business --
Manufacturing."
NEED TO DEVELOP INFRASTRUCTURE TO SUPPORT COMMERCIALIZATION. Conductus has
very limited experience in commercial sales, marketing and distribution.
Expanded manufacturing, sales, marketing and customer
8
<PAGE>
service capabilities are also needed. Although Conductus has been expanding its
expertise in these areas, there can be no assurance that it will be able to
establish adequate sales, marketing and distribution capabilities or be
successful in gaining market acceptance for any of its potential products.
LIMITED OUTLETS FOR CERTAIN PRODUCTS. The market for NMR probes is highly
concentrated, with estimates that approximately 90% of the U.S. and worldwide
market is divided between Varian Associates ("Varian") and Bruker Instruments.
Although the Company has worked closely with Varian to develop and commercially
introduce the Company's first probe subsystems, there can be no assurance that
Varian will be successful in marketing the probes, that Varian will continue to
market the probes or that the Company will be able to market the probes through
other channels should distribution through Varian prove unsuccessful. See
"Business -- Strategic Alliances and Development Agreements."
HIGH DEGREE OF DEPENDENCE UPON GOVERNMENT CONTRACTS. A significant portion
of the Company's revenues has been derived from contracts with agencies of the
U.S. government. The Company's revenue from government-related contracts
represented approximately 85%, 77%, 82% and 78% of total revenue for the quarter
ended March 31, 1996 and for fiscal 1995, 1994 and 1993, respectively. The
Company's contracts involving the U.S. government are or may be subject to
various risks, including: unilateral termination for the convenience of the
government; reduction or modification in the event of changes in the
government's requirements or budgetary constraints; increased or unexpected
costs causing losses or reduced profits under fixed-price contracts or
unallowable costs under cost reimbursement contracts; risks of potential
disclosure of Conductus' confidential information to third parties; the failure
or inability of the prime contractor to perform its prime contract in
circumstances where Conductus is a subcontractor; the failure of the government
to exercise options provided for in the contracts; the government's
nonexclusive, royalty-free license to use technology developed pursuant to the
contracts by or on behalf of the government in certain circumstances; and
exercise of "march-in" rights by the government. March-in rights refer to the
right of the U.S. government or government agency to require the Company to
license to third parties patented technology developed under contracts funded by
the government if the contractor fails to continue to develop the technology.
The programs in which Conductus participates in many cases extend for several
years, but are normally funded on an annual basis. Although revenues from
government contracts have increased in recent years, there can be no assurance
that government contract revenues will grow at historical rates or continue at
historical levels in the future. A reduction in, or discontinuance of, such
commitment or of the Company's participation in such programs would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Government Contracts."
GOVERNMENT REGULATIONS. Some of the Company's potential products may be
used as subsystems in medical devices, such as MRI and NMR devices, which are
subject to extensive governmental regulation in the U.S. by the Food and Drug
Administration ("FDA") and other government agencies. Regulation of medical
devices outside the U.S. varies widely from country to country. The clearance
and approval process for both the FDA and foreign regulatory authorities can be
costly and time consuming and the Company will be largely dependent upon the
efforts of manufacturers of instruments that utilize the Company's subsystems to
obtain necessary approvals. There can be no assurance that any buyers of the
Company's subsystems will be able to obtain any necessary governmental
approvals, or otherwise comply with applicable government regulations.
In addition, in some states, a certificate of need ("CON") or similar
regulatory approval is required prior to acquisition of medical equipment or
introduction of a new service by hospitals or healthcare providers. CON
regulations limiting the number of new MRI machines or limiting the acquisition
of magnetoencephalography devices could adversely impact commercialization of
those products, whether or not they incorporate superconducting products
supplied by the Company.
In the communications area, the operation of cellular and PCS base stations
is regulated in the United States by the Federal Communications Commission
("FCC"). Base stations and equipment marketed for use therein must meet specific
technical standards. The Company's ability to sell its HTS filter subsystems
will depend upon the ability of base station equipment manufacturers and of
cellular base station operators
9
<PAGE>
to obtain and retain the necessary FCC approvals and licenses. Any failure or
delay of base station manufacturers or operators in obtaining necessary
approvals could have a material adverse effect on the Company's business,
operating results and financial condition.
ENVIRONMENTAL REGULATIONS. The Company is subject to a number of federal,
state and local governmental regulations related to the use, storage, discharge
and disposal of toxic, volatile or otherwise hazardous chemicals used in its
business. Any failure to comply with present or future regulations could result
in fines being imposed on the Company and the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand or could require the Company to acquire costly
equipment or to incur other significant expenses to comply with environmental
regulations or to clean up prior discharges.
ATTRACTION AND RETENTION OF KEY EMPLOYEES. The Company is highly dependent
upon the efforts of its senior management and technical team, as well as the
contributions of its Scientific Advisory Board. The loss of the services of one
or more members of the senior management and technical team or Scientific
Advisory Board could impede the achievement of product development and
commercialization objectives. Due to the specialized technical nature of the
Company's business, the Company is also highly dependent upon its ability to
attract and retain qualified technical and key management personnel. Moreover,
the Company is targeting its products towards markets, such as communications,
healthcare and instrumentation, that require substantial industry knowledge and
expertise. Although the Company has engaged consultants with substantial
expertise in its targeted markets, the Company currently has limited expertise
in these areas and it is essential to attract qualified personnel with expertise
in manufacturing, marketing, sales and support in each of its targeted markets.
There is intense competition for qualified personnel in the areas of the
Company's activities and there can be no assurance that the Company will be able
to continue to attract and retain qualified personnel necessary for the
development of its business. See "Business -- Employees."
VOLATILITY OF STOCK PRICE. There has been significant volatility in the
market price of securities of technology companies, particularly those that,
like the Company, are still primarily engaged in product development activities.
See "Price Range of Common Stock and Dividend Policy." Factors such as
technology and product announcements by the Company or its competitors, disputes
relating to patents and proprietary rights and variations in quarterly operating
results may have a significant impact on the market price of the Common Stock.
In addition, the securities markets have experienced volatility which is often
unrelated to the operating performance of particular companies. In the past,
following periods of volatility in the market price of a company's securities,
securities class action lawsuits have been instituted against a company. If
brought, such litigation could have a material adverse effect on the Company's
business, results of operations and financial condition.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF RESTATED
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS AND OF DELAWARE LAW. The
Board of Directors has the authority to issue up to 1,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. The Company
has no present plans to issue shares of Preferred Stock. Further, certain
provisions of the Company's Restated Certificate of Incorporation and Bylaws and
of Delaware corporate law could delay or make more difficult a merger, tender
offer or proxy contest involving the Company. Among other things, the Company's
Restated Certificate of Incorporation does not permit stockholders to act by
written consent. See "Description of Capital Stock -- Preferred Stock" and "--
Antitakeover Effects of Provisions of the Restated Certificate of Incorporation
and Bylaws and of Delaware Law."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of a
substantial number of shares of Common Stock in the public market following this
offering could adversely affect the market price for the Company's Common Stock.
The number of shares of Common Stock available for sale in the public market is
limited by restrictions under the Securities Act of 1933, as amended (the
"Securities Act"), and lock-up agreements
10
<PAGE>
under which the holders of such shares have agreed not to sell or otherwise
dispose of any of their shares for a period of 90 days after the effective date
of this offering without the prior written consent of Tucker Anthony
Incorporated. However, Tucker Anthony Incorporated may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. As a result of these restrictions, based on
shares outstanding as of March 31, 1996, 5,308,724 shares of Common Stock will
be freely tradable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, including the 1,000,000 shares of
Common Stock offered hereby, 1,500,000 shares registered pursuant to the
Company's initial public offering and 2,808,724 shares that have either been
registered on Form S-8 or are restricted securities that can be sold pursuant to
Rule 144(k) or Rule 701 under the Securities Act. A total of 1,424,265 shares
are held by affiliates of the Company and will be eligible for sale on the date
of this Prospectus subject to the restrictions of Rule 144 ("Affiliate Shares").
All of the Affiliate Shares will be subject to lock-up arrangements.
Furthermore, upon expiration of the lock-up agreements referred to above,
holders of approximately 2,017,000 shares of Common Stock and warrants to
purchase 33,534 shares of Common Stock will be entitled to certain registration
rights with respect to such shares. If such holders, by exercising their
registration rights, cause a large number of shares to be registered and sold in
the public market, the sale of such shares could have a material adverse effect
on the market price for the Company's Common Stock and would have a material
adverse effect the Company's ability to raise additional capital when or if
required. See "Shares Eligible for Future Sale" and "Description of Capital
Stock -- Registration Rights."
ABSENCE OF DIVIDENDS. The Company has never paid cash dividends and does
not anticipate paying cash dividends on the Common Stock in the foreseeable
future. See "Price Range of Common Stock and Dividend Policy."
DILUTION. The public offering price will be substantially higher than the
book value per share of the currently outstanding Common Stock. Investors
purchasing shares in this offering will therefore suffer immediate and
substantial dilution. See "Dilution." In addition, the exercise of any of the
currently outstanding warrants or stock options would likely result in a
dilution of the value of the Common Stock. Moreover, the Company may at any time
in the future sell additional securities and/or rights to purchase such
securities, grant additional warrants, stock options or other forms of
equity-based incentive compensation to the Company's management and/or employees
to attract and retain such personnel or 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. Any of these actions
would have a dilutive effect upon the holders of the Common Stock.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered hereby are estimated to be $13,700,000, assuming a public
offering price of $15.00 per share and after deducting the underwriting discount
and estimated offering expenses.
The Company anticipates that a significant portion of the net proceeds will
be used for working capital required to support expansion of its operations, and
that approximately $2,500,000 will be spent on new manufacturing equipment
during the next 24 months. The Company also expects to use a portion of the net
proceeds to repay all amounts outstanding under its bank line of credit, which
the Company anticipates may total approximately $500,000 immediately prior to
the closing. As of March 31, 1996, there were no borrowings under this credit
facility which provides for borrowing up to the lesser of $2,000,000 or 75% of
eligible receivables, bears interest at prime plus 0.50% and expires in February
1997. The Company also anticipates using approximately $2,500,000 of the net
proceeds for the development of its superconducting products. The Company
anticipates that the balance of the net proceeds will be added to working
capital and used for general corporate purposes, including expansion of
manufacturing, sales and marketing infrastructure. The Company may also consider
using the net proceeds for the acquisition of complementary businesses, products
or technologies. However, the Company currently has no specific plans with
respect to any such acquisition. Pending such uses, the Company intends to
invest the net proceeds in short-term, investment-grade, interest-bearing
securities.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock of the Company commenced trading on the Nasdaq National
Market under the trading symbol "CDTS" on August 5, 1993. The following table
presents quarterly information on the high and low closing sales prices for
shares of the Company's Common Stock for the periods indicated as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
1994
First Quarter............................................................... $10 5/8 $ 5
Second Quarter.............................................................. 7 1/2 2 5/8
Third Quarter............................................................... 5 3/4 3 1/4
Fourth Quarter.............................................................. 5 1/4 4
1995
First Quarter............................................................... 7 4 1/2
Second Quarter.............................................................. 8 6
Third Quarter............................................................... 7 5 3/4
Fourth Quarter.............................................................. 7 1/2 5 3/16
1996
First Quarter............................................................... 15 6 1/2
Second Quarter (through May 14, 1996)....................................... 16 1/2 9 3/4
</TABLE>
On May 14, 1996, the last sales price of the Common Stock, as reported on
the Nasdaq National Market, was $15.125 per share. There were 111 holders of
record of the Company's Common Stock as of May 10, 1996.
The Company has not paid any cash dividends on its capital stock since its
inception, and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. The Company is restricted under its bank financing agreement
from paying any cash dividends but may pay stock dividends.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, and as adjusted for the sale of 1,000,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net proceeds
therefrom, at an assumed offering price of $15.00 per share:
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Long-term debt, net of current portion (1)......................................... $ 1,258,228 $ 1,258,228
Stockholders' equity:
Preferred stock, $0.0001 par value:
Authorized: 1,000,000 shares;
No shares issued and outstanding............................................... -- --
Common stock, $0.000l par value:
Authorized: 11,000,000 shares;
Issued: 5,905,363, actual; 6,905,363, as adjusted (2)
Outstanding: 5,732,989, actual; 6,732,989, as adjusted (2)..................... 574 674
Additional paid-in capital....................................................... 30,069,797 43,769,697
Unrealized gain on investments, net.............................................. 319 319
Accumulated deficit.............................................................. (25,601,960) (25,601,960)
-------------- -------------
Total stockholders' equity................................................... 4,468,730 18,168,730
-------------- -------------
Total capitalization......................................................... $ 5,726,958 $ 19,426,958
-------------- -------------
-------------- -------------
</TABLE>
- ------------------------
(1) See Note 10 of Notes to Financial Statements.
(2) Based on the number of shares outstanding as of March 31, 1996. Excludes
1,167,026 shares of Common Stock issuable upon exercise of outstanding
options as of March 31, 1996, with a weighted average exercise price of
$5.04 per share, and 21,177 shares of Common Stock that may be issuable
under the Company's Employee Stock Purchase Plan upon the expiration of the
current purchase period. See "Management -- 1992 Stock Option/Stock Issuance
Plan," "-- Employee Stock Purchase Plan" and Note 13 of Notes to Financial
Statements.
13
<PAGE>
DILUTION
As of March 31, 1996, the Company had a net tangible book value of
$4,430,000, or approximately $0.77 per share of outstanding Common Stock. "Net
tangible book value" represents the amount of total tangible assets less total
liabilities. Without taking into account any other changes in the net tangible
book value after March 31, 1996, other than to give effect to the receipt by the
Company of the net proceeds from the sale of the shares of Common Stock offered
by the Company hereby at an assumed public offering price of $15.00 per share,
the pro forma net tangible book value of the Company as of March 31, 1996 would
have been $18,130,000, or $2.69 per share. This represents an immediate increase
in net tangible book value of $1.92 per share to existing stockholders and an
immediate dilution in net tangible book value of $12.31 per share to purchasers
of Common Stock in the offering ("New Investors"). Dilution is determined by
subtracting net tangible book value per share after the offering from the amount
of cash paid by a New Investor for a share of Common Stock. New Investors
participating in this offering will incur immediate, substantial dilution. This
is illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................................... $ 15.00
Net tangible book value per share before the offering.................... $ 0.77
Increase per share attributable to New Investors......................... 1.92
---------
Pro forma net tangible book value per share after the offering............... 2.69
---------
Dilution per share to New Investors.......................................... $ 12.31
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1996,
the difference between the existing stockholders and the New Investors (at an
assumed public offering price of $15.00 per share) with respect to the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)........................ 5,732,989 85.1% $ 30,070,371 66.7% $ 5.25
New Investors.................................... 1,000,000 14.9 15,000,000 33.3 $ 15.00
---------- ----- ------------- -----
Total.......................................... 6,732,989 100.0% $ 45,070,371 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Total consideration paid by existing stockholders is net of issuance costs
and treasury stock.
The foregoing computations are based on the number of shares outstanding as
of March 31, 1996 and exclude shares of Common Stock issuable upon exercise of
outstanding options and warrants as of March 31, 1996 with a weighted average
exercise price of $5.04 per share. To the extent options or warrants are
exercised, there will be further dilution to the New Investors. See "Management
- -- 1992 Stock Option/Stock Issuance Plan" and Note 13 of Notes to Financial
Statements.
14
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statement of operations data for the
years ended December 31, 1995, 1994 and 1993, and the balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited financial statements elsewhere in this Prospectus. The statement of
operations data for the years ended December 31, 1992 and 1991 and the balance
sheet data at December 31, 1992 and 1991 are derived from audited financial
statements not included herein. The statement of operations data for the
quarters ended March 31, 1996 and 1995 and the balance sheet data at March 31,
1996 are derived from unaudited financial statements that include, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information set forth
therein. The results of operations for the three months ended March 31, 1996 or
any other period are not necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993(2) 1992(2) 1991(2)
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract.............................. $ 2,214 $ 1,644 $ 8,148 $ 7,048 $ 5,070 $ 2,233 $ 740
Product sales......................... 397 369 2,434 1,588 1,409 438 158
--------- --------- --------- --------- --------- --------- ---------
Total revenues...................... 2,611 2,013 10,582 8,636 6,479 2,671 898
--------- --------- --------- --------- --------- --------- ---------
Costs and Expenses:
Cost of product sales................. 256 166 1,430 975 1,175 295 70
Research and development.............. 2,743 2,578 9,819 9,202 7,080 3,903 3,381
Selling, general and administrative... 1,007 827 3,756 3,336 1,589 1,605 737
Nonrecurring charge related to
purchased technology................. -- -- -- -- 705 -- --
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses............ 4,006 3,571 15,005 13,513 10,549 5,803 4,188
--------- --------- --------- --------- --------- --------- ---------
Loss from operations.............. $ (1,395) $ (1,558) $ (4,423) $ (4,876) $ (4,070) $ (3,132) $ (3,290)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss................................ $ (1,379) $ (1,570) $ (4,422) $ (4,544) $ (4,122) $ (3,215) $ (3,130)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share (1)........... $ (0.24) $ (0.29) $ (0.80) $ (0.85) $ (1.40) $ (1.91) $ (1.79)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing per share
amounts (1)............................ 5,706 5,397 5,543 5,323 2,940 1,680 1,753
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1995 1994 1993(2) 1992 1991
MARCH 31, --------- --------- --------- --------- ---------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $ 3,074 $ 4,287 $ 7,076 $ 12,438 $ (1,332) $ 1,783
Total assets..................................... 8,937 10,128 12,541 16,233 3,250 5,054
Long-term debt, net of current portion........... 1,258 1,146 533 180 252 735
Total stockholders' equity....................... 4,469 5,814 9,529 14,057 46 3,235
</TABLE>
- ------------------------
(1) See Note 2 of Notes to Financial Statements.
(2) Excluding results of operations for Tristan prior to its acquisition by
Conductus on May 28, 1993.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND IN "RISK FACTORS" AND "BUSINESS."
OVERVIEW
Conductus develops, manufactures, and markets electronic components and
systems based on superconductors for applications in the communications,
healthcare and instrumentation markets. In May 1993, Conductus acquired Tristan
Technologies ("Tristan"), a San Diego, California-based company founded in 1991,
that designed, manufactured and sold large-scale magnetic sensing systems and
instrumentation. In June 1994, Tristan became the Conductus Instrument & Systems
Division. As of March 31, 1996, Conductus had accumulated losses of
approximately $25,602,000 and expects to incur additional losses at least during
1996 due to the Company's planned expansion of operations. Conductus, alone or
with collaborative partners, must successfully develop, manufacture, introduce
and market its potential products in order to achieve profitability. Conductus
does not expect to recognize meaningful product sales until it successfully
develops and commercializes superconductive components, systems and subsystems
that address significant market needs. See "Risk Factors."
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1996 AND 1995
The Company's total revenues increased to $2,611,000 for the first quarter
of 1996, a 30% increase over the $2,013,000 for the same period in 1995. Total
revenues consisted primarily of contract revenue and, to a lesser extent,
product sales. Revenues under U.S. government research and development contracts
increased to $2,214,000 in the period from $1,643,000 in the same period in the
prior year and represented 85% and 82% of total revenue for the periods,
respectively. At March 31, 1996, Conductus has approximately $5,577,000 in
contracts and grants and $7,760,000 in awards for future research and
development. The recognition of revenue and receipt of payment pursuant to these
contracts and awards are subject to numerous risks.
Revenues from sales of large-scale superconducting magnetic systems, SQUIDs,
HTS thin films and other products increased to $397,000 in the first quarter of
1996, an 8% increase over the $369,000 of product sales in same period in the
prior year. The increase in the first quarter of 1996 is primarily related to
magnetic sensing systems and instruments. The large-scale magnetic sensing
systems have large unit prices and are sold in low volumes, and thus significant
fluctuations in sales of these systems may occur between quarters. Conductus
does not expect to recognize significant product sales until it successfully
develops and commercializes superconductive components and systems addressing
significant markets.
Cost of products increased to $256,000 for the first quarter of 1996, a 54%
increase over the $166,000 for the same period in 1995. The increase in cost of
products was directly related to increased product sales. Gross margins
decreased to 36% in the first quarter of 1996 from an unusually high gross
margin of 55% in the comparable period for the prior year. The reduction
reflects changes in commercial product mix between the two quarters. Large
systems margins may vary based on options included and may have downward impacts
on overall margins. Costs of contract revenues are included in research and
development expenses.
Research and development expenses increased to $2,743,000 in the first
quarter of 1996, a 6% increase over the $2,577,000 for the same period in 1995.
The increase is directly related to the development of
16
<PAGE>
commercial products, particularly in both communications markets, cellular and
PCS. The contract cost portion increased ratably from period to period. The
Company expects to continue to incur significant research and development
expenses as it seeks to develop additional products.
Selling, general and administrative expenses increased to $1,007,000 for the
first quarter of 1996 from $827,000 for the same quarter in 1995. These costs
increased in 1996 compared to the prior quarter due to increased sales costs
associated with the representative network for magnetic sensing and instrument
products and the increasing size of the Company's operations. Headcount
increased to 105 at March 31, 1996 from 101 at March 31, 1995. To the extent the
Company increases sales of commercial products, there will be additional sales
and marketing costs over those incurred in the first quarter of 1996.
Interest income was $27,000 in the first quarter of 1996 compared to $80,000
during the same quarter in 1995. The primary reason for the decrease was a lower
amount of cash and investments which was partly offset by higher interest rates.
Interest charges increased on the Company's debt financing to approximately
$36,000 in the first quarter of 1996 compared to $24,000 for the same quarter in
1995, due to higher outstanding debt balances incurred to purchase capital
equipment.
As a result of incurring losses, the Company has not incurred any income tax
liability. The Company has established a valuation allowance against its
deferred tax assets and reviews this allowance on a periodic basis. At such time
that the Company believes that it is more likely than not that the deferred tax
asset will be realized, the valuation allowance will be reduced.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The results of operations of the Company for the year ended December 31,
1993 do not include the results of operations of Tristan prior to its
acquisition by Conductus on May 28, 1993.
Total revenues increased to $10,582,000 in 1995 from $8,636,000 in 1994 and
$6,479,000 in 1993. Total revenues consist primarily of contract revenue and, to
a lesser extent, product sales. Revenues for 1993 do not include revenues of
Tristan before May 28, 1993, which were $602,000 for the period. Revenues under
U.S. government research and development contracts increased to $8,148,000 in
1995 from $7,048,000 in 1994 and $5,070,000 in 1993 and represented 77%, 82% and
78% of total revenue in 1995, 1994 and 1993, respectively. The increase in
contract revenues during 1995 was largely attributable to the addition of
several new multi-year government contracts. Revenues under these new contracts
are expected to offset planned declines in revenues from contracts approaching
the end of their terms. The Company had $3,930,000 and $2,751,000 in contracts
and grants and $9,228,000 and $5,410,000 in awards from U.S. government agencies
as of December 31, 1995 and 1994, respectively. Conductus does not anticipate
that government contract revenues will grow at historical rates in the future.
The recognition of revenue and receipt of payment pursuant to these contracts
and awards are subject to numerous risks. See Note 12 of Notes to Financial
Statements.
Revenue from sales of large-scale superconductive magnetic sensing systems,
SQUIDs, HTS thin films and other products increased to $2,433,000 in 1995 from
$1,588,000 in 1994 and $1,409,000 in 1993, primarily due to an increase in sales
of magnetic sensing systems and instruments introduced late in 1994 and in 1995.
The large-scale magnetic sensing systems have large unit prices and are sold in
low volumes, and thus, the timing of individual sales of these systems could
result in significant period to period fluctuations in revenues. Product sales
for 1993 do not include $602,000 realized by Tristan from sales of
superconducting magnetic systems before May 28, 1993.
Cost of product sales were $1,430,000, $975,000 and $1,175,000 for 1995,
1994 and 1993, respectively. Gross margins were 41%, 39% and 17% for 1995, 1994
and 1993, respectively. Gross margins increased in 1995 and 1994 over 1993
primarily due to lower margins in 1993 on initial system products which included
startup costs. Startup costs on the introduction of new products also affected
margins in 1995 but, due to broader product lines, the effect was not as
substantial.
17
<PAGE>
The Company's research and development expenses, including cost of contract
revenues, increased to $9,819,000 in 1995 from $9,201,000 in 1994 and $7,080,000
in 1993, representing 65%, 68% and 67%, of total operating expenses in the
respective years. The increases in 1995 and 1994 reflected the increase in the
Company's overall research and development activities, and emphasis on efforts
in communications and healthcare. Research and development includes both
externally and internally funded projects. Externally funded research and
development programs, primarily under contracts with agencies of the U.S.
government, accounted for approximately $9,176,000 of research and development
expenses in 1995, $8,717,000 in 1994 and $6,500,000 in 1993, reflecting
increased government contract and research activity throughout the period.
Current levels of expenditure are expected to continue for development of
commercial products, particularly in the communication and healthcare areas. Net
expenses do not include a non-recurring charge of $705,000 resulting from the
acquisition of Tristan in 1993. The Company expects to continue to incur
significant research and development expenses and these expenses are likely to
increase as it seeks to develop additional products.
Selling, general and administrative expenses increased to approximately
$3,756,000 in 1995 from $3,336,000 in 1994 and $1,589,000 in 1993 or 25%, 25%
and 15%, respectively, of total operating expenses in 1995, 1994 and 1993. These
costs increased in 1995 and 1994 compared to 1993 due to the increased size of
the Company as a result of the acquisition of Tristan, significant headcount
additions and increasing sales and marketing activities. Total headcount has
increased to 99 at December 31, 1995 from 96 at December 31, 1994 and 64 at
December 31, 1993. Increases in 1995 over 1994 also include the selling costs
associated with expanding the Company's representative network of independent
distributors of magnetic sensing and instrumentation products. Included in 1994
expenses is a non-recurring charge of approximately $230,000 for severance and
recruitment expenses associated with management changes and additions.
Additionally, the Company expects sales and marketing expenses to continue to
increase as it begins to market commercial products.
The Company's total operating expenses increased to $15,005,000 in 1995 from
$13,513,000 in 1994 and $10,549,000 in 1993. Operating expenses for 1993 include
a non-recurring charge of $705,000 associated with purchased technology from the
acquisition of Tristan.
Losses from operations were $4,423,000, $4,876,000 and $4,070,000 for 1995,
1994 and 1993, respectively. Excluding the non-recurring charge of $705,000
resulting from the acquisition of Tristan, the loss from operations for 1993
would have been $3,365,000. The decreasing loss in 1995 compared to 1994 was
primarily related to planned increases in revenues offset by headcount and
contract costs as the Company moved toward developing and commercializing
products.
Interest income from cash equivalents and investments were $249,000 in 1995,
$344,000 in 1994 and $166,000 in 1993. The primary reasons for the changes
between years were the levels of cash equivalents and investments, as
approximately $13 million was received in the Company's initial public offering
in August 1993, and thereafter there have been reductions to support operations
through 1994 and 1995.
Interest charges were $156,000, $56,000 and $176,000 in 1995, 1994 and 1993,
respectively. Interest charges related to the Company's equipment term loan
financing which commenced in September 1994 were reflected for the entire year
compared to a minimal amount in 1994. The decrease in interest charges from 1993
to 1994 was primarily due to the maturing of portions of the three equipment
lease lines. As of year end, only two lease line obligations remain at a reduced
level due to maturities. Additionally, in 1993 the Company incurred interest
charges of $86,000 related to its bridge loan financing.
As a result of incurring losses, the Company has not incurred any income tax
liability. The Company has established a valuation allowance against its
deferred tax assets and reviews this allowance on a periodic basis. At such time
that the Company believes that it is more likely than not that the deferred tax
asset will be realized, the valuation allowance will be reduced.
Conductus does not believe that inflation has had a material effect on its
financial condition or results of operations during the past three fiscal years.
However, there can be no assurance that the Company's business will not be
affected by inflation in the future.
18
<PAGE>
During March 1995, the Financial Accounting Standards Board ("FASB")issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 will become
effective for the Company's year ending December 31, 1996. The Company has
studied the implications of SFAS 121 and, based on its initial evaluation, does
not expect it to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") which established a fair value based
method of accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will continue to account for employee purchase rights
and stock options under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123 disclosures will be effective for the Company's year ending
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's aggregate cash, cash equivalents and
short-term and long-term investments totaled $2,110,000 compared to $3,153,000
as of December 31, 1995 and $7,538,000 as of December 31, 1994. The Company has
financed its operations since inception primarily through $13,251,000 in net
proceeds from its initial public offering of Common Stock in August 1993,
$14,645,000 raised in private financings, $25,529,000 from U.S. government
contracts, $4,823,000 in aggregate borrowings under three equipment lease lines
of credit and equipment term loan and $3,183,000 in interest income.
Net cash used in operations was $4,625,000, $3,578,000 and $2,795,000 for
1995, 1994 and 1993, respectively. The increase in net cash used in operations
in 1995 over the prior years was due primarily to increased size of the
Company's operations including headcount and other related costs, which was
partially offset by increased revenues. A significant portion of the increase is
related to increased receivables on government contracts and prepaid expenses
and other current assets, offset to some extent by increased accounts payables.
The prior year was also affected by the non-recurring charge for purchased
technology of $705,000. The Company anticipates that its accounts receivable
from revenues under U.S. government contracts and product sales, as well as
inventories, will increase during 1996. Such increases will result in the use of
additional cash in operating activities.
Net cash used in operations was $1,061,000 for the first quarter period of
1996. The net cash used in operating activities in the first quarter of 1996 was
primarily due to operating losses and to a lesser extent increases in inventory
which were partially offset by reductions in accounts receivables and prepaid
expenses and other current assets and other related costs. The Company
anticipates that its accounts receivable from revenues under U.S. government
contracts and product sales, as well as inventories, may increase during 1996.
Any such increases will result in the use of additional cash in operating
activities.
During 1995 and 1994, net cash of $2,670,000 and $1,743,000 was provided by
investing activities from the reduction in investments partially offset by
purchases of property and equipment. During 1993, net cash of $10,458,000 was
used in investing activities from funding received on the initial public
offering. Purchases of property and equipment in 1995 were $1,568,000, an
increase of $342,000 over the prior year primarily reflecting expenditures to
expand the Company's facilities in 1995 which approximated $625,000 and
increased equipment needs for research and development and operations.
Net cash from investing activities was $1,129,000 for the first quarter of
1996. Net cash was provided by net reductions in short-term investments,
partially offset by purchases of property and equipment.
Net cash from financing activities was $1,722,000, $269,000 and $14,933,000
in 1995, 1994 and 1993, respectively. Net cash provided by financing activities
in 1995 and 1994 was primarily due to borrowings under the Company's equipment
term loan offset by principal payments under capital lease obligations and
proceeds from issuance of shares under the 1994 Employee Stock Purchase Plan.
Net cash provided by financing activities in 1993 was primarily due to the
Company's initial public offering in August 1993, its
19
<PAGE>
private placement in June 1993, and bridge loan financings which were converted
into equity in the private placement, offset by principal payments under capital
lease obligations, equipment term loan and debt assumed in the Tristan
acquisition.
Net cash from financing activities was $241,000 for the first quarter of
1996, primarily due to borrowings under the Company's equipment term loan offset
by principal payments under capital lease obligations.
Conductus anticipates that its existing available cash, its line of credit
of $2,000,000 and term loan facility for fixed assets of $1,000,000 should be
adequate to fund the Company's operations through at least the end of 1996. See
Note 10 of Notes to Financial Statements and "Use of Proceeds." There can be no
assurance that additional funding, if required, will be available on acceptable
terms or at all.
The actual amount of the Company's future capital requirements will depend
on many factors, including continued progress in its research and development
programs, the magnitude of these programs, the time and costs involved in
obtaining any required regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patents, successful completion of
technological, manufacturing and marketing requirements, changes in existing
research relationships, the availability of funding under government contracts,
the ability of the Company to establish collaborative arrangements and the cost
of manufacturing scale-up and the amount of future revenues. The development of
the Company's potential products will require a commitment of substantial funds
to conduct further research and development and testing of its potential
products, to establish commercial-scale manufacturing and to market any
resulting products. The Company expects to use significant amounts of cash for
capital equipment and support operations until product revenues can contribute.
20
<PAGE>
BUSINESS
THE BUSINESS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTS THAT COULD CAUSE SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN "RISK
FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
Conductus develops, manufactures and markets electronic components and
subsystems based on superconductors. The unique properties of superconductors
provide the basis for electronic products with significant potential performance
advantages over products based on competing materials such as copper and
semiconductors. Depending on the application, these advantages include enhanced
sensitivity, efficiency, speed and operating frequency as well as reduced power
consumption, size, weight and cost.
Conductus is currently focusing significant development efforts on
applications for superconductors in communications, healthcare and
instrumentation. In the communications market, Conductus is developing filter
subsystems for cellular and personal communication services ("PCS") base
stations. These superconducting filter subsystems could provide significant
benefits in base station performance and reduce the size of the filter
components. In the healthcare market, Conductus is developing and testing
prototype superconductive receiver subsystems for several types of magnetic
resonance instruments, including nuclear magnetic resonance ("NMR")
spectrometers and magnetic resonance imaging ("MRI") scanners. The Company
currently manufactures and sells a limited number of superconducting receiver
probe subsystems for NMR spectrometers. In the instrumentation market, Conductus
currently manufactures and sells superconducting sensors called Superconducting
Quantum Interference Devices ("SQUIDs"), which can be used to build electronic
instruments that detect and precisely locate extremely weak magnetic signals.
Conductus is also marketing and developing a variety of electronic components
and instruments based on SQUID technology.
BACKGROUND
SUPERCONDUCTORS
Superconductors are materials that have the ability to transport electrical
energy with little or no loss when cooled to a "critical" temperature. The
intrinsic properties of superconductors are unique in nature and offer potential
performance benefits to electrical and electronic systems. These include
low-loss signal transmission, extreme magnetic sensitivity and efficient
high-speed switching. When electrical currents flow through ordinary materials,
they encounter resistance which consumes energy by converting electrical energy
into heat energy. Depending on whether direct or alternating current is applied,
superconductors have the ability to transport electrical current with no
resistance at all or with only a tiny fraction (typically less than one percent)
of what is found in the best conventional conductors. This property is extremely
beneficial in electronic components whose increased efficiency leads to enhanced
signal strength, improved signal resolution and reduced component size and
weight. Other intrinsic properties of superconductors enable the fabrication of
unique electronic devices, including high-speed electronic switches and ultra-
sensitive magnetic sensors.
From 1911, when superconductivity was first discovered, until 1986, the
critical temperatures for all known superconductors did not exceed 23 K
(-418 DEG. F). As a result, superconductivity was not widely used in commercial
applications because of the high cost and complexities associated with reaching
and maintaining such low temperatures. In 1986, a new class of superconducting
materials, referred to as high-temperature superconductors ("HTS"), was
discovered having critical temperatures above 77 K (-320 DEG. F), the boiling
point of liquid nitrogen. These high critical temperatures allow HTS materials
to be cooled to a superconducting state using liquid nitrogen, which is
inexpensive and relatively easy to use, or using relatively simple mechanical
refrigerators. Conductus believes that this ability to obtain the benefits of
superconducting technology at more easily achieved temperatures enables much
broader commercial applications.
21
<PAGE>
CONDUCTUS' APPROACH
Conductus develops, manufactures and markets superconductive electronic
devices and components using thin-film technology based upon the material
yttrium barium copper oxide ("YBCO"), which the Company has judged to be best
suited for electronic applications. Conductus combines what it believes to be
the world's most advanced YBCO thin-film technology with expertise in electronic
device and component design, analog and digital electronic engineering,
cryogenic packaging, mechanical engineering and system integration. Conductus
believes that systems containing superconductive electronic technology will
offer performance that is unavailable from competing technology, will reduce the
costs of performing desired functions, or, in many cases, do both.
CHOICE OF MATERIAL. Although a number of high-temperature superconductors
have been identified, Conductus has focused upon the development of YBCO for
electronic applications. See "Risk Factors -- Uncertainty of Patents and
Proprietary Rights; Risk of Litigation." YBCO is the only HTS material for which
there has been both significant development and successful demonstration of
multilayer technology, i.e., the use of multiple thin-film materials deposited
one upon another. Conductus believes that such multilayer structures are
important for many electronic components and devices, where they can be used for
better film quality and stability and enhanced device functionality. Conductus
has developed several proprietary processes for producing YBCO and other
thin-film materials as well as for fabricating superconducting components and
devices. These processes include thin-film growth, photolithography, etching and
other standard procedures used in the manufacture of electronic devices.
THIN-FILM EXPERTISE. Conductus produces superconducting components using a
thin-film fabrication approach. The Company's superconductive circuits and
components are fabricated on the surface of wafers using vapor-phase thin-film
growth and standard circuit processing steps similar to those used to
manufacture semiconductor devices. Furthermore, the fabrication of HTS
components and circuits entails specialized processes, which are the subject of
Conductus' patents or proprietary know-how, in order for HTS materials such as
YBCO to exhibit desirable superconducting properties. Conductus, in many
instances, has performed pioneering work in materials, processes and structures
based on thin-film superconductive technology, and has developed processes it
believes are capable of routinely producing a variety of high quality films in
quantity for several applications, including multiple layer thin-film materials
suitable for more complex devices and components. Compared to "thick-film"
approaches and ceramic fabrication techniques, the Company believes that the
thin-film approach is more versatile and provides more compact components and
that the superconducting properties of the materials produced in this way are
superior.
FOCUS ON COMPLETE SOLUTIONS. Conductus believes that superconductive
component technology can best be provided to customers in the form of integrated
subsystems that incorporate the components, additional electronic circuits and
devices, and the self-contained refrigeration equipment and packaging required
to maintain the reduced temperatures necessary to sustain superconductivity. For
this reason, in addition to its thin-film expertise, Conductus has also
established significant expertise and know-how in areas that it believes are
necessary for the commercial development of superconductive technology,
including electronic device and component design, analog and digital electronic
engineering, cryogenic packaging (including cryoelectronics, thermal management,
vacuum engineering and cryocoolers), mechanical engineering and system
integration. Conductus seeks to make the presence of superconductive and
cryogenic components an entirely internal feature of its products that requires
no special expertise or skill on the part of the user. By skillful integration
of the refrigeration system into its communications filter subsystem, for
example, and by selection of a refrigeration approach with proven durability,
Conductus believes that its products can be easily accommodated and well
accepted by end users. Similarly, the Company's NMR probe is designed to be
readily installed into existing NMR systems in essentially the same manner as
conventional probes. The Company believes that providing its technology at the
subsystem level to system manufacturers in specific markets will allow it to
rapidly and efficiently expand both its product line and its customer base.
22
<PAGE>
SIGNIFICANT COMPANY MILESTONES. Since establishing its laboratory
facilities in 1989, Conductus has made significant and continuous progress in
establishing the enabling technologies for its target applications. The table
below sets forth significant milestones in the development and commercialization
of Conductus' technology:
<TABLE>
<CAPTION>
DEVELOPMENT AND COMMERCIALIZATION MILESTONES
HTS THIN-FILM
TECHNOLOGY COMMUNICATIONS HEALTHCARE INSTRUMENTATION
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Pre-1991 Developed multilayer
HTS technology.
1991 Sold first single- and Demonstrated low Made world's first
multilayer HTS films. phase-noise YBCO YBCO integrated SQUID
Developed biepitaxial resonator. magnetometer.
junctions for use in
HTS SQUID manufacture.
1992 Demonstrated YBCO film Demonstrated HTS Demonstrated HTS MRI Introduced Mr.
with state-of-the-art microwave delay lines. receiver coil. SQUID-Registered Trademark-
low surface resistance HTS SQUID
on MgO substrate. magnetometer.
1993 Demonstrated hybrid Demonstrated HTS Began development of Acquired Tristan.
semiconductor- microwave subsystem. NMR probe subsystem.
superconductor
structure on a single
substrate.
1994 Fabricated Delivered HTS Signed joint Introduced
single-sided 4" YBCO microwave subsystem development agreement iMAG-Registered Trademark-
wafers. for Navy satellite with Varian on HTS NMR high performance HTS
mission. spectrometer probes. and LTS SQUID systems.
1995 Established Fabricated 19-pole HTS Realized first Introduced xMag-TM-
coevaporation cellular filter on 3" revenues from sales of magnetic measurement
deposition process. substrate. NMR probe to Varian. system.
Demonstrated Announced program with
integrated HTS Stanford University to
cellular filter develop MRI for
subsystem at industry mammography.
trade shows and to
potential OEMs.
1996 Began production of Performed first field Signed joint
single- and tests of prototype HTS development agreement
double-sided wafers by filter subsystem for with Siemens for low-
coevaporation. rural cellular market. field HTS MRI
subsystem.
Signed joint Introduced first
development agreement commercial HTS NMR
with Lucent to develop probe product.
HTS filter subsystem
for PCS market.
Performed initial
laboratory and field
tests of prototype HTS
filter subsystem for
PCS market.
</TABLE>
23
<PAGE>
BUSINESS AND DEVELOPMENT STRATEGY
Conductus' strategy for developing, manufacturing and marketing
superconductive electronics products includes the following key elements:
MAINTAIN TECHNOLOGY LEADERSHIP. Conductus has devoted significant resources
to developing proprietary HTS thin-film manufacturing and process technologies.
Based on publicly available information, the Company believes that its
technologies are more advanced than those of other companies or research
laboratories. The Company has successfully developed and marketed products
including single- and multilayer YBCO films, superconducting NMR spectroscopy
probes and SQUID sensors and systems. Conductus has utilized its technology
skills to develop filters, low-noise amplifiers, radio-frequency receivers and
other devices. Conductus has also established significant expertise and know-how
in areas essential to product commercialization, including electronic device and
component design, analog and digital electronic engineering, cryogenic
packaging, mechanical engineering and system integration. Conductus has received
16 U.S. patents and one related foreign patent and has 17 patent applications
pending in the U.S. and related patents pending in other countries relating to
various aspects of its technologies.
COMMERCIALIZE PRODUCTS WITH SIGNIFICANT MARKET POTENTIAL. Conductus
believes that the largest potential near-term markets for superconductor-based
products exist in wireless communications and healthcare and is actively
developing HTS component-based subsystems for these markets. See table on page
26. In the cellular market, Conductus has completed laboratory and initial field
tests of its low-noise receiver filter subsystems for base stations and expects
to commence commercial sales in late 1996. In the emerging PCS market, Conductus
is developing integrated transceiver subsystems incorporating HTS transmit and
receive filters, cryocooled low-noise amplifiers and refrigeration equipment. In
the healthcare market, Conductus has developed and currently sells several types
of probe subsystems for NMR spectrometers on an OEM basis to Varian. In
addition, the Company plans to develop other spectrometer probe types during
1996 as well as demonstrate prototype receiver coil subsystems for MRI machines
in late 1996.
LEVERAGE STRATEGIC ALLIANCES. Conductus' strategy is to enter into
collaborative arrangements with market leaders in its target markets in order to
allow the Company to focus primarily on the development of superconductive
components and subsystems for use in products in these markets. Conductus has
entered into joint development agreements with Lucent Technologies, Inc. in PCS
communications, Varian Associates in NMR spectroscopy and Siemens AG in MRI. It
has also entered into agreements whose primary focus is technology development
for a range of applications, including agreements with TRW, Inc. ("TRW") and
Northrop-Grumman Corporation (originally with Westinghouse Electric Corporation)
for development of digital electronics technology; and the High-temperature
Superconductor Thin-film Manufacturing Alliance ("HTMA") for development of
commercial, thin-film HTS manufacturing processes. Additionally, Conductus has
funded its development programs and enhanced its development and manufacturing
resources by establishing collaborative arrangements with corporate partners,
government agencies and public and private research institutions. Since 1991, a
significant portion of the Company's research and development program has been
funded by U.S. government agencies in the form of grants and contract awards.
See "Risk Factors -- Extensive Reliance on Collaborative Relationships" and
"Business Strategic Alliances and Development Agreements."
PROVIDE COMPLETE SOLUTIONS. Conductus believes that superconductive
component technology can best be provided to customers in the form of integrated
subsystems that incorporate the components, additional electronic circuits and
devices, and the self-contained refrigeration equipment and packaging required
to maintain the operating temperatures necessary for the superconductive
components. Conductus seeks to make the presence of superconductive and
cryogenic components an entirely internal feature of its products that requires
no special expertise or skill on the part of the user. The Company believes that
providing its technology at the subsystem level to system manufacturers in
specific markets will allow it to most rapidly and efficiently expand both its
product line and its customer base.
DEVELOP COMMERCIAL INFRASTRUCTURE. Conductus is building the manufacturing,
sales and marketing infrastructure it believes is necessary to support the
commercialization of its products in target markets. This includes development
of thin-film deposition techniques suitable for volume manufacture, acquisition
and
24
<PAGE>
build-out of manufacturing and assembly areas, hiring of employees with
significant marketing experience in key product areas and expansion of its sales
team. The Company's sales and marketing strategy is to use manufacturers'
representatives supplemented by a small direct sales organization for sales of
its laboratory instrument products and to rely primarily on OEMs for its
subsystem products for the communications, healthcare and instrumentation
markets.
The following table sets forth the key target markets for which Conductus is
developing superconductive products and the development status of those products
as of May 1996.
<TABLE>
<CAPTION>
TARGET MARKETS AND COMMERCIALIZATION STATUS
PARTNERS/
TARGET DISTRIBUTION
MARKET PRODUCT PRODUCT BENEFITS MARKET CHANNEL CURRENT STATUS
- ----------------- ------------------ -------------------- ------------------ --------------- --------------------
<S> <C> <C> <C> <C> <C>
Communications Cellular receiver Increased range for Rural segment of Sales to end Completed laboratory
filter subsystem existing and new installed base of users and initial field
rural base stations. cellular base tests. Additional
station market and field tests ongoing.
new network Anticipate
buildout. commercial sales in
late 1996.
PCS transceiver Increased range, Forecasted build Lucent Developed initial
filter subsystem higher call out of PCS base prototype filter
capacity, reduced stations. subsystems and
interference, higher completed initial
quality connections, field test.
reduced size. Anticipate
commercial sales in
late 1997 or early
1998.
Healthcare NMR probe Allows use of New NMR Varian First production
subsystem smaller samples or spectrometers; units of probe
higher throughput. installed base of subsystems
Allows analysis of machines. delivered. Commenced
more complex commercial shipments
compounds. Achieves in 1996. Developing
performance of prototypes of
high-end system with additional probes.
lower-cost
equipment.
MRI receiver Better images, New low-field MRI Siemens Developing prototype
subsystem for low- faster scan time, scanners; subsystems in 1996.
field scanners increased throughput installed base of Planning RSNA trade
in lower-cost MRI machines. show demonstration
systems. in December 1996.
Instrumentation Laboratory Highly sensitive Research Sales to end Commercial sales of
instruments measurement of laboratories. users HTS and LTS
magnetic properties products.
of materials. First
HTS magnetic sensing
products available
to researchers.
SQUID sensors and Allows measurement New markets in Kanazawa Providing components
front-end and location of medicine, Institute of for KIT and research
electronics extremely small geophysics and Technology customers.
magnetic signals. non- destructive ("KIT")
testing.
Geometrics Developing
subsystems for use
in geophysical
instruments.
</TABLE>
25
<PAGE>
CONDUCTUS' TARGET APPLICATIONS
The unique properties of superconductors provide the basis for electronic
products with significant potential performance advantages over products based
on competing materials such as copper and semiconductors. Conductus is currently
focusing significant development efforts on products for applications in the
communications, healthcare and instrumentation markets for which it believes
there is the greatest near-term market potential. Conductus is also developing
additional technology for longer-term applications such as high-speed circuits
for the communications market and NMR microscopes for the healthcare market.
COMMUNICATIONS
Cellular and PCS communications systems use radio frequency signals to
establish communications between customers using portable or mobile telephones
and base stations operated by service providers. Cellular telephone networks are
divided into specific coverage areas called cells, each of which has a base
station for sending and receiving voice and other communications within the
cell. The base station contains electronic equipment required to send and
receive radio signals. In setting up a base station, the service provider seeks
to install equipment with sufficient sensitivity within the frequency band
assigned to it to handle communications with the lowest power handsets over its
entire geographical area and with sufficient selectivity to avoid interfering
signals from adjacent frequency bands. Filters within these base stations select
frequencies within the operators' assigned bands and reject unwanted
frequencies. Amplifiers boost the strength of signals coming in and out of the
base station. The operator's assigned frequency range is then allocated using
one of several schemes to provide telephone service to multiple subscribers. The
capacity of the system depends upon the number of effective channels, that is,
channels whose signal quality is sufficient to satisfy customer demands for
clear communications.
Cellular base stations currently face a number of operating problems. These
include signal interference caused by multiple communications channels, poor
signal quality resulting from lower-power, handheld telephones and strained
capacity due to the growing demand for cellular service. The advent of PCS
technology will place additional demands on the performance of wireless base
stations and upon the size of the hardware therein. Power losses resulting from
the use of components made from conventional conductors have limited the ability
of the industry to address these problems. Conductus believes that
superconductive filters used in conjunction with cryogenically-cooled amplifiers
have the potential to offer solutions to several operating problems in cellular
base stations as well as to provide solutions to anticipated problems in
forthcoming PCS base stations.
CELLULAR MARKET. According to industry reports, there are approximately
20,000 installed cellular base stations in the United States and 40,000
worldwide, with growth estimated at 6,000 annually through the year 2000. Of the
U.S. installed base, Conductus estimates approximately 4,000 are located in a
rural environment. The present cellular communications network, operating at
frequencies near 850 MHz, was established at a time when the typical cellular
telephone was a mobile unit capable of transmitting up to 3 watts of radio
frequency power and the total number of subscribers was relatively low. Today,
portable handsets that transmit only 0.6 watts are increasingly replacing
higher-power mobile telephones, thereby decreasing the effective receiving range
of existing base stations. As a result, in rural areas where base stations are
widely separated, current cellular customers can experience dropped calls due to
"dead zones" in coverage. At the same time, the increasing demand for cellular
service in urban areas has led to the utilization by service providers of a
greater number of channels within their allotted frequency bands, thereby
increasing the incidence of interference.
In rural areas, where the primary problem is base station range, solutions
that increase the strength of the received signal or decrease the system noise
level can provide enhanced reception, and thus reduce the occurrence of dead
zones. One solution, which entails significant costs, is to increase the number
of base stations and thereby reduce the required range for each station. Another
solution, which is potentially more economical, is to enhance the signal
reception and noise filtering capabilities of existing base stations. Approaches
to enhance the performance of existing base stations include increasing the
height of towers or locating filters and amplifiers at the tops of towers to
reduce the loss of electrical energy as the signals travel
26
<PAGE>
through cables from the antenna to the receiver. Each of these solutions has
shortcomings with respect to such issues as cost, servicing logistics and
ultimate performance. Accordingly, rural systems operators could significantly
benefit from a system that provides significantly improved filtering and very
low noise amplification at reasonable cost.
In urban areas, the high density of cellular users creates problems of
interference and system capacity. In every area, there are two cellular service
providers, each allotted their own operating band within the frequency spectrum.
Near the edges of each provider's operating frequency range, the performance of
cellular systems can be hampered by interference from the competing carrier and
from a variety of other signal sources. Carriers can attempt to avoid this
interference by not using channels at the edges of their operating bands,
however this diminishes system capacity. Interference is also addressed by using
highly selective filters in the base station receiver. The ideal filter would
filter out all signals outside the targeted operating band without reducing
signal strength inside the band. Filters are made more selective by adding
additional resonators or "poles" to the filter. However, in filters made of
conventional materials, adding additional poles introduces more energy loss and
thereby reduces the strength of the desired signals. For this reason,
conventional filters generally do not incorporate more than eight or nine poles,
thus achieving only a certain level of selectivity. With superconducting
materials, which exhibit extremely low energy loss, filters can be fabricated
with a higher number of poles, thereby increasing filter selectivity.
PCS MARKET. PCS is a newer urban-based communication system designed to
provide wireless telephone service utilizing radio frequency signals in a
frequency band near 2 GHz. This all-digital system will be designed to handle
both voice and data transmissions, including features such as Internet access.
Although it utilizes the same basic building blocks as a cellular system, the
higher operating frequency of PCS compared with the cellular network limits the
range of its signal transmission. Because of this limited range of signal
transmission and because PCS has no installed base in the U.S., third party
sources estimate that the forthcoming PCS buildout will result in 70,000 new
installed base stations throughout the U.S. by the year 2000.
The projected large number and primarily urban location of PCS base stations
drive the needs for equipment cost and size reduction. However, signal losses in
base station components such as filters, antennas and cables are exacerbated by
higher frequency operation. Conventional receiver components limit sensitivity
and therefore base station range. Conventional filters tend to be physically
large and proposed PCS base station architectures call for the use of multiple
filters in each station. Collectively, these issues present a difficult set of
requirements for the designers of forthcoming PCS base station equipment.
CONDUCTUS' SOLUTIONS. Conductus believes that the performance of cellular
base stations and PCS base stations could be improved significantly by using HTS
components in both their receivers and their transmitters. Communication filters
made using thin-film superconductor technology have the potential to provide
extraordinary frequency selectivity while maintaining excellent efficiency
because of their inherent low insertion losses. On the receiver side, the use of
superconducting filters along with cryogenically-cooled low-noise amplifiers has
the potential to lower the noise figure of the receiver and thereby increase its
sensitivity. Increased sensitivity translates into increased range for the base
station which could be utilized to improve the performance of existing stations
or to allow fewer base stations to serve a new geographic area. In addition, HTS
filters with enhanced selectivity over conventional designs could significantly
reduce signal interference in base station receivers with minimal signal loss.
In the cellular market, Conductus is focusing on development of low-noise
receiver subsystems for rural base stations that incorporate HTS filters,
cryocooled low-noise amplifiers and refrigeration equipment into a rack-mounted
package. Initial laboratory and field tests have demonstrated the ability of the
subsystem to increase receiver sensitivity, thereby increasing the range of base
stations as well as their overall performance. As a result, by using these
filter systems, cellular service providers in rural environments may require
fewer base stations in order to serve a given geographic area. Initial field
tests with these filter systems completed in early 1996 show range expansions of
20% to 60%. Conductus expects that the subsystem will undergo increasingly
rigorous testing during 1996, leading to potential deliveries of the first
commercial units for retrofit use in rural base stations in late 1996. Conductus
anticipates that its commercial receiver
27
<PAGE>
subsystems will be provided in a variety of configurations depending on the
requirements of the specific base station into which it will be inserted. While
the Company has demonstrated functionality in its prototype units, additional
engineering will be required to complete the development of commercial
communications subsystems. See "Risk Factors -- Limited Commercial Manufacturing
Capabilities."
Base stations avoid the transmission of unwanted and interfering distortion
signals by the use of costly ultra-linear (extremely low distortion) amplifiers
in their transmitters. For the PCS market, Conductus believes that low-loss
superconducting transmit filters offer the potential to "clean up" the output of
lower-quality amplifiers by removing unwanted signals at a lower overall cost to
the base station operator. Conductus' work on transmit filters has been a part
of the activities of the Consortium for Superconductor Electronics wireless
program, which primarily involves Conductus, Lucent Bell Labs, MIT Lincoln
Laboratories and CTI-Cryogenics, a division of Helix Technology Corporation.
Conductus is developing an integrated transceiver subsystem for PCS base
stations consisting of HTS receiver filters, cryogenically-cooled low-noise
amplifiers and HTS transmit filters that potentially may provide increased
range, increased call capacity, reduced interference between bands, improved
call quality and reduced size compared to subsystems using conventional
technology. Additionally, the HTS components utilized in the subsystem have
permitted the inclusion of as many as 19 poles, compared to eight or nine in
conventional filters, which results in significant selectivity enhancements.
Conductus intends to work with PCS system manufacturers, such as Lucent, with
the goal of designing superconductive filter subsystems into new PCS base
stations. The first field test of Conductus' initial prototype of the receiver
portion of the system has been conducted with Lucent. Conductus expects to
conduct additional tests of increasingly complex prototypes with Lucent
throughout 1996 and 1997 and does not anticipate first commercial sales before
late 1997 or early 1998.
FUTURE APPLICATIONS. Pursuant to government-sponsored research and
development programs, Conductus is exploring the application of superconductive
electronic technology to problems in high-speed, high-bandwidth communications
switching. The high-speed, low-power properties of Josephson junctions, which
are active switching devices made from superconductors, could be applied to
communications systems to significantly improve data transmission rates and
reduce system power requirements and costs. These devices are several times
faster than the fastest semiconductor transistor and consume thousands of times
less power. Josephson junction circuit technology is in the early stages of
development, and significant additional advancements will be required before
superconductive products incorporating this technology could become available.
HEALTHCARE
Instruments based on NMR technology use the characteristic response of
matter to electromagnetic fields to determine the structure and properties of
chemical and biological specimens. In these instruments, a powerful magnetic
field magnetizes atoms in the sample being studied, radio-frequency pulses cause
the atoms to emit characteristic signals and sensitive radio-frequency receivers
are used to detect these signals. Existing magnetic resonance instruments
contain radio-frequency receivers that use specialized copper coils to sense the
signals from the object being studied. The principal applications of NMR are in
spectrometers, which are used for analyzing the composition and structure of
complex chemical compounds, and in MRI scanners, which are used to provide
detailed images of the human body without invasive procedures or exposure to
harmful radiation, such as x-rays.
For both of these instruments, the signal-to-noise ratio ultimately
determines the sensitivity of the instrument. A higher signal-to-noise ratio
results in better data quality and a reduction in the amount of time required to
obtain the data. There are two basic approaches to increasing the
signal-to-noise ratio of the instruments: increasing the signal or field
strength by using a more powerful magnet, or increasing the sensitivity by
reducing inherent noise levels in the receiver. Increasing field strength can be
prohibitively
28
<PAGE>
expensive. On the other hand, significant gains in receiver sensitivity are
difficult to achieve using conventional technology. HTS technology offers three
potential benefits for these healthcare imaging and analysis instruments: much
greater instrument sensitivity, much faster data acquisition time and, in the
case of NMR spectroscopy systems, the ability to study smaller amounts of costly
samples.
NMR SPECTROMETERS. NMR spectroscopy is a well-established technique for
chemical analysis that enables the user to determine the structures of even very
complex proteins and large molecules such as those used in the development of
pharmaceuticals. A conventional NMR spectrometer includes a superconducting
magnet to supply a powerful magnetic field and a copper or other conventional
metal receiver coil to detect the signals from the sample.
With conventional NMR technology, major increases in sensitivity can only be
obtained with disproportionate increases in cost associated with providing
increasingly powerful magnets. Some large magnet systems cost well over $1
million. One alternative to increasing the field strength is to increase the
sensitivity of the receiver. However, conventional coil design is at a fairly
mature stage and significant further improvements in sensitivity from
modification of current receiver technology are unlikely. Another alternative is
to reduce the temperature of conventional receiver components to near absolute
zero, in order to reduce resistance and decrease noise, but the refrigeration
necessary to reach the required temperatures would be costlier and more
elaborate than is needed for HTS probes. Such cold conventional metal receivers
have not been made commercially available.
CONDUCTUS' SOLUTION. Conductus has shown that the use of HTS receiver coils
in spectrometers dramatically improves the sensitivity of the instrument.
Compared to existing receivers based on specialized copper coils, Conductus'
low-loss superconducting receiver coils significantly enhance probe performance
by improving the signal-to-noise ratio, which leads to either improved chemical
sensitivity or faster chemical measurements. As a result, users can examine less
sample material and still obtain the same or more information than is possible
using conventional technology. For this application, Conductus' probe technology
has demonstrated a 300-to-400% signal-to-noise ratio improvement over
conventional probes enabling a three-to-four fold reduction in sample size for
the same analysis time or up to a 16-fold increase in sample throughput.
Conductus is currently working with Varian to develop a family of low-loss
superconductor receiver coils for use as probes in NMR spectrometers to meet the
demand for high sensitivity analysis. Conductus introduced its first NMR probe
products in March 1996, pursuant to an OEM arrangement with Varian. Currently,
Conductus is manufacturing and selling through Varian two NMR probe types, each
of which is available in two frequencies. The Company anticipates introducing a
third NMR probe type for commercial sale by the end of 1996.
MRI. Magnetic resonance imaging is an important diagnostic medical
technique that provides detailed images of internal organs and structures within
the body without invasive procedures or exposure to harmful radiation. Important
applications include imaging soft tissues, diagnosing certain brain and spinal
cord disorders and diagnosing joint and muscle injuries. The cost of MRI
machines is significant, with prices often in the $1-3 million range. More
recently, "low-field" and "mid-field" MRI machines have become available. These
machines have the advantage of being less confining to the patient and are less
expensive, but provide significantly poorer images than high-field machines.
Government and healthcare provider cost containment initiatives are discouraging
the use of larger magnets for MRI. As cost controls have become more pervasive,
the majority of new installations have been of less costly, lower-field
machines.
CONDUCTUS' SOLUTION. Conductus has shown that the use of HTS receiver coils
can significantly improve the signal-to-noise ratio in low-field MRI machines,
potentially allowing them to produce an image similar in quality to that of the
more expensive machines. The development of higher-performance low-field
machines may lead to the use of MRI in a wider range of diagnostic imaging
applications, such as routine screening for breast cancer. In January 1996,
Conductus entered into a non-exclusive agreement with Siemens to develop HTS
receiver coil subsystems for a Siemens' low-field MRI machine. The Company has
also received support from DARPA to develop superconducting technology for MRI
breast cancer screening in collaboration with researchers from Stanford
University.
29
<PAGE>
FUTURE APPLICATIONS. HTS receiver technology can be used in NMR
microscopes, which are essentially high-resolution MRI machines for examining
small objects in high detail. Biological specimens such as pathology samples,
which are currently sliced, stained and examined with optical microscopes, could
be placed whole in the imager and a complete three-dimensional data set could be
constructed. The pathologist could have the computer slice the image in any
plane, which is not possible using the current techniques, even with computer
assistance, because of the dramatic and variable shrinkage of the samples.
Presently, NMR microscopy is only a research tool because the use of copper
receiver coils can require data collection times of one to two days to obtain an
acceptable image. The enhancement in signal-to-noise ratio provided by HTS and
cryoelectronic technologies could reduce this data collection time to a matter
of minutes. Conductus is developing receiver subsystems for this application in
collaboration with Duke University under government contract funding from the
National Institutes of Health.
INSTRUMENTATION
Superconductive magnetic sensors known as SQUIDs are used in electronic
instruments to detect signals thousands of times smaller than can be detected by
conventional magnetometers. With appropriate control electronics, SQUIDs can
discern magnetic signals one hundred billion times smaller than the earth's
magnetic field. A number of different types of instruments, including
specialized laboratory equipment, non-destructive test equipment, geophysical
surveying instruments and advanced medical diagnostic instruments, can
potentially utilize magnetic sensors to detect and locate magnetic signals of
interest.
Magnetic sensors are used in some circumstances to locate oil and other
mineral deposits. In this application, SQUID technology offers the advantage of
portability by virtue of the small size of its sensors compared to bulky
conventional copper coils used as magnetometers. SQUID sensors can also be used
to detect electrical currents as well as any intrinsic magnetism in materials.
As a result, they can potentially be used in a variety of instruments to inspect
and analyze materials and structures on the basis of magnetic signatures that
cannot be effectively measured using competing technologies. These instruments
can measure materials that are hidden or submerged, such as mines or storage
drums; detect flaws in metallic structures, such as components of buildings,
nuclear power plants or airplanes, without physically invading or contacting the
structure; and measure electrical currents in, for example, semiconductor
integrated circuits.
SQUID sensors can also detect electrical impulses in the heart without the
use of electrodes or other contacts to the patient required by conventional
EKGs, using a technique called magnetocardiography ("MCG"). Conductus believes
that MCG potentially may require far less time and effort from medical personnel
than electrocardiography and therefore reduce the cost of obtaining cardiac
diagnostic information. For example, MCG could become a significant diagnostic
tool for disorders caused by cardiac arrhythmias (i.e., irregular heart beats).
Improving the sensitivity of magnetic sensor technology in general, as well
as providing HTS versions of SQUID sensors in particular, has the potential to
significantly improve the performance of several existing instruments as well as
enable magnetic sensing technology to be used for important new applications.
CONDUCTUS' SOLUTION. Conductus currently manufactures and sells SQUIDs and
laboratory instruments based on SQUIDs and is developing additional SQUID
sensors, electronics and complete sensing subsystems for customers in the
geophysical, non-destructive evaluation and medical markets. Conductus' standard
products include magnetic sensing components sold under the tradenames "iMAG"
and "Mr. SQUID" and a complete magnetometer system sold under the tradename
"xMAG." List prices for complete iMAG systems generally range from $7,000 to
over $40,000 depending on the configuration. Mr. SQUID has a list price of
approximately $2,000. List prices for complete xMAG systems generally range from
$87,000 to over $140,000 depending on the configuration.
Conductus has also built and sold limited numbers of custom multichannel
low-temperature superconducting ("LTS") SQUID systems for non-destructive test
applications. While Conductus manufactures some of its instrumentation products
using well-established LTS materials, the Company believes that the cost and
30
<PAGE>
operating difficulties associated with using liquid helium or other complex
refrigeration techniques required to cool LTS materials have limited their
commercial potential. Conductus believes that the portability and relative ease
of use inherent in HTS SQUID technology greatly enhances its utility in multiple
applications.
While historically the Company's sales have been primarily to laboratory
customers, Conductus believes that the greatest opportunities for growth for its
magnetic sensing products will be with OEM customers for specific applications.
Currently, Conductus is developing HTS geophysical systems under government
contracts from two different agencies and is working with Geometrics, Inc., a
manufacturer of geophysical surveying equipment, to develop and market
commercial instruments for these applications. Conductus is also working with
researchers at Kanazawa Institute of Technology in Japan to develop SQUID-based
instruments for seismic studies. Conductus has also sold sensors, electronics
and cryogenic vessels to customers developing biomedical applications of SQUIDs.
STRATEGIC ALLIANCES AND DEVELOPMENT AGREEMENTS
Conductus is party to a number of collaborative arrangements with
corporations and research institutions with respect to the research, development
and marketing of certain of its potential products. Conductus evaluates, on an
ongoing basis, potential collaborative relationships and intends to continue to
pursue such relationships. The Company's future success will depend
significantly on its collaborative arrangements with third parties. There can be
no assurance that these arrangements will result in commercially successful
products. See "Risk Factors -- Extensive Reliance on Collaborative
Relationships."
LUCENT TECHNOLOGIES, INC. Conductus and Lucent entered into a joint
development and licensing agreement in April 1996, under which Conductus is
developing a superconductive transceiver filter subsystem for the PCS market.
Both Conductus and Lucent are to provide technical support to the program.
Initial tests of a prototype of the receiver portion of the subsystem were
conducted in April 1996. Each party will retain rights to the intellectual
property it develops under the program, subject to certain nonexclusive
licensing rights of the other party, and jointly developed intellectual property
will be jointly owned.
VARIAN ASSOCIATES. Conductus and Varian entered into a joint development
and licensing agreement in 1994, under which they jointly developed a
superconducting probe for NMR instruments for high-resolution spectroscopy. Both
Conductus and Varian provided technical support to the program, and each retains
rights to intellectual property it developed under the program, subject to
certain nonexclusive licensing rights of the other party. The program resulted
in the commercial introduction, in March 1996, of probes incorporating HTS
receiver subsystems manufactured by the Company and sold by Varian. Conductus
and Varian currently are negotiating a sales agreement under which Varian will
likely have a period of exclusivity from the date of commercial introduction.
Conductus and Varian continue to cooperate in the development of additional
probes for NMR spectroscopy.
SIEMENS AG. Conductus is developing a general-purpose superconducting MRI
receiver coil for a Siemens' low-field MRI system under a joint development
agreement effective December 1, 1995. Under that agreement, Conductus will
design a coil and test it on Siemens' instruments, while Siemens will assist
Conductus by providing information and access to instrumentation. All
intellectual property rights will remain with the party developing the
intellectual property, and jointly developed property will be jointly owned.
CTI-CRYOGENICS. Conductus and CTI-Cryogenics, a division of Helix
Technology Corporation, entered into a collaboration agreement in September
1995, under which CTI will work with Conductus to design interfaces between CTI
cryocoolers and Conductus subsystems.
HIGH TEMPERATURE SUPERCONDUCTOR THIN-FILM MANUFACTURING ALLIANCE. Conductus
is a member of the HTMA, which was formed in October 1995 to develop
cost-effective manufacturing methods for YBCO thin-films for radio-frequency
applications, establish industry standards and provide second-sourcing and
technology transfer among the companies under a program funded in part by the
Department of Defense Advanced Research Projects Agency ("DARPA").
Superconductor Technologies, Inc. ("STI") is the other principal member of the
HTMA. Other members include Stanford University and the Georgia Research
31
<PAGE>
Corporation, Focused Research, Microelectronic Control and Sensing Incorporated,
IBIS and BDM Federal. Under the HTMA, each party will have access to the
technology of the other party that is developed under the program.
KANAZAWA INSTITUTE OF TECHNOLOGY. In September 1995, Conductus entered into
an OEM agreement with Kanazawa Institute of Technology ("KIT") under which
Conductus is to be KIT's exclusive supplier of LTS and HTS SQUIDs for use in
instruments that it is developing. KIT intends that its initial product will be
for seismology. Conductus has received an initial order for LTS SQUIDs under
this agreement. The agreement contains no minimum purchase requirement, and
there can be no assurance that KIT will successfully develop and market
instruments using Conductus' SQUID products or, if it does develop such
products, that a significant market will exist for those products.
GEOMETRICS. Conductus is working with Geometrics, Inc., a geophysical
instrumentation company, under two government contracts to develop SQUID-based
instruments for geophysical exploration. If successful, the project could lead
to the development of commercial geophysical instruments incorporating Conductus
SQUIDs and SQUID electronics.
RESEARCH AND DEVELOPMENT; GOVERNMENT CONTRACTS
The Company's research and development expenses in the three months ended
March 31, 1996, and fiscal years 1995, 1994 and 1993 were approximately
$2,743,000, $9,819,000, $9,201,000 and $7,080,000, respectively. Externally
funded research and development programs, primarily under contracts with
agencies of the U.S. government, accounted for approximately $2,214,000,
$9,176,000, $8,717,000 and $6,500,000 of these expenses in the three months
ended March 31, 1996, and fiscal years 1995, 1994 and 1993, respectively. The
Company's revenue from government-related contracts represented approximately
85%, 77%, 82% and 78% of total revenue for the three months ended March 31, 1996
and fiscal years 1995, 1994 and 1993, respectively. Conductus believes that it
will continue to be heavily dependent on U.S. government contracts to fund a
significant portion of its research and development programs. The Company's
strategy is to fund a significant portion of its research and development,
particularly for wireless communications and digital electronics applications,
through contracts with agencies of the U.S. government. As of March 31, 1996,
the Company had received aggregate awards since its inception of approximately
$38,944,000 from U.S. government agencies, including approximately $25,607,000
recognized as revenue by the Company through March 31, 1996, and approximately
$7,760,000 in awards for which it has not yet entered into research contracts.
As of March 31, 1996, Conductus had approximately $5,577,000 under existing U.S.
government contracts which provide that most of the research and development is
to be performed in the next 12 months. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations."
32
<PAGE>
As shown in the examples below, these contract programs and others enable
Conductus to develop its core technologies and support Conductus' business
areas.
<TABLE>
<CAPTION>
GOVERNMENT-SUPPORTED RESEARCH AND DEVELOPMENT
SELECTED FUNDING AGENCIES
<S> <C> <C> <C>
Defense Advanced Research Projects National Aeronautics and Naval Research Laboratory
Agency Space Administration
Department of Commerce National Institutes of Office of Naval Research
Health
Department of Energy United States Navy
</TABLE>
<TABLE>
<CAPTION>
SELECTED AREAS OF RESEARCH AND DEVELOPMENT
<S> <C> <C> <C>
TECHNOLOGIES COMMUNICATIONS HEALTHCARE INSTRUMENTATION
- --------------- ---------------- ----------------- ------------------
Thin films Transmit filters NMR spectroscopy SQUID technology
Multilayer Cellular
films receivers MRI SQUID amplifiers
Cryopackaging Switching NMR microscopy SQUID geophysical
</TABLE>
The Company's contracts involving the U.S. government are or may be subject
to numerous risks. These risks include: unilateral termination for the
convenience of the government; reduction or modification in the event of changes
in the government's requirements or budgetary constraints; increased or
unexpected costs causing losses or reduced profits under fixed-price contracts
or unallowable costs under cost reimbursement contracts; risks of potential
disclosure of Conductus' confidential information to third parties; the failure
or inability of the prime contractor to perform its prime contract in
circumstances where Conductus is a sub-contractor; the failure of the government
to exercise options provided for in the contracts; the government's
nonexclusive, royalty-free license to use technology developed pursuant to the
contracts by or on behalf of the government in certain circumstances; and
exercise of "march-in" rights by the government. March-in rights refer to the
right of the U.S. government or government agency to require the Company to
license patented technology developed under contracts funded by the government
if the contractor fails to continue to develop the technology. In addition,
there can be no assurance that the U.S. government will continue its commitment
to programs to which the Company's development projects are applicable,
particularly in light of recent legislative initiatives to reduce the funding of
various U.S. government agencies and programs, or that the Company can compete
successfully to obtain funding pursuant to such programs. See "Risk Factors --
High Degree of Dependence Upon Government Contracts."
PATENTS, PROPRIETARY TECHNOLOGY AND TRADEMARKS
Conductus has received 16 U.S. patents and one related foreign patent which
have unexpired terms ranging from 15 to 18 years and has 17 patent applications
pending before the U.S. Patent and Trademark Office. One of those patents, for
an MRI coil, is currently involved in an interference proceeding in the U.S.
Patent and Trademark Office. See "Legal Proceedings." International counterparts
of several of these pending applications or issued patents have been filed under
the Patent Cooperation Treaty with a number of applications currently pending in
various countries worldwide. These patents and patent applications cover
Conductus processes and products in many aspects of its business. The Company
will continue to file other U.S. and key international patent applications as
part of its business strategy to protect technology it considers important to
providing a competitive market advantage for its technologies but there can be
no assurance that its applications will result in issued patents. The Company
also relies upon trade secrets, unpatented know-how, continuing technological
innovation, employee and third-party nondisclosure agreements and the pursuit of
licensing opportunities in order to develop and maintain its competitive
position.
33
<PAGE>
The Company's efforts to protect its proprietary rights may not be successful,
prevent their misappropriation or ensure that these rights will provide the
Company with a competitive advantage. Additionally, certain of the issued
patents and patent applications are jointly owned by the Company and third
parties. Any party has the right to license rights under such patents and
applications, which could result in Conductus not having exclusive control over
such inventions.
The Company believes that, since the discovery of HTS in 1986, several
thousand patent applications have been filed worldwide and over a thousand
patents have been granted in the U.S. relating to superconductivity. There are
interference proceedings pending regarding rights to inventions claimed in some
of the applications. Accordingly, the patent positions of companies using HTS
technology, including Conductus, are uncertain and involve both complex legal
and factual questions. Consequently, there is significant risk that others,
including competitors of the Company, have obtained or will obtain patents
relating to the Company's planned products or technology.
A patent issue of particular importance to the Company relates to copper
oxides or "cuprates," that are used to make HTS products, including YBCO.
Conductus has neither obtained any issued patents nor has it filed any patent
applications covering the composition of any cuprates or other HTS materials.
However, several U.S. and foreign patent applications, including applications
filed by IBM, AT&T, the University of Houston, the Naval Research Laboratory and
others, are pending that cover the composition of YBCO and related HTS. See
"Business -- Background -- Conductus Approach." The Company understands that at
least several of such U.S. applications are the subject of an interference
proceeding currently pending in the U.S. Patent and Trademark Office
(Interference No. 101,981). Additionally, E. I. du Pont de Nemours & Co.
("DuPont") has notified Conductus that it is the exclusive licensee of patents
issued in Israel, Sweden, Taiwan and the United Kingdom covering the composition
of YBCO and a method for using YBCO in superconducting applications. Dupont has
stated that it is interested in sublicensing such patents to Conductus, and
would consider sublicensing to Conductus, as they issue, any other foreign and
U.S. patent applications licensed to DuPont by the University of Houston. The
Company anticipates that it will be required to obtain a license to use YBCO
from one or more of these parties in order to continue to develop and sell
products based on YBCO.
There can be no assurance that the Company would able to obtain licenses to
patents covering YBCO compositions, when issued, or to any other patents
applicable to the Company's business on commercially reasonable terms. In such
an event, the Company could be required to expend significant resources to
develop non-infringing technology alternatives or to obtain licenses to the
technology that the Company infringes or would infringe. There can be no
assurance that the Company would be able to successfully design around these
third party patents or to obtain licenses to technology that it may require.
Furthermore, there can be no assurance that the Company will not be obligated to
defend itself at substantial cost against allegations of infringement of third
party patents. An adverse outcome in such a suit could subject the Company to
significant liabilities to third parties, or require the Company to cease using
such technology. In addition, aside from the merits of a claim, the cost of
defending any such suit would constitute a major financial burden for the
Company that would materially adversely affect on its business, operating
results and financial condition. See "Risk Factors -- Uncertainty of Patents and
Proprietary Rights; Risk of Litigation."
Conductus has granted to various entities non-exclusive, royalty-bearing
licenses to certain of its proprietary technology for the manufacture and
distribution of various equipment, including rotating target holders, substrate
heaters and mutual inductance probes to be used in cryogenic measurement
systems. Through its strategic relationships, Conductus has received rights to
certain intellectual property developed by its partners, as well as commitments
from those partners to offer licenses to certain background technology.
Conductus cannot, however, be certain that such licenses will be on terms that
allow Conductus to compete effectively in the marketplace. See "Risk Factors --
Uncertainty of Patents and Proprietary Rights; Risk of Litigation."
Conductus owns the United States registered trademarks "CONDUCTUS," the
Conductus logo, "Mr. SQUID" and "iMAG" and claims the rights to the trademark
"xMAG."
34
<PAGE>
MANUFACTURING
Conductus has performed pioneering work in materials, processes and
structures based on thin-film superconducting technology, and has developed
processes it believes are capable of routinely producing a variety of
high-quality films for several applications, including multilayer thin-film
materials suitable for more complex devices and components. Conductus has
established a pilot production facility at its headquarters in Sunnyvale,
California to fabricate, test and assemble HTS and LTS thin films and
components. The Company fabricates two-, three- and four-inch wafers in two
cleanroom areas that consist, in the aggregate, of approximately 2,600 square
feet and that have ratings of subclass 1,000 and 10,000 (meaning there are fewer
than 1,000 or 10,000 particles larger than 0.5 microns per cubic foot of air).
See "Business -- Properties." Conductus combines what it believes to be the
world's most advanced YBCO thin-film technology with expertise in electronic and
device component design, analog and digital electronic engineering, cryogenic
packaging, mechanical engineering and system integration.
The primary materials and equipment used in Conductus' products include
substrates, YBCO and processing equipment. The Company procures its substrates
from several suppliers. The Company procures its YBCO source material from two
suppliers and believes that YBCO can be obtained from at least two other
vendors. For certain processes, Conductus utilizes elemental metals (yttrium,
barium and copper) to produce YBCO. These substances are available from numerous
vendors. The Company's processing equipment is assembled from off-the-shelf
components which can be obtained from multiple sources.
Conductus believes that most of its products for the communications and
healthcare markets will be in the form of subsystems that incorporate
superconducting and cryoelectronic components with cryogenic refrigerators and
conventional electronic assemblies. Apart from the superconducting components
which are manufactured by Conductus, the Company anticipates that most other
components of its subsystems will be purchased as standard products from
commercial vendors or specially ordered from various suppliers. These include
cryogenic refrigerators, printed circuit boards, product cases and housings,
vacuum vessels and other components. Certain components of Conductus'
subsystems, including cryocoolers, are currently obtained from a single source
or a limited number of suppliers. Although the Company does not believe that it
is ultimately dependent upon any supplier of these components as a sole source
or limited source for any critical components, the inability of the Company to
develop alternative sources, if required, an inability to meet demand, a
prolonged interruption in supply or a significant increase in price of one or
more components would have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors -- High Degree of
Dependence Upon Other Complementary Technologies, Limited or Sole Source
Suppliers."
Conductus is focusing on the development of its production processes and is
manufacturing limited quantities of superconducting components and prototypes at
its Sunnyvale, California facility. Apart from the production of superconducting
components, the Company's manufacturing activities generally will be limited to
cleaning, final assembly, vacuum bakeout and test procedures. Conductus is
producing these products in limited commercial quantities and is continuing to
expand its capabilities. See "Risk Factors -- Limited Commercial Manufacturing
Capability." At its Instrument and Systems Division in San Diego, California,
Conductus designs and manufactures large-scale superconductive magnetic sensing
systems using these superconductive components. This facility also designs and
manufactures electronic instruments and circuitry used in conjunction with
superconductive components.
COMPETITION
Although the market for superconductive electronics currently is small and
in the early stages of development, Conductus believes this market will become
intensely competitive if products with significant market potential are
successfully developed.
A number of large American, Japanese and European companies are engaged in
research and development programs that the Company believes could lead to the
development and/or commercialization of superconductive electronic products.
These include, among others: DuPont, IBM, TRW, and Northrop-
35
<PAGE>
Grumman Corporation in the U.S.; and Fujitsu Ltd., Hitachi Ltd., NEC Corp. and
Sumitomo Electric Industries, Ltd. in Japan. The Company also believes that a
number of smaller companies are engaged in various aspects of the development
and commercialization of superconductive electronics products. These include,
among others, Biomagnetic Technology, Inc. and Quantum Design, Inc. in magnetic
sensing products; Hypres, Inc. in digital circuits; and Illinois Superconducting
Corp., Superconducting Core Technologies, Inc. and Superconductor Technologies
Inc. in wireless communications. Furthermore, academic institutions,
governmental agencies and other public and private research organizations are
engaged in development programs which may lead to competitive arrangements for
commercializing superconductive electronics products. In addition, if the
superconductor industry does develop further, new competitors with significantly
greater resources are likely to enter the field. Conductus' ability to compete
successfully will require it to develop and maintain technologically advanced
products, attract and retain highly qualified personnel, obtain patent or other
protection for its technology and products and manufacture and market its
products, either alone or with third parties. See "Risk Factors -- Intense
Competition."
The Company's existing collaborative arrangements permit, and future
arrangements also may permit, the Company and each partner to use the technology
developed under these arrangements. Accordingly, the Company may compete with
its partners for commercial sales of any products developed under these
arrangements.
The Company's potential products, if successfully developed, may compete
directly with other existing and subsequently developed products using
competitive, conventional technologies. There can be no assurance that the
Company's products will have sufficient performance advantages over these other
products to attract significant commercial interest. These and related factors
may limit market acceptance of products incorporating superconductive
technology. See "Risk Factors -- Competing Technologies."
Conductus believes that the principal competitive factors in the market for
superconductive electronics will be the following: the ability to develop
commercial applications of superconductive technology; product performance,
including, where appropriate, speed, sensitivity, size and power dissipation;
price; product quality and reputation. Conductus believes that it compares
favorably with respect to these factors.
SALES AND MARKETING
Although Conductus has limited experience in sales, marketing and
distribution, it has been expanding its expertise and activities in these areas
in order to successfully commercialize its potential products. Conductus sells
its products through a combination of OEM relationships, direct sales and a
network of independent manufacturer's representatives and distributors. The
Company's sales and marketing strategy is to use manufacturers' representatives
and distributors for sales of its magnetic sensor-based and laboratory
instrument products and to rely primarily on OEMs for its subsystem products for
communications, healthcare and instrumentation. The Company has established a
domestic and international network of independent manufacturer's representatives
who have primary responsibility for selling magnetic sensing and laboratory
instrumentation products. As of March 31, 1996, 17 domestic and international
firms were manufacturer's representatives and distributors, covering 42 states
and certain foreign countries including a majority of Europe, Japan, Australia,
Taiwan and India. See "Risk Factors -- Need to Develop Infrastructure to Support
Commercialization."
The Company currently employs a sales and marketing staff of nine full-time
equivalents. These employees are actively engaged in direct marketing to OEM and
potential OEM customers, as well as in sales and marketing support. The Company
actively markets its products through advertisements in trade journals as well
as through demonstration of its technology and products at industry trade shows,
including trade shows related to telecommunications, NMR spectroscopy, MRI
imaging and magnetic sensing. The Company publishes widely in trade and
technical journals. Additionally, Conductus' employees have frequently presented
Conductus' technology as invited speakers at conferences worldwide.
36
<PAGE>
For the three months ended March 31, 1996 and fiscal years 1995, 1994 and
1993, commercial sales to one customer of $241,000, $1,172,000, $732,000 and
$816,000 were 9%, 11%, 8% and 13% of total revenues, respectively. This customer
acts primarily as a distributor of the Company's products, selling to end-users.
ENVIRONMENTAL MATTERS
The Company uses certain hazardous materials in its research and
manufacturing operations. As a result, Conductus is subject to federal, state
and local governmental regulations. Conductus believes that it has complied with
all regulations and has all permits necessary to conduct its business. See "Risk
Factors -- Environmental Regulations."
PROPERTIES
The Company's principal facility, including its pilot production facility,
is located in two buildings providing approximately 40,000 square feet of
available space in Sunnyvale, California. In November 1994, the Company signed
new leases on both buildings which will expire in August 2000 and 2001,
respectively. The increase in space will facilitate expansion for manufacturing
and development efforts. Conductus also leases approximately 10,000 square feet
in San Diego, California under a lease expiring in 1998 for its Instrument and
Systems Division. The Company believes its existing facilities are adequate and
suitable for its current needs, and additional space can be obtained on
commercially reasonable terms as needed to expand the Company's operations.
LEGAL PROCEEDINGS
One Conductus patent covering technology related to certain magnetic
resonance probe coils is currently subject to an interference proceeding with a
competitor, Superconductor Technologies, Inc., before the Patent and Trademark
Office. Based on the Company's current product development plan, the Company
does not believe that an adverse resolution of the proceeding would have a
material adverse effect on its business operating results or financial
condition. The Company is not a party to any material litigation and is not
aware of any pending or threatened litigation against the Company that could
have a material adverse effect upon the Company's business, operating results or
financial condition. See "Risk Factors -- Uncertainty of Patents and Proprietary
Rights; Risk of Litigation."
EMPLOYEES
As of March 31, 1996, the Company had a total of 105 full-time equivalent
employees of which 46 hold advanced degrees. Of the total full-time employees,
65 were engaged in research and product development, 11 in manufacturing, nine
in sales and marketing, three in operations and 17 in administration and
finance. None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its relations with
its employees to be good.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The officers and directors of the company, and their ages, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ---------------------------------------------
<S> <C> <C>
Charles E. Shalvoy........................... 48 President, Chief Executive Officer and
Director
Duncan J. MacMillan.......................... 51 Vice President, Marketing
Randy W. Simon, Ph.D......................... 42 Vice President, Technology Programs
William J. Tamblyn........................... 37 Vice President, Chief Financial Officer and
Secretary
John F. Shoch, Ph.D. (1)(2).................. 47 Chairman of the Board
Richard W. Anderson.......................... 58 Director
Martin Cooper................................ 67 Director
Robert J. Saldich............................ 63 Director
Anthony Sun (1).............................. 43 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
MR. SHALVOY joined the Company in June 1994 as President, Chief Executive
Officer and Director. From 1988 to 1994, he was President and Chief Operating
Officer of Therma-Wave, Inc., a manufacturer of semiconductor production
equipment. Prior to that he was employed by Aehr Test Systems, Emerson Electric
Corp. and Raychem Corporation in a variety of senior management positions. Mr.
Shalvoy holds a B.S. in Mechanical Engineering from the University of Notre Dame
and an M.B.A. from Stanford University.
MR. MACMILLAN joined the Company in October 1994 as Vice President of
Marketing. From 1984 to September 1994, he held various senior managerial
positions with Octel Communications Corporation, a manufacturer of voice
processing systems. Prior to that he was employed by Rolm Corporation in several
sales, product and general management positions. Mr. MacMillan holds a B.S. in
Mechanical Engineering from Stevens Institute and an M.B.A. from Stanford
University.
DR. SIMON joined the Company in October 1990 as Senior Scientist and served
as Director of Research and Development from March 1991 to January 1993 and as
Vice President, Marketing and Development from January 1993 to November 1994 and
Vice President, Technology Programs and Investor Relations from November 1994 to
November 1995 and Vice President, Technology Programs since November 1995. From
January 1985 to October 1990, he held a variety of scientific and managerial
positions at TRW, where he headed TRW's Superconductivity Research Department's
high-temperature superconductivity program and managed TRW's internal research
and development program on high-temperature superconductive electronics. Dr.
Simon holds a B.S. in Physics from Pomona College and an M.S. and a Ph.D. in
Physics from the University of California, Los Angeles.
MR. TAMBLYN joined the Company in March 1994 as Director of Finance and
Principal Accounting Officer and has served as Chief Financial Officer since
April 1994. From May 1993 through December 1993, Mr. Tamblyn was Vice President
of Finance and Chief Financial Officer of Ramtek Corporation. From October 1988
to April 1993, he was employed by Coopers & Lybrand as an Audit Manager. Mr.
Tamblyn holds a B.S. in Business Administration -- Accounting from San Jose
State University and is a Certified Public Accountant.
DR. SHOCH has served as Chairman of the Board of the Company since its
inception in 1987. As a founder of Conductus, Dr. Shoch served as President from
1987 to 1988. Since 1985, he has been a general partner of
38
<PAGE>
AMC Partners 84, which is the general partner of Asset Management Associates
1984, a venture capital investment fund and a principal stockholder of the
Company. Dr. Shoch holds a B.S. in political science and an M.S. and Ph.D. in
computer science from Stanford University.
MR. ANDERSON has served as director of the Company since February 1992.
Since 1985, he has served as the Vice President and General Manager of the
Microwave and Communications Group of Hewlett-Packard Company ("H-P"). Mr.
Anderson holds a B.S. in electrical engineering from Utah State University and
an M.S. in electrical engineering from Stanford University and attended the
Stanford Executive Program in 1982.
MR. COOPER has served as director of the Company since January 1995. Since
1992, Mr. Cooper has served as Chairman and Chief Executive Officer of
ArrayComm, Inc., a company he co-founded that manufactures intelligent antennas
for wireless applications. Previously he was co-founder, chairman, Chief
Executive Officer and President of Cellular Business Systems, Inc., a provider
of management information software to the cellular industry that was purchased
by Cincinnati Bell in 1983. Mr. Cooper worked for 29 years at Motorola Inc.,
where he started out as a Senior Development Engineer in 1954 and advanced to
Corporate Director of Research and Development in 1983. Mr. Cooper earned a B.S.
and M.S. in electrical engineering from the Illinois Institute of Technology.
MR. SALDICH has served as a director of the Company since January 1996. Mr.
Saldich was the President and Chief Executive Officer of Raychem Corp. from
April 1990 until his recent retirement in October 1995. Mr. Saldich worked for
Raychem Corp. for 31 years, in various senior management positions. Mr. Saldich
earned a B.S. in chemical engineering from Rice University and an M.B.A. from
Harvard University.
MR. SUN has been at Venrock Associates, a venture capital firm, since 1979.
Previously, he was employed by Hewlett-Packard, TRW and Caere Corporation. He is
a director of Centura Software Corporation, a client/server software company,
Cognex Corporation, a computer systems company, Inference Corporation, a
client/server and internet help desk software company, Komag, Inc., a computer
storage component company, Photonics Corporation, a computer peripherals
company, StrataCom, Inc., a telecommunications company, and Worldtalk
Communications Corporation, a software application router company. He is also a
director of several private companies. Mr. Sun received S.B.E.E., S.M.E.E. and
Engineer degrees from the Massachusetts Institute of Technology, and a Master of
Business Administration degree from Harvard University.
Mr. Anderson was nominated for election as a director by H-P pursuant to
Series B Preferred Stock Purchase Agreement between the Company and H-P. See
"Business -- Strategic Alliances and Development Agreements" and "Certain
Transactions -- Relationship with H-P" for additional information about the
relationship between Conductus and H-P.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and each of its
other four most highly compensated executive officers whose compensation was in
excess of $100,000 (determined as of the end of the last fiscal year) for
services rendered in all capacities to the Company for the fiscal year ended
December 31, 1995 (collectively, the "Named Officers"). No executive officers
who would have otherwise been includable in such table on the basis of salary
and bonus earned for the 1995 fiscal year have resigned or terminated employment
during that fiscal year, except for Henry Zauderer who resigned as Vice
President, Technology and Product Development effective September 30, 1995.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS OPTIONS (#) COMPENSATION
- -------------------------------------------- --------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Charles E. Shalvoy, President and CEO 1995 $ 175,011 $ 31,669 -- --
1994 94,925(2) 44,250 250,000 --
Duncan J. MacMillan, Vice President 1995 125,108 25,388 -- --
1994 25,723(3) 7,219 100,000 --
Randy W. Simon, Vice President 1995 105,704 21,612 8,000 --
1994 96,620 21,483 -- --
1993 95,262 25,000 11,250 --
William J. Tamblyn, Vice President 1995 99,750 25,220 40,000 --
1994 72,067(4) 21,945 10,000 --
Henry Zauderer, Vice President 1995 121,500(5) -- -- $ 13,500(5)
1994 -- -- 60,000 --
</TABLE>
- ------------------------
(1) Salary includes amounts deferred pursuant to the Company's 401(k) Plan.
(2) Includes salary from June 6, 1994 upon commencement of employment.
(3) Includes salary from October 1, 1994 upon commencement of employment.
(4) Includes salary from March 1, 1994 upon commencement of employment.
(5) Includes salary from January 1, 1995 until his resignation effective
September 30, 1995. Other compensation relates to Mr. Zauderer's severance
package.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the Named Officers for the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM (2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) (1) DATE 5% 10%
- -------------------------------- ----------- ------------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy.............. -- -- -- -- -- --
Duncan J. MacMillan............. -- -- -- -- -- --
Randy W. Simon.................. 8,000 3.21% $ 4.9375 1/23/05 $ 24,841 $ 62,953
William J. Tamblyn.............. 40,000 16.05% 4.9375 1/23/05 124,207 314,764
Henry Zauderer.................. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The options granted to Dr. Simon and Mr. Tamblyn are immediately subject to
a right of repurchase in favor of the Company that lapses as follows: 20%
upon the completion of the first year of service measured from January 1,
1995 and an additional 1.67% upon the completion of each month of service
elapsed thereafter, until the option shall be fully vested upon the
completion of the fifth year of service
40
<PAGE>
from the vesting date. The options were granted January 24, 1995, and began
vesting on January 1, 1995. The exercise price may be paid in cash, in
shares of Common Stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the
purchased shares. The Company may also finance the option exercise by
loaning the optionee sufficient funds to pay the exercise price for the
purchased shares and the federal and state income tax liability incurred by
the optionee in connection with such exercise. The Compensation Committee
has the discretionary authority to reprice outstanding options through the
cancellation of those options and the grant of replacement options with an
exercise price equal to the lower fair market value of the option shares on
the regrant date.
(2) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning holdings at the end of
the 1995 fiscal year with respect to the Named Officers. No options or SARs were
exercised during the 1995 fiscal year, nor were any SARs outstanding at the end
of such fiscal year.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT FISCAL
FISCAL YEAR END (1)(2) YEAR END (3)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Charles E. Shalvoy........................................ 250,000 -- $ 343,750 --
Duncan J. MacMillan....................................... 100,000 -- 231,250 --
Randy W. Simon............................................ 50,399 -- 280,758 --
William J. Tamblyn........................................ 50,000 -- 88,750 --
Henry Zauderer............................................ -- -- -- --
</TABLE>
- ------------------------
(1) Excludes options granted after the end of fiscal year 1995.
(2) Each option is immediately exercisable for all the option shares, but any
shares purchased under the option will be subject to repurchase by the
Company, at the original exercise price per share, upon the optionee's
cessation of service prior to vesting in such shares. As of December 31,
1995, the Company's repurchase right had lapsed with respect to the
following number of option shares: Mr. Shalvoy -- 69,998; Mr. MacMillan --
28,333; Dr. Simon -- 33,806; and Mr. Tamblyn -- 13,666.
(3) Calculated on the basis of the fair market value of the Common Stock on
December 31, 1995 of $6.87 per share, as reported on the Nasdaq National
Market, minus the exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John F. Shoch, who became a member of the Compensation Committee of the
Board of Directors in May 1993, is a general partner of AMC Partners 84, which
is the general partner of Asset Management Associates 1984, the beneficial owner
of more than 5% of the Company's Common Stock. Dr. Shoch served as Chief
Executive Officer of the Company from September 1987 until October 1988.
For information concerning grants of options to certain non-employee members
of the Board of Directors, including Dr. Shoch and Mr. McKenna, see "Certain
Transactions -- Option Grants."
The Company has entered into separate indemnification agreements with its
directors and officers. These agreements require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities
arising from actions not taken in good faith or in a manner the indemnitee
believed to be opposed to the best interest of the Company) to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified and to obtain director's and officers' insurance if
available on reasonable terms.
41
<PAGE>
EMPLOYMENT CONTRACTS
None of the Company's executive officers (other than Charles E. Shalvoy)
have employment agreements with the Company, and their employment may be
terminated at any time at the discretion of the Board. The Company entered into
an agreement with Mr. Shalvoy, the Company's President and Chief Executive
Officer, on May 3, 1994, which provides for accelerated vesting of his option
shares as if he remained employed for one additional year in the event that his
employment is terminated without cause following certain mergers, acquisitions
or sales of all or substantially all of the assets of the Company. In addition,
the Compensation Committee has the authority as Plan Administrator of the 1992
Stock Option/ Stock Issuance Plan to provide for the accelerated vesting of the
shares of Common Stock subject to outstanding options held by the Chief
Executive Officer and the Company's other executive officers, whether granted
under that plan or any predecessor plan, in the event their employment were to
be terminated (whether involuntarily or through a forced resignation) following
(i) an acquisition of the Company by merger or asset sale or (ii) a hostile
takeover of the Company effected through a successful tender offer for more than
50% of the Company's outstanding Common Stock or through a change in the
majority of the Board as a result of one or more contested elections for Board
membership.
1992 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1992 Stock Option/Stock Issuance Plan (the "1992 Plan") was
adopted by the Board of Directors on January 11, 1992, and approved by the
stockholders on April 25, 1992 as the successor to the 1987 Stock Option Plan
and 1989 Stock Option Plan ("Predecessor Plans"). The 1992 Plan has been amended
on numerous occasions, most recently in January 1996 to increase the number of
shares issuable under the 1992 Plan. The January 1996 amendment is subject to
stockholder approval at the 1996 annual meeting. A total of 1,880,000 shares of
Common Stock have been authorized for issuance under the 1992 Plan. As of March
31, 1996, 310,784 shares had been issued under the 1992 Plan, options for
1,157,026 shares were outstanding (including options incorporated from the
Predecessor Plans) and 412,190 shares remained available for future grant.
Shares of Common Stock subject to outstanding options, including options granted
under the Predecessor Plans, which expire or terminate prior to exercise will be
available for future issuance under the 1992 Plan.
The 1995 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which employees (including officers)
and independent consultants may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock at an exercise price per
share not less than 85% of fair market value on the grant date, (ii) the Stock
Issuance Program under which such individuals may, in the plan administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price per share not less than 85% of fair market value per
share at the time of issuance or as a fully-paid bonus for services rendered the
Company; and (iii) the Automatic Option Grant Program under which option grants
will automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to 100% of
the fair market value of the option shares on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Compensation Committee of the Board. The Compensation
Committee, as plan administrator, has complete discretion to determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the status of any granted
option as either an incentive stock or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. In no event, however, may any one participant in the 1992 Plan
acquire more than 240,000 shares of Common Stock under the 1992 Plan, exclusive
of any option grants or share issuances received prior to December 31, 1993.
The exercise price for options granted under the 1992 Plan may be paid in
cash or in outstanding shares of Common Stock. Options may also be exercised on
a cashless basis through the same-day sale of the
42
<PAGE>
purchased shares. The Compensation Committee may also permit the optionee to pay
the exercise price through a promissory note payable in installments over a
period of years. The amount financed may include any Federal or state income and
employment taxes incurred by reason of the option exercise.
Each option granted to an officer of the Company subject to the short-swing
profit restrictions of the Federal securities laws may include a special stock
appreciation right which provides that, upon the acquisition of 50% or more of
the Company's outstanding voting stock pursuant to a hostile tender offer, such
option, if outstanding for at least six months, will automatically be cancelled
in exchange for a cash distribution to the officer based upon the tender offer
price.
The Compensation Committee has the authority to effect, from time to time,
the cancellation of outstanding options under the 1992 Plan in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of the Common Stock on
the new grant date.
In the event the Company is acquired by merger, consolidation or asset sale,
the shares of Common Stock subject to each option outstanding at the time under
the 1992 Plan will immediately vest in full, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
acquiring entity, and options will accelerate to the extent not assumed by the
acquiring entity. The Compensation Committee also has discretion to provide for
the acceleration of one or more outstanding options under the 1992 Plan
(including options incorporated from the 1992 Plan) and the vesting of shares
subject to outstanding options upon the occurrence of certain hostile tender
offers. Such accelerated vesting may be conditioned upon the subsequent
termination of the affected optionee's service.
Under the automatic grant program, each individual serving as a non-employee
director on January 23, 1995, and each individual who first joins the Board as a
non-employee director on or after that date, will receive at that time an
automatic option grant for 15,000 shares of Common Stock. Each option will have
an exercise price equal to the fair market value of the Common Stock on the
automatic grant date and a maximum term of ten years, subject to earlier
termination following the optionee's cessation of Board service. The option will
be immediately exercisable for all of the shares but the shares will be subject
to repurchase at original cost. The repurchase right shall lapse and the
optionee vest in a series of annual and monthly installments over a five-period,
beginning one year from the grant date. However, vesting of the shares will
automatically accelerate upon (i) an acquisition of the Company by merger,
consolidation, or asset sale, or (ii) a hostile takeover of the Company effected
by tender offer for more than 50% of the outstanding voting stock or proxy
contest for Board membership.
In the event that more than 50% of the Company's outstanding voting stock
were to be acquired pursuant to a hostile tender offer, each automatic option
grant which has been outstanding for at least six months may be surrendered to
the Company in return for a cash distribution from the Company based upon the
tender offer price per share of Common Stock at the time subject to the
surrendered option.
The Board may amend or modify the 1992 Plan at any time. The 1992 Plan will
terminate on January 10, 2002 unless sooner terminated by the Board.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted on August 1, 1994 an Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 200,000 shares of Common Stock have been reserved
for issuance under the Purchase Plan. The Purchase Plan, which is intended to
qualify under Section 423 of the Internal Revenue Code, has been implemented
through a series of offering periods, each with a maximum duration of twelve
months, commencing on August 1, 1994, with purchases generally occurring at
six-month intervals. The Purchase Plan is administered by the Compensation
Committee of the Board. Employees are eligible to participate if they are
employed by the Company for at least 20 hours per week and have been employed by
the Company for at least ninety days. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 10% of an employee's compensation, nor more than 2,500 shares per
participant on any purchase date. The price of stock purchased under the
Purchase Plan will be 85% of
43
<PAGE>
the lower of the fair market value of the Common Stock at the beginning of the
offering or on the semi-annual purchase date. Employees may end their
participation in the offering at any time during the purchase period, and
participation ends automatically on termination of employment with the Company.
Each outstanding purchase right will be exercised immediately prior to a merger
or consolidation unless assumed by the acquiring corporation. The Board may
amend or terminate the Purchase Plan immediately after the close of any purchase
period. However, the Board may not, without stockholder approval, materially
increase the number of shares of Common Stock available for issuance or
materially modify the eligibility requirements for participation or the benefits
available to participants.
401(K) PROFIT SHARING PLAN
Effective January 1, 1988, the Company adopted a retirement profit sharing
plan (the "401(k) Plan") that covers all employees of the Company in the U.S. An
employee may elect to defer, in the form of contributions to the 401(k) Plan, up
to 15% of the total compensation that would otherwise be paid to the employee,
currently not to exceed $9,500 per calendar year (adjusted for cost-of-living
increases). Employee contributions are invested in selected equity mutual funds
or a money market fund at the direction of the employee. The contributions are
fully vested and nonforfeitable at all times.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation limits the liability of
its directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. The Company
has also entered into indemnification agreements with its officers, directors
and certain employees containing provisions that may require the Company, among
other things, to indemnify such officers, directors and employees against
certain liabilities that may arise by reason of their status or service as
directors, officers or employees (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms. The
Company believes that these provisions and agreements are necessary to attract
and retain qualified directors, executive officers and certain employees.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
CERTAIN TRANSACTIONS
RELATIONSHIP WITH H-P
In May 1993, the Company and H-P modified a previous Coordinated Research
Program Agreement (the "Prior H-P Agreement") by entering into a new five-year
agreement (the "Current H-P Agreement"). Under the Prior H-P Agreement, H-P and
Conductus were involved in several joint development projects, including the
development of a stable, low phase-noise oscillator for microwave test and
instrumentation applications using resonators developed by Conductus, and the
development of a variety of digital LTS circuits for high-speed digital
electronic applications. All rights to technology arising out of joint
development projects are owned jointly by H-P and Conductus. As a result, both
Conductus and H-P will be entitled to commercialize products incorporating such
technology.
Any royalties received by either H-P or Conductus for technology developed
under the Prior H-P Agreement will be divided equally between the two parties,
except that Conductus generally may not license third parties to make circuits
based on circuit designs made solely by H-P employees as part of a joint
44
<PAGE>
development project or sell such circuits to third parties for incorporation
into products for resale. H-P is a party to certain cross-license arrangements
and may in the future enter into similar cross-licenses. Consequently, such
third parties may have non-exclusive rights in technology developed under
research projects under the Prior H-P Agreement. H-P also has the right,
beginning two years after information developed under the Prior H-P Agreement or
disclosed to the other party is designated as confidential, to disclose such
information to third parties or to the public (including information disclosed
to H-P by Conductus). Conductus has comparable license and information
disclosure rights.
The Current H-P Agreement requires Conductus and H-P to exchange reviews and
assessments of Conductus' technical and applications developments, particularly
with respect to their potential application to H-P's product lines. H-P has the
right to appoint an H-P employee (the "H-P Member") as a member of the Company's
Scientific Advisory Board. H-P will jointly own with Conductus any invention by
the H-P Member acting pursuant to the H-P Agreement or using the Company's
confidential information.
Mr. Anderson, Vice President and General Manager of the Microwave and
Communication Group at H-P, was nominated for election as a director of the
Company by H-P pursuant to the Series B Preferred Stock Purchase Agreement
between the Company and H-P. See "Management -- Directors and Executive
Officers."
Between January 1990 and June 1993, Conductus and H-P entered into four
equipment lease lines, pursuant to which Conductus leased equipment and incurred
monthly payments in the aggregate of approximately $166,500, including principal
and interest. Three of the four lease lines expired in May 1993.
SELECTED PREVIOUS FINANCINGS
In October 1992 and January 1993, the Company raised an aggregate of
$2,000,000 to finance its operations through the issuance of $1,980,000
principal amount of convertible promissory notes bearing interest at 9% per
annum (the "Promissory Notes"), and warrants to purchase Series B Preferred
Stock that converted into warrants to purchase an aggregate of 33,460 shares of
Common Stock at the closing of the Company's initial public offering (the "IPO")
in August 1993. The warrants had an effective exercise price of $8.96 per share
of Common Stock. The Promissory Notes and warrants were issued to affiliates of
the following persons, each of which beneficially owned more than 5% of the
Company's Common Stock as of March 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON
PRINCIPAL STOCK ISSUABLE UPON AMOUNT
AMOUNT AMOUNT OF EXERCISE OF OUTSTANDING
ENTITY ADVANCED NOTES WARRANTS UNDER NOTES
- ------------------------------------------------------- ---------- ---------- --------------------- -----------
<S> <C> <C> <C> <C>
Asset Management Associates 1984 ("Asset
Management").......................................... $ 339,000 $ 335,610 5,674 $ 350,174
Venrock Associates ("Venrock")......................... $ 339,000 $ 335,610 5,674 $ 350,174
</TABLE>
The expiration date of these warrants was extended by two years in August
1993 in exchange for the agreement of the warrant holders to enter into lock-up
agreements in connection with the IPO. The warrants expired in August 1995
without being exercised.
As a result of their respective positions as general partners or as general
partners of general partners of Asset Management and Venrock, Dr. Shoch and Mr.
Sun may be deemed to benefit to the extent that Common Stock held by such
stockholders increases in value as a result of this offering.
45
<PAGE>
In June 1993, the Company sold 434,508 shares of Common Stock (including
Common Stock issuable upon conversion of Series B Preferred Stock), including
shares sold to the following persons, each of which beneficially owned more than
5% of the Company's Common Stock, at an effective price of $8.96 per share:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PURCHASE
ENTITY COMMON STOCK PRICE CONSIDERATION
- ----------------------------------------- -------------- ------------ -----------------------------------------
<S> <C> <C> <C>
Hewlett-Packard.......................... 137,276 $ 1,230,000 $1,000,000 in cash and $230,000 in
equipment
Asset Management......................... 39,081 $ 350,174 Cancellation of promissory notes
Venrock.................................. 39,081 $ 350,174 Cancellation of promissory notes
</TABLE>
In August 1993, the Company issued 1,500,000 shares of its Common Stock to
the public at $10.00 per share pursuant to the IPO. In connection with the IPO,
the Company also effected the conversion of all of its shares of Series A
Preferred Stock and Series B Preferred Stock into Common Stock and all of the
warrants to purchase Series A Preferred Stock and Series B Preferred Stock into
warrants to purchase the Common Stock of the Company at a conversion rate of
.3125-for-one.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation limits the liability of
its directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. The Company
has also entered into indemnification agreements with its officers, directors
and certain employees containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms. See "Management --
Limitation of Liability and Indemnification Matters."
OPTION GRANTS
On January 23, 1995, the Company granted each of Dr. Shoch and Messrs.
McKenna and Sun an option to purchase 15,000 shares of Common Stock at an
exercise price of $4.93 per share pursuant to the Automatic Option Grant Program
under the 1992 Plan. On January 25, 1996, the Company granted Mr. Saldich an
option to purchase 15,000 shares of Common Stock at an exercise price of $6.50
per share pursuant to the same program. See "Management -- 1992 Stock
Option/Stock Issuance Plan."
On May 3, 1994, the Company granted Mr. Shalvoy options to purchase an
aggregate of 250,000 shares of Common Stock at an exercise price of $5.50 per
share, including 240,000 shares granted pursuant to the 1992 Plan, in connection
with Mr. Shalvoy joining the Company as President and Chief Executive Officer.
See "Management -- Directors and Executive Officers" and "-- Aggregate Option
Exercises and Fiscal Year-End Values."
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 1, 1996, and as adjusted to
reflect the sale of shares offered hereby, by (i) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the Named Officers
and (iv) all current officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1)(2) OFFERING (1)(2)(3)
5% STOCKHOLDERS, DIRECTORS, NAMED OFFICERS ----------------------- -----------------------
AND OFFICERS AND DIRECTORS AS A GROUP NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Hewlett-Packard Company ("H-P") ..................................... 695,312 12.1% 695,312 10.3%
300 Hanover Street
Palo Alto, CA 94304
Asset Management Associates 1984 (4) ................................ 351,581 6.1 351,581 5.2
2275 East Bayshore Road
Suite 150
Palo Alto, CA 94303
Venrock Associates (5) .............................................. 351,581 6.1 351,581 5.2
755 Page Mill Road
Suite A230
Palo Alto, CA 94304
John F. Shoch (6).................................................... 380,394 6.6 380,394 5.6
Anthony Sun (7)...................................................... 371,269 6.5 371,269 5.5
Richard W. Anderson (8).............................................. -- -- -- --
Martin Cooper (9).................................................... 15,000 * 15,000 *
Robert J. Saldich (10)............................................... 15,000 * 15,000 *
Charles E. Shalvoy (11).............................................. 260,895 4.4 260,895 3.7
Duncan J. MacMillan (12)............................................. 102,665 1.8 102,665 1.5
Randy W. Simon (13).................................................. 73,207 1.3 73,207 1.1
William J. Tamblyn (14).............................................. 63,423 1.1 63,423 *
Henry Zauderer (15).................................................. -- -- -- --
All directors and officers as a group
(9 persons) (16).................................................... 1,281,853 20.4 1,281,853 17.6
</TABLE>
- ------------------------
* Less than 1%
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
(2) Percentage of beneficial ownership is calculated assuming 5,732,989 shares
of Common Stock were outstanding on March 31, 1996. This percentage also
includes Common Stock of which such individual or entity has the right to
acquire beneficial ownership within sixty days of March 31, 1996, including
but not limited to the exercise of an option; however, such Common Stock
shall not be deemed outstanding for the purpose of computing the percentage
owned by any other individual or entity. Such calculation is required by
Rule 13d-3(1)(i) under the Securities Exchange Act of 1934, as amended. The
number of shares outstanding after this Offering includes the 1,000,000
shares of Common Stock being offered for sale by the Company in this
Offering.
(3) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
47
<PAGE>
(4) Includes 351,581 shares held by Asset Management Associates 1984. Dr.
Shoch, a director of the Company, is a general partner of AMC Partners 84,
which is the general partner of Asset Management Associates 1984. Dr. Shoch
disclaims beneficial ownership of the shares held by Asset Management
Associates 1984, except to the extent of his pecuniary interest therein.
Messrs. Franklin P. Johnson, Jr. and Craig C. Taylor are the other general
partners of AMC Partners 84 and may be deemed beneficial owners of shares
owned by Asset Management Associates 1984.
(5) Includes 351,581 shares held by Venrock Associates. Mr. Sun, a director of
the Company, is a general partner of Venrock Associates. Mr. Sun disclaims
beneficial ownership of the shares held by Venrock Associates, except to the
extent of his pecuniary interest therein. Messrs. Peter O. Crisp, Ted H.
McCourtney, Jr., Anthony B. Evnin, David R. Hathaway, Ray Rothrock, Patrick
Latterell and Ms. Kimberly A. Rummelsburg are the other general partners of
Venrock Associates and may be deemed beneficial owners of such shares.
(6) Includes 6,000 shares held and 22,813 shares in the form of an immediately
exercisable option held by Dr. Shoch and 351,581 shares held by Asset
Management Associates 1984, as to which Dr. Shoch disclaims beneficial
ownership except to the extent of his pecuniary interest therein.
(7) Includes 19,688 shares in the form of an immediately exercisable option
held by Mr. Sun and 351,581 shares held by Venrock Associates, as to which
Mr. Sun disclaims beneficial ownership except to the extent of his pecuniary
interest therein.
(8) Does not include shares held by H-P, of which Mr. Anderson is
Vice-President and General Manager of the Microwave and Communications
Group. Mr. Anderson disclaims beneficial ownership of the shares
beneficially owned by H-P.
(9) Includes 15,000 shares in the form of an immediately exercisable option
held by Mr. Cooper.
(10) Includes 15,000 shares in the form of an immediately exercisable option
held by Mr. Saldich.
(11) Includes 10,895 shares held and 250,000 shares in the form of immediately
exercisable options, of which 180,002 are subject to a repurchase right in
favor of the Company that will lapse in a series of installments so long as
Mr. Shalvoy remains in the service of the Company.
(12) Includes 2,665 shares held and 100,000 shares in the form of immediately
exercisable options, of which 71,667 shares are subject to repurchase right
in favor of the Company that will lapse in a series of installments so long
as Mr. MacMillan remains in the service of the Company.
(13) Includes 2,909 shares held and 70,399 shares in the form of immediately
exercisable options, of which 35,593 shares are subject to repurchase right
of the Company that will lapse in a series of installments so long as Dr.
Simon remains in the service of the Company.
(14) Includes 3,423 shares held and 60,000 shares in the form of immediately
exercisable options, of which 46,334 shares are subject to a repurchase
right of the Company that will lapse in a series of installments so long as
Mr. Tamblyn remains in the service of the Company.
(15) Mr. Zauderer commenced employment January 1, 1995 and resigned effective
September 30, 1995. No shares or options are owned or outstanding,
respectively, related to Mr. Zauderer at April 1, 1996.
(16) Includes 552,900 shares in the form of options exercisable at April 1,
1996. See Notes (6) through (15).
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 11,000,000 shares of
Common Stock, $0.0001 par value, and 1,000,000 shares of Preferred Stock,
$0.0001 par value.
COMMON STOCK
As of March 31, 1996, there were 5,732,989 shares of Common Stock
outstanding that were held of record. There will be 6,732,989 shares of Common
Stock outstanding (assuming no exercise of the Underwriters' over-allotment
option and assuming no exercise after March 31, 1996, of outstanding options)
after giving effect to the sale of the shares of Common Stock to the public
offered hereby.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Price Range of Common Stock and Dividend Policy." In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be issued upon
completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the stockholders and may
adversely affect the voting and other rights of the holders of Common Stock. The
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION
AND BYLAWS AND OF DELAWARE LAW
RESTATED CERTIFICATE OF INCORPORATION
Under the Company's Restated Certificate of Incorporation, the Board of
Directors has the power to authorize the issuance of up to 1,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without further vote or
action by the stockholders. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of and the voting and other rights of the holders of the Common
Stock. In addition, the Restated Certificate of Incorporation provides that,
effective upon the closing of this offering, all stockholder actions must be
effected at a duly called meeting and not by a consent in writing. These
provisions of the Restated Certificate of Incorporation could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and in the
policies formulated by the Board of Directors and to discourage certain types
49
<PAGE>
of transactions that may involve an actual or threatened change of control of
the Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal. These provisions are also
intended to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for the Company's shares and, as a consequence, they also
may inhibit fluctuations in the market price of the Company's shares which could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in the management of the Company. See "Risk
Factors -- Effect of Certain Charter Provisions; Antitakeover Effects of
Restated Certificate of Incorporation and Bylaw Provisions and of Delaware Law."
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
Pursuant to the Second Amended and Restated Registration Rights Agreement
among the Company and certain stockholders (the "Registration Rights
Agreement"), holders of approximately 1,877,000 shares of Common Stock and any
shares of Common Stock issued as a dividend or other distribution with respect
to, in exchange for, or in replacement of, such approximately 1,877,000 shares
of Common Stock and 18,534 shares issuable upon exercise of a certain warrant
(collectively, the "Registrable Securities") will be entitled to certain rights
with respect to the registration of the Registrable Securities under the Act.
Under the terms of the Registration Rights Agreement, if the Company proposes to
register any of its securities under the Act for its own account, holders of the
Registrable Securities, as well as 139,813 shares of Common Stock held by seven
consultants and 15,000 shares issuable upon exercise of a certain warrant
(collectively, the "Piggyback Shares"), are entitled to notice of such
registration and are entitled to include their Registrable Securities and/or
Piggyback Shares therein ("piggyback registration"). In accordance with the
terms of the Registration Rights Agreement, holders of the Registrable
Securities and Piggyback Shares are not entitled to piggyback registration in
connection with this offering. Beginning four months after the effective date of
this offering
50
<PAGE>
and subject to certain dollar limitations, the holders of Registrable Securities
may also require the Company, on no more than two occasions, to file a
registration statement under the Act with respect to their Registrable
Securities and the Company is required to use its best efforts to effect such
registration ("requested registration"). In addition, upon qualification of the
Company to file registration statements on Form S-3 under the Act and subject to
certain dollar limitations, holders of Registrable Securities are entitled to
request the Company to effect registrations of the Registrable Securities on
Form S-3 ("S-3 registration"). The foregoing rights to registration are subject
to certain limitations and conditions, including the underwriters' right to
limit the number of Registrable Securities and Consultant Shares being
registered pursuant to piggyback registrations and the Company's right to delay
requested and S-3 registration in good faith. The Company is required to bear
the expenses relating to requested, piggyback and the first two S-3
registrations, except for the selling stockholders' pro rata portion of the
underwriting discounts and commissions.
The following entities which may be considered "affiliates" of the Company,
as that term is defined in the Act, own a total of 1,398,474 shares of
Registrable Securities: H-P owns 695,312 shares and Asset Management and Venrock
each own 351,581 shares of Registrable Securities. See "Principal Stockholders."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston, Boston, Massachusetts. Its telephone number is (617) 575-2900.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding an
aggregate of 6,732,989 shares of Common Stock, based on shares outstanding as of
March 31, 1996 and assuming the issuance of the 1,000,000 shares of Common Stock
offered hereby and no exercise of the Underwriters' over-allotment option. Of
the total outstanding shares of Common Stock, 5,308,724 shares of Common Stock
will be freely tradable without restriction or further registration under the
Act, unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Act, including the 1,000,000 shares of Common Stock offered
hereby, 1,500,000 shares registered pursuant to the Company's initial public
offering and 2,808,724 shares that have either been registered on Form S-8 or
are restricted securities that can be sold pursuant to Rule 144(k) or Rule 701
under the Act. The remaining 1,424,265 shares are held by affiliates of the
Company and will be eligible for sale on the date of this Prospectus subject to
the restrictions of Rule 144 ("Affiliate Shares"). All of the Affiliate Shares
will be subject to the lock-up arrangements described below.
Officers, directors and certain stockholders, holding in the aggregate
1,424,265 shares of Common Stock, have agreed not to offer, sell or otherwise
dispose of any such Common Stock for a period of 90 days after the date of this
Prospectus, without the prior consent of Tucker Anthony Incorporated, a
Representative of the Underwriters. See "Underwriting." The shares of Common
Stock subject to lock-up agreements include 1,424,265 shares that are
"restricted securities" and eligible for immediate resale after the 90-day
lock-up period as described below.
In general, under Rule 144 as currently in effect, an affiliate of the
Company or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least two (2) years, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of one percent (1%) of the then outstanding shares of the Company's
Common Stock or the average weekly trading volume of the Company's Common Stock
on the Nasdaq National Market during the four (4) calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the affiliate of the Company at any time during the ninety
(90) days preceding a sale, and who has beneficially owned shares for at least
three (3) years (including any period of ownership of preceding non-affiliated
holders), would be entitled to sell such shares under Rule 144(k) without regard
to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
51
<PAGE>
UNDERWRITING
The Underwriters named below, acting through Tucker Anthony Incorporated and
Pennsylvania Merchant Group Ltd., as Representatives, have agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the respective
numbers of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Tucker Anthony Incorporated................................................................
Pennsylvania Merchant Group Ltd............................................................
----------
Total.................................................................................. 1,000,000
----------
----------
</TABLE>
The Underwriters will purchase all shares of Common Stock offered hereby,
other than over-allotment shares, if any of such shares are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein. In the event of a default
by an Underwriter, the commitment set forth above of the non-defaulting
Underwriter may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. Such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the public offering, the public offering price, concession and reallowance
to dealers may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable by the
Underwriters not later than 30 days after the effective date of this Prospectus,
to purchase up to 150,000 additional shares of Common Stock at the public
offering price, less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriters may exercise such option, in whole or in part,
only to cover over-allotments made in connection with the sale of Common Stock
offered hereby. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total shown,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters.
In connection with this offering, certain underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market immediately prior to the commencement of sales in
this offering, in accordance with Rule 10b-6A under the Securities Exchange Act
of 1934. Passive market making consists of displaying bids on the Nasdaq
National Market limited by the bid prices of independent market makers and
purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified period and must be discontinued when such limit
is reached. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail and, if commenced, may
be discontinued at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
and to contribute to certain payments that the Underwriters may be required to
make.
The Company has agreed that during the 90-day period commencing on the date
hereof, the Company will not, without the prior written consent of the
Underwriters, sell, grant any option for the sale of, transfer
52
<PAGE>
or otherwise dispose (or announce any offer, sale, contract to sell, grant any
option for sale, transfer or other disposition) of any shares of Common Stock
other than pursuant to outstanding options, warrants or convertible securities
(other than certain employee stock options described herein and not exercisable
during such 90-day period) or, after the 90-day period commencing on the date
hereof, effect any sales of Common Stock, options, warrants or convertible
securities issued in connection with an acquisition. The Company's directors and
certain officers have agreed that during the 90-day period commencing on the
date hereof they will not, without the prior written consent of the
Underwriters, sell, grant any option for the sale of, transfer or otherwise
dispose (or announce any offer, sale, contract to sell, grant of any option for
sale, transfer or other disposition) of any shares of Common Stock other than
gifts to family members and charitable institutions who agree to the same
limitations.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Palo
Alto, California. Certain matters relating to patents in connection with the
offering will be passed upon for the Company by Merchant & Gould, Minneapolis,
Minnesota. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto,
California.
EXPERTS
The balance sheets of the Company as of December 31, 1995 and 1994 and the
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995, included in this Prospectus
have been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The matters set forth under "Risk Factors -- Uncertainty of Patents and
Proprietary Rights; Risk of Litigation" and "Business -- Patents, Proprietary
Technology and Trademarks" have been included in this Prospectus in reliance
upon Merchant, Gould, Smith, Edell, Welter & Schmidt, P.A., Minneapolis,
Minnesota, as experts in patent matters, which firm will pass on certain legal
matters in connection with this offering. See "Legal Matters."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
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"). Reports, proxy statements
and other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 75 Park Place,
14th Floor, New York, New York 10007. Copies of such materials can be obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered by the Company has been filed with the Commission.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to the Registration
Statement and the exhibits and schedules thereto. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C. and copies of all or any part thereof may
be obtained from the Public Reference Section of the Commission, at the address
set forth in the preceding paragraph, upon payment of certain fees prescribed by
the Commission.
53
<PAGE>
CONDUCTUS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.................................................................... F-2
Balance Sheets....................................................................................... F-3
Statements of Operations............................................................................. F-4
Statements of Stockholders' Equity................................................................... F-5
Statements of Cash Flows............................................................................. F-6
Notes to Financial Statements........................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Conductus, Inc.:
We have audited the accompanying balance sheets of Conductus, Inc. as of
December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Conductus, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 9, 1996, except as to Note 10
for which the date is March 8, 1996
F-2
<PAGE>
CONDUCTUS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, -------------- --------------
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 582,303 $ 272,410 $ 504,763
Short-term investments.............................................. 1,528,028 2,880,464 6,052,944
Accounts receivable (net of allowance for doubtful accounts of
$50,000 in 1996, 1995 and 1994, respectively)...................... 2,967,562 3,251,147 2,340,574
Inventories......................................................... 1,055,434 765,424 494,579
Prepaid expenses and other current assets........................... 151,155 285,404 162,410
-------------- -------------- --------------
Total current assets.............................................. 6,284,482 7,454,849 9,555,270
Property and equipment, net........................................... 2,555,893 2,550,042 1,768,599
Long-term investments................................................. -- -- 980,619
Other assets.......................................................... 96,912 123,340 236,991
-------------- -------------- --------------
Total assets...................................................... $ 8,937,287 $ 10,128,231 $ 12,541,479
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES
Current liabilities:
Current portion of long-term debt................................... $ 809,421 $ 687,736 $ 61,566
Accounts payable.................................................... 1,603,555 1,621,424 1,270,595
Other accrued liabilities........................................... 786,104 821,230 1,006,034
Obligations under capital leases, current portion................... 11,249 37,894 140,963
-------------- -------------- --------------
Total current liabilities......................................... 3,210,329 3,168,284 2,479,158
Long-term debt, net of current portion................................ 1,258,228 1,146,227 493,139
Obligations under capital leases, net of current portion.............. -- -- 40,271
-------------- -------------- --------------
Total liabilities................................................. 4,468,557 4,314,511 3,012,568
-------------- -------------- --------------
Commitments (Note 11)
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value:
Authorized: 1,000,000 shares
None issued or outstanding in 1996, 1995 or 1994..................... -- -- --
Common stock, $0.000l par value:
Authorized: 11,000,000 shares;
Issued: 5,905,363, 5,861,632 and 5,534,550
shares in 1996, 1995 and 1994, respectively
Outstanding: 5,732,989, 5,689,258 and 5,371,143 shares in 1996, 1995
and 1994, respectively............................................... 574 570 537
Additional paid-in capital............................................ 30,069,797 30,035,358 29,414,318
Unrealized gain (loss) on investments, net............................ 319 626 (84,762)
Accumulated deficit................................................... (25,601,960) (24,222,834) (19,801,182)
-------------- -------------- --------------
Total stockholders' equity........................................ 4,468,730 5,813,720 9,528,911
-------------- -------------- --------------
Total liabilities and stockholders' equity...................... $ 8,937,287 $ 10,128,231 $ 12,541,479
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract.............................. $ 2,213,762 $ 1,643,486 $ 8,148,189 $ 7,048,529 $ 5,070,544
Product sales......................... 397,497 369,456 2,433,496 1,587,603 1,408,735
------------- ------------- ------------- ------------- -------------
Total revenues...................... 2,611,259 2,012,492 10,581,685 8,636,132 6,479,279
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of product sales................. 256,300 166,002 1,429,516 974,699 1,175,283
Research and development.............. 2,743,131 2,577,387 9,819,416 9,201,460 7,080,230
Selling, general and administrative... 1,006,518 827,281 3,755,653 3,336,346 1,588,565
Nonrecurring charge related to
purchased technology................. 705,000
------------- ------------- ------------- ------------- -------------
Total costs and expenses............ 4,005,949 3,570,670 15,004,585 13,512,505 10,549,078
------------- ------------- ------------- ------------- -------------
Loss from operations................ (1,394,690) (1,557,728) (4,422,900) (4,876,373) (4,069,799)
Interest income......................... 27,329 80,101 249,371 344,496 166,232
Other income (expense).................. 24,521 (68,799) (92,608) 43,737 (41,803)
Interest expense........................ (36,286) (24,032) (155,515) (55,816) (176,447)
------------- ------------- ------------- ------------- -------------
Net loss............................ $ (1,379,126) $ (1,570,458) $ (4,421,652) $ (4,543,956) $ (4,121,817)
------------- ------------- ------------- ------------- -------------
Net loss per common share............... $ (0.24) $ (0.29) $ (0.80) $ (0.85) $ (1.40)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used in computing per share
amounts................................ 5,706,000 5,397,000 5,543,073 5,322,767 2,940,976
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
NOTES UNREALIZED
ADDITIONAL RECEIVABLE GAIN
PREFERRED COMMON PAID-IN FROM (LOSS) ON ACCUMULATED
STOCK STOCK CAPITAL STOCKHOLDERS INVESTMENTS DEFICIT TOTAL
--------- ------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1993............... $789 $ 53 $11,203,180 $(22,756) $(11,135,409) $ 45,857
Issuance of Series B preferred
warrants............................... 10,000 10,000
Issuance of 342,588 shares of common
stock in connection with Tristan
acquisition............................ 34 1,095,966 1,096,000
Issuance of 9,345 shares of common stock
to employees........................... 1 4,837 4,838
Compensation associated with stock
options granted........................ 48,011 48,011
Issuance of 230,570 shares of Series B
preferred stock for conversion of
promissory notes....................... 74 2,065,833 2,065,907
Issuance of 182,276 shares of Series B
preferred stock and 21,670 shares of
common stock........................... 58 2 1,657,129 1,657,189
Issuance of 1,500,000 shares of common
stock through initial public offering,
net of issuance costs and the
conversion of preferred stock into
2,877,840 shares of common stock....... (921) 438 13,251,527 13,251,044
Net loss................................ (4,121,817 ) (4,121,817)
--------- ------ ----------- ------------ ----------- ------------ -----------
Balances, December 31, 1993............. -- 528 29,336,483 (22,756) (15,257,226 ) 14,057,029
Issuance of 91,001 shares of common
stock to employees..................... 9 24,291 24,300
Repurchase of 531 shares of common stock
and repayment of notes receivable from
stockholders........................... (5,648) 22,756 17,108
Compensation associated with stock
options granted........................ 59,192 59,192
Unrealized loss on investments, net..... $(84,762) (84,762)
Net loss................................ (4,543,956 ) (4,543,956)
--------- ------ ----------- ------------ ----------- ------------ -----------
Balances, December 31, 1994............. -- 537 29,414,318 -- (84,762) (19,801,182 ) 9,528,911
Issuance of 224,762 shares of common
stock to employees..................... 23 133,386 133,409
Compensation associated with stock
options granted........................ 34,528 34,528
Issuance of 101,790 shares of common
stock to employees under the employee
stock purchase plan.................... 10 453,216 453,226
Repurchase of 8,967 shares of common
stock.................................. (90) (90)
Unrealized gain on investments, net..... 85,388 85,388
Net loss................................ (4,421,652 ) (4,421,652)
--------- ------ ----------- ------------ ----------- ------------ -----------
Balances, December 31, 1995............. -- 570 30,035,358 -- 626 (24,222,834 ) 5,813,720
Issuance of 43,731 shares of common
stock to employees and warrant
holders................................ 4 34,439 34,443
Unrealized loss on investments, net..... (307) (307)
Net loss................................ (1,379,126 ) (1,379,126)
--------- ------ ----------- ------------ ----------- ------------ -----------
Balances, March 31, 1996 (unaudited).... $-- $574 $30,069,797 $ -- $ 319 $(25,601,960) $ 4,468,730
--------- ------ ----------- ------------ ----------- ------------ -----------
--------- ------ ----------- ------------ ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- ------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (1,379,126) $ (1,570,458) $ (4,421,652) $ (4,543,956) $ (4,121,817)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 245,592 271,816 901,340 948,132 1,030,472
Compensation associated with stock options
granted...................................... 34,528 59,192 48,011
Provision for excess and obsolete inventory... 20,000 61,000
Nonrecurring charge associated with purchased
technology................................... 705,000
Loss on disposal of equipment................. 15,473 16,879
Other noncash expenses, net................... 57,535 133,918
Decrease (increase) in:
Accounts receivable......................... 283,585 290,321 (910,573) (428,871) (575,782)
Inventory................................... (290,010) (174,030) (290,845) (342,499) (213,080)
Prepaid expenses and other current assets... 134,249 52,561 (122,994) (11,480) 211,675
Other assets................................ (2,260) (1,499) (1,099) (4,193) (56,195)
(Decrease) increase in:
Accounts payable and accrued liabilities.... (52,995) 313,306 166,025 611,413 26,339
------------- ------------- ------------- ------------- ------------
Net cash used in operating activities..... (1,060,965) (817,983) (4,625,270) (3,578,254) (2,794,580)
------------- ------------- ------------- ------------- ------------
Cash flows from investing activities:
Net cash received in acquisition.............. 54,497
Proceeds from sales of short-term
investments.................................. 4,132,703 17,626,192 40,473,743 42,875,034 35,988,476
Purchases of short-term investments........... (2,780,267) (16,851,948) (36,235,256) (39,906,358) (46,075,477)
Acquisition of property and equipment......... (252,258) (386,870) (1,568,033) (1,225,846) (425,276)
Proceeds from sales of assets................. 29,196
------------- ------------- ------------- ------------- ------------
Net cash provided by (used in) investing
activities............................... 1,129,374 387,374 2,670,454 1,742,830 (10,457,780)
------------- ------------- ------------- ------------- ------------
Cash flows from financing activities:
Proceeds from borrowings...................... 405,620 322,247 1,432,944 554,705 990,000
Proceeds from repayment of note receivable
from stockholder............................. 18,765
Net proceeds from issuance of:
Series B preferred stock.................... 1,427,189
Warrants to purchase Series B preferred
stock...................................... 10,000
Common stock................................ 34,443 32,066 586,635 24,300 13,255,882
Repurchase of common stock.................... (90)
Principal payments under capital lease
obligations.................................. (26,645) (39,507) (143,340) (329,148) (628,611)
Principals payments on long-term debt......... (171,934) (153,686) (121,035)
------------- ------------- ------------- ------------- ------------
Net cash provided by financing
activities............................... 241,484 314,806 1,722,463 268,622 14,933,425
------------- ------------- ------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents............................ 309,893 (115,803) (232,353) (1,566,802) 1,681,065
Cash and cash equivalents at beginning of
period......................................... 272,410 504,763 504,763 2,071,565 390,500
------------- ------------- ------------- ------------- ------------
Cash and cash equivalents at end of period...... $ 582,303 $ 388,960 $ 272,410 $ 504,763 $ 2,071,565
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
1. FORMATION AND BUSINESS OF THE COMPANY:
The Company was formed to develop, manufacture and market superconductive
electronic devices, circuits and systems for sensor, communications, test and
instrumentation, and digital electronics applications. Effective June 28, 1994,
the Company dissolved its subsidiary, Tristan Technologies, Inc. ("Tristan")
acquired in May 1993 and the former Tristan operations have become the Company's
Instrument and Systems Division. At that date the Company discontinued use of
"Consolidated" in the financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR:
The Company uses a 52-53 week fiscal year ending on the last Friday of the
month. For convenience of presentation, the accompanying financial statements
have been shown as ending on December 31 of each applicable period.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CERTAIN RISKS AND CONCENTRATIONS:
The Company's superconducting products are concentrated in the electronic
component industry which is highly competitive and rapidly changing. Revenues
for the Company's products are concentrated with a relatively limited number of
customers and supplies for certain components are concentrated among a few
providers. The development of new technologies or commercialization of
superconductive products by any competitor could affect operating results
adversely.
CASH, CASH EQUIVALENTS AND INVESTMENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Investments,
which consist primarily of U.S. government obligations, corporate bonds and
commercial paper, are stated at fair market value. Management believes that the
financial institutions in which it maintains such deposits are financially sound
and, accordingly, minimal credit risk exists with respect to these deposits.
Additionally, cash and cash equivalents are held by two major banks.
Other financial instruments, principally accounts receivable and leases
payable, are considered to approximate fair value based upon comparable market
information available at respective balance sheet dates.
As of April 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities" which requires a change in the method used to account for
certain investments. All investments at April 1, 1994 were deemed by management
to be available-for-sale and therefore are reported at fair market value with
net unrealized losses reported as a separate component of stockholders' equity.
Available-for-sale marketable securities with maturities less than one year from
the balance sheet date are classified as short-term and those with maturities
greater than one year from the balance sheet date are classified as long term.
Adoption of SFAS 115 did not have a material effect on the Company's financial
statements.
F-7
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Appropriate consideration is given to obsolescence,
excessive levels, deterioration and other factors in evaluating net realizable
value.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost, net of accumulated depreciation
and amortization.
Depreciation of property and equipment are computed using the straight-line
method over estimated useful lives of four to six years. Amortization of
leasehold improvements is computed using the straight-line method over the
shorter of the useful life of the assets and the related lease term.
REVENUE RECOGNITION:
Product revenues are recognized at the time of shipment.
RESEARCH AND DEVELOPMENT CONTRACTS:
The Company has entered into contracts to perform research and development
for the U.S. government. Revenues from these contracts are recognized utilizing
the percentage-of-completion method measured by the relationship of costs
incurred to total contract costs. Costs include direct engineering and
development costs and applicable overhead.
RESEARCH AND DEVELOPMENT:
Internally funded research and development expenditures are charged to
operations as incurred.
INCOME TAXES:
The Company utilizes the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards ("SFAS No. 109"),
"Accounting for Income Taxes." Under the liability method, deferred taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
UNAUDITED INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited interim financial statements for the three months
ended March 31, 1996 and 1995 have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company, all
adjustments (consisting of only normal recurring accruals) considered necessary
to present fairly the financial position as of March 31, 1996 and the statements
of operations, stockholders' equity and cash flows for the three month periods
ended March 31, 1996 and 1995 have been included.
RECLASSIFICATIONS:
Certain amounts in the December 31, 1994 and 1993 financial statements have
been reclassified to conform to the presentation at December 31, 1995. The
reclassifications had no impact on previously reported net losses, total assets
or net cashflows.
COMPUTATION OF NET LOSS PER COMMON SHARE:
Net loss per common share is based upon the weighted average number of
common shares outstanding. Common equivalent shares have not been included in
the per share calculations as the effect would not be dilutive.
F-8
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENT PRONOUNCEMENTS:
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS 121 will become effective for the
Company's year ending December 31, 1996. The Company has studied the
implications of SFAS 121 and, based on its initial evaluation, does not expect
it to have a material impact on the Company's financial condition or results of
operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" which
established a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies who elect not to
adopt the new method of accounting. The Company will continue to account for
employee purchase rights and stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123 disclosures will be effective for
fiscal years beginning after December 15, 1995.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest......................................... $ 147,605 $ 58,816 $ 90,539
---------- ---------- ------------
---------- ---------- ------------
Supplemental schedule of noncash investing and funding activities:
Capital lease obligation incurred in connection with equipment leases.......... $ 205,053
------------
------------
Reclassification to long-term investment upon adoption of SFAS No. 115......... $ 980,619
----------
----------
Reclassification of investments to short-term investments based on maturity
date.......................................................................... $ 980,649
----------
----------
Unrealized gain (loss) on investments, net..................................... $ 85,388 $ (84,762)
---------- ----------
---------- ----------
Repurchase of common stock in exchange for note receivable..................... $ 5,648
----------
----------
Deferred compensation charge relating to stock option plan..................... $ 295,955
------------
------------
Equipment purchases included in accounts payable reclassed to capital leases... $ 87,899
------------
------------
Series B preferred stock issued in payment of notes payable and related accrued
interest...................................................................... $ 2,065,907
------------
------------
Series B preferred stock issued for equipment acquired......................... $ 230,000
------------
------------
Common stock issued in connection with the acquisition of Tristan.............. $ 1,096,000
------------
------------
Conversion of Series A preferred stock to common stock......................... $ 610
------------
------------
Conversion of Series B preferred stock to common stock......................... $ 311
------------
------------
Other noncash expenses:
Compensation associated with stock options granted............................. $ 34,528 $ 59,192 $ 48,011
Additions to principal for accrued interest earned on notes receivable from
stockholders.................................................................. (1,657)
Additions to principal for accrued interest charged on notes payable........... 85,907
---------- ---------- ------------
$ 34,528 $ 57,535 $ 133,918
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-9
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
4. INVESTMENTS:
Investments are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- --------------------------
MARKET MARKET
COST VALUE COST VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Debt securities:
Corporate bonds.................................... $ 3,526,598 $ 3,499,970
Preferred bonds.................................... $ 500,000 $ 500,000
U.S. government and related agency securities...... 795,897 796,902 1,990,069 1,931,935
Commercial paper................................... 1,499,909 1,499,530 1,399,074 1,399,074
Other.............................................. 40,904 40,904 125,672 125,672
Accrued interest................................... 43,128 43,128 76,912 76,912
------------ ------------ ------------ ------------
Subtotal......................................... 2,879,838 2,880,464 7,118,325 7,033,563
Unrealized gain (loss), net.......................... 626 (84,762)
------------ ------------ ------------ ------------
Total............................................ $ 2,880,464 $ 2,880,464 $ 7,033,563 $ 7,033,563
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
At December 31, 1995, all scheduled maturities of investments are within one
year and unrealized gains for investments were $626. Additionally, investments
consisted of Preferred bonds, U.S. government obligations, and commercial paper
bearing interest between 4.0% to 6.0% per annum are due to mature between
January 1, 1996 and July 1996.
At December 31, 1994, scheduled maturities of investments within one year
were approximately $6,053,000 and for one year to five years were approximately
$981,000 and net unrealized losses on investments were $84,762. Additionally,
investments consisted of U.S. corporate bonds, U.S. government obligations, and
commercial paper bearing interest between 4.00% to 9.375% per annum, due to
mature between January 1995 and July 1996.
5. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
U.S. government contracts:
Unbilled.................................................... $ 565,959 $ 411,206 $ 406,056
Billed...................................................... 1,895,894 2,036,294 1,601,884
Commercial.................................................... 505,709 803,647 332,634
------------ ------------ ------------
Total..................................................... $ 2,967,562 $ 3,251,147 $ 2,340,574
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-10
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
6. INVENTORIES:
Inventories, net of reserves at March 31, 1996 and December 31, 1995 and
1994 of $81,000, $81,000, and $61,000, respectively, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials.................................................... $ 370,513 $ 299,619 $ 170,762
Work in process.................................................. 634,466 431,882 304,559
Finished goods................................................... 50,455 33,923 19,258
------------ ---------- ----------
$ 1,055,434 $ 765,424 $ 494,579
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
7. PROPERTY AND EQUIPMENT:
Property and equipment, including equipment acquired under capital leases
(see Note 9), consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Equipment..................................................... $ 5,677,664 $ 5,494,288 $ 4,798,632
Leasehold improvements........................................ 1,500,516 1,489,856 992,472
Furniture and fixtures........................................ 355,542 368,164 184,835
Construction in process....................................... 188,506 191,664 --
------------ ------------ ------------
7,722,228 7,543,972 5,975,939
Less accumulated depreciation and amortization................ 5,166,335 4,993,930 4,207,340
------------ ------------ ------------
$ 2,555,893 $ 2,550,042 $ 1,768,599
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
8. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1996 1995 1994
----------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Accrued consulting.............................................. $ 84,621 $ 74,772 $ 207,552
Accrued compensation............................................ 495,522 525,193 573,137
Accrued professional expenses................................... 57,688 84,962 122,797
Other accrued liabilities....................................... 148,273 136,303 102,548
----------- ---------- ------------
$ 786,104 $ 821,230 $ 1,006,034
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
9. EQUIPMENT LEASE LINES OF CREDIT:
As of December 31, 1995, the Company has borrowings due under two equipment
lease lines of credit. No additional amounts were available as of December 1995.
The borrowings are collateralized by the related equipment. Lease payments under
the lines are based on the total delivered equipment cost multiplied by a
monthly rate factor of 2.5%.
F-11
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
9. EQUIPMENT LEASE LINES OF CREDIT: (CONTINUED)
Following is an analysis of equipment acquired under the lease lines of
credit:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Equipment..................................................................... $ 292,953 $ 756,327
Less accumulated amortization................................................. (267,588) (452,272)
----------- -----------
Net property acquired under capital leases.................................... $ 25,365 $ 304,055
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1995, future minimum lease payments under capital leases
are as follows:
<TABLE>
<S> <C>
Total minimum lease payments for 1996.............................. $ 38,949
Less amount representing interest.................................. 1,055
---------
37,894
Less current portion............................................... 37,894
---------
$ --
---------
---------
</TABLE>
10. LONG-TERM DEBT AND OTHER BORROWINGS:
In March 1996, the Company added to its $2,000,000 equipment credit facility
with a financial institution to finance costs associated with the acquisition of
equipment by adding a second facility for $1,000,000. All borrowings under these
credit facilities are at the bank's prime rate plus 1.00% (9.50% at December 31,
1995) with interest paid monthly, and are collateralized by the related
equipment. Principal installments under the $2,000,000 facility commenced
September 1995 and mature over a thirty-six (36) month period as follows:
$687,736, $687,736, and $458,491 in 1996, 1997 and 1998, respectively. At
December 31, 1995, no additional amounts were available under the $2,000,000
credit facility. The $1,000,000 facility matures over a 34 month period. The
Company is restricted from paying cash dividends but may pay stock dividends.
The Company in March 1996 modified its line of credit facility with a bank
to expire February 28, 1997. The agreement provides for borrowings up to the
lesser of $2,000,000 or 75% of eligible receivables. Borrowings under the
agreement bear interest at the bank's prime rate plus 0.50% (9% at December 31,
1995) and are collateralized by accounts receivable, equipment and other assets
of the Company. At December 31, 1995, the Company has no borrowings under the
agreement and had $1,000,000 available under the line of credit. In connection
with this modification, on March 8, 1996, the Company issued the lender warrants
to acquire 15,000 shares of the Company's common stock at a price of $11.25 per
share. These warrants may be exercised by the holder at any time until the
expiration date, March 8, 2001.
The two equipment credit facilities and line of credit facility require that
the Company provide financial information to the lender, obtain approval of the
lender for any material disposition of the collateral except in the ordinary
course of business and meet certain financial ratios, minimum tangible net
worth, minimum cash and investments and other covenants.
Warrants to acquire 33,460 shares of common stock, at a price of $8.96 per
share, issued in connection with the issuance of convertible promissory notes in
1993 and 1992, expired in August 1995.
11. COMMITMENTS:
The Company leases its administrative, sales, marketing, manufacturing,
research and development facilities under noncancelable operating leases
expiring in February 1998 and August 2000 and 2001. Under the terms of the
leases, the Company is responsible for certain expenses and taxes.
F-12
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
11. COMMITMENTS: (CONTINUED)
Future minimum payments under these noncancelable leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR:
- ----------------------------------------------------------------
<S> <C>
1996............................................................ $ 394,917
1997............................................................ 396,951
1998............................................................ 338,810
1999............................................................ 327,114
2000............................................................ 279,114
Thereafter...................................................... 122,076
------------
$ 1,858,982
------------
------------
</TABLE>
Rent expense was $470,379, $456,459, $380,806, $115,067 and $102,823 for
December 31, 1995, 1994, 1993 and the three months ended March 31, 1996 and
1995, respectively.
12. RESEARCH AND DEVELOPMENT ARRANGEMENTS:
GOVERNMENT CONTRACTS:
The Company is party to a number of research and development contracts,
generally short-term in nature, with various agencies of the United States
government, which provided approximately $8,148,000, $7,049,000, $5,071,000,
$2,214,000 and $1,644,000 of revenues in the years ended December 31, 1995,
1994, 1993 and the three months ended March 31, 1996 and 1995, respectively.
Credit risk related to accounts receivable arising from such contracts is
considered minimal. For each of the three years ended December 31, 1995, 1994,
1993 and the three months ended March 31, 1996 and 1995 government related
contracts accounted for 77.0%, 81.6%, 78.3%, 84.8% and 81.7%, respectively, of
the Company's total revenues. Cost of contract revenue for the years ended
December 31, 1995, 1994 and 1993 and the three months ended March 31, 1996 and
1995 was $9,176,000, $8,717,000, $6,500,000, $2,855,000 and $1,902,000,
respectively.
DEVELOPMENT AND MARKETING AGREEMENT WITH VARIAN:
Conductus and Varian entered into a joint development and licensing
agreement in 1994, under which they jointly developed a superconducting probe
for NMR instruments for high-resolution spectroscopy. Both Conductus and Varian
provided technical support to the program, and each retains rights to
intellectual property it developed under the program, subject to certain
nonexclusive licensing rights of the other party.
Technology developed by one party under the Agreement is owned by that
party, subject to certain royalty-free non-exclusive rights of Varian and to a
reassignment right upon termination of the Agreement.
COORDINATED RESEARCH PROGRAM:
In May 1993, the Company and Hewlett-Packard Company ("H-P") modified a
previous Coordinated Research Program ("CRP") agreement by entering into a new
five-year agreement.
This agreement requires the Company and H-P to exchange reviews and
assessments of the Company's technical and applications developments,
particularly with respect to their potential application to H-P's products. H-P
has the right to appoint an H-P employee as a member of the Company's Scientific
Advisory Board, and the Company agreed to use its best efforts to cause a
nominee to be elected to the Board of Directors. Under this agreement, H-P will
not have rights to any of the Company's inventions, except that it will jointly
own with the Company any invention developed by the H-P Member pursuant to the
agreement or using the Company's confidential information. As a result, H-P and
the Company will each be entitled to
F-13
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
12. RESEARCH AND DEVELOPMENT ARRANGEMENTS: (CONTINUED)
commercialize products incorporating such inventions without the consent of or
an accounting to the other party, including through license and cross-license
arrangements with third parties. This agreement may be terminated by mutual
consent of either party.
In connection with the agreement, the Company received $1,000,000 in cash
and $230,000 in equipment from H-P in exchange for issuing 439,286 shares of its
Series B preferred stock, which automatically converted into 137,276 shares of
common stock upon the close of the Company's initial public offering in August
1993.
CONSORTIUM FOR SUPERCONDUCTING ELECTRONICS:
The Company is a member of the Consortium for Superconducting Electronics
formed to conduct research and development programs leading to applications of
superconductive electronics. The Company is presently participating with other
members of the Consortium in two projects relating to the development of
superconductive wireless communications.
The Company has been granted a non-exclusive, royalty free license to all
intellectual property conceived or first actually reduced to practice in
connection with any work under a Consortium project in which the Company
participates while the Company is a member. The Company must pay a one-time
license fee for commercializing any invention covered by a "commercialized"
patent licensed to it by a university member or government laboratory member.
The fee is $50,000 or, in some cases, $25,000. (A patent is "commercialized"
when the Company's revenues from external sales of products covered by such
patent exceed $2,000,000). The Company may also be required to pay a license fee
for commercializing any invention covered by a "highly commercialized" patent
licensed to it by a university member, if the patent is owned solely or jointly
by a university or government laboratory member and if the patent is determined
to be a "basic" patent (i.e., a patent is "basic" if it represents a singular
contribution of profound commercial significance) under procedures established
by the Consortium. The initial fee may not exceed $1,000,000. In addition, a
second fee may be established after five years in accordance with such
procedures which may not exceed $5,000,000. (A patent is "highly commercialized"
if the Company's revenues from external sales of products covered by such patent
exceed $10,000,000)
ADVANCED TECHNOLOGY PROGRAM:
In August 1992, the Company, acting as administrator for and on behalf of a
joint venture formed to conduct research to develop a prototype hybrid
superconductor/semiconductor computer under the Department of Commerce Advanced
Technology Program, entered into a cost-sharing cooperative agreement with the
U.S. government. The U.S. government is expected to financially support the
project in one-year increments over a total five-year period. Under the terms of
the first-four years of the agreement, the U.S. government agreed to share costs
of the joint venture's research effort up to an aggregate of $5,959,596,
including subcontractor costs. The estimated cost of the total research efforts
in 1995, 1994 and 1993 were $3,719,572, $3,174,740 and $2,743,148, respectively.
Revenue of $1,920,020, $1,520,390 and $1,369,928 which represented the
government's cost-sharing portion of 42.60%, 48.30% and 49.94%, was recognized
under this contract for 1995, 1994 and 1993, respectively.
13. STOCKHOLDERS' EQUITY
CAPITAL STOCK:
In connection with obtaining the lease lines of credit (see Note 9), the
Company issued to the leasing companies warrants exercisable for the Company's
preferred stock, which converted to warrants for 32,894
F-14
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND THEREAFTER IS UNAUDITED)
13. STOCKHOLDERS' EQUITY (CONTINUED)
and 9,664 shares of common stock, at a price per share of $6.08 and $8.96,
respectively. As of March 31, 1996, warrants for 16,447 and 1,087 shares of
common stock remain exercisable, respectively. The warrants, which were
immediately exercisable, expire August 5, 1998.
1992 STOCK OPTION/STOCK ISSUANCE PLAN:
The Company's 1992 Stock Option/Stock Issuance Plan (the "Plan") serves as
the successor equity incentive program to the Company's 1987 and 1989 Stock
Option Plans (the "Predecessor Plans"). All outstanding stock options under the
Predecessor Plans will continue to be governed by the terms and conditions of
the Predecessor Plans and the specific instruments evidencing those options, but
no additional options will be granted under the Predecessor Plans.
A total of 1,580,000 shares of common stock are authorized for issuance
under the Plan as of December 31, 1995. Such authorized share reserve is
comprised of 7,812 shares originally approved under the Plan, the aggregate
outstanding shares under the Plan (approximately 689,912 shares) and an increase
of 882,276 shares under amendments to the Plan. The individuals eligible to
receive option grants or stock issuances pursuant to the Plan are limited to
employees (including officers and directors) and consultants of the Company or
any parent or subsidiary corporations. Each non-employee Board member who first
becomes a non-employee Board member at any time on or after January 23, 1995
shall automatically be granted at the time of such initial election or
appointment an option to purchase 15,000 shares of common stock.
The Plan is divided into two separate components: the option grant program
and the stock issuance program. Under the option grant program, eligible
individuals may be granted incentive stock options or nonstatutory options. The
exercise price of incentive stock options granted under the Plan must be at
least equal to the fair market value of the common stock of the Company on date
of grant. The exercise price of nonstatutory options granted under the Plan must
be not less than 85% of the fair market value of the common stock on date of
grant. The stock issuance program allows eligible individuals to effect
immediate purchases of the Company's common stock at fair market value or for
such consideration as the Compensation Committee deems advisable.
Options granted under the Plan may be immediately exercisable for all the
option shares, on either a vested or unvested basis, or may become exercisable
for fully vested shares in one or more installments over the participant's
period of service. Shares issued under the stock issuance program may either be
vested upon issuance or subject to a vesting schedule tied to the participant's
period of future service or to the attainment of designated performance goals.
No option may be granted with a term exceeding ten years. However, each such
option may be subject to earlier termination within a designated period
following the optionee's cessation of service with the Company.
In 1992, the Company recognized a compensation charge of $295,000, which is
being amortized to the statement of operations over the vesting period of the
related options as a result of a "deemed" fair market value in excess of the
exercise price of the options in connection with the initial public offering of
the Company's stock. As of December 31, 1995, $91,127 remains to be amortized.
F-15
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND HEREAFTER IS UNAUDITED)
13. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------
AVAILABLE PRICE
FOR GRANT SHARES PER SHARE AMOUNT
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1993................................... 191,954 498,038 $ .16-.56 $ 189,910
Additional shares authorized.............................. 82,276
Granted................................................... (136,000) 136,000 $ .56-10.63 407,367
Exercised................................................. (9,345) $ .45-.56 (4,838)
Canceled.................................................. 4,319 (4,319) $ .45-.56 (2,137)
---------- ---------- ------------
Balances, December 31, 1993................................. 142,549 620,374 $ .16-10.63 590,302
Additional shares authorized.............................. 500,000
Granted................................................... (546,875) 546,875 $ 4.38-5.75 2,809,297
Exercised................................................. (91,001) $ .16-.88 (24,300)
Canceled.................................................. 56,093 (56,093) $ .45-10.63 (332,539)
---------- ---------- ------------
Balance, December 31, 1994.................................. 151,767 1,020,155 $ .16-5.75 3,042,760
Additional shares authorized.............................. 300,000
Granted................................................... (317,413) 317,413 $ 4.94-7.25 1,766,494
Exercised................................................. (170,701) $ .16-6.31 (105,407)
Canceled.................................................. 154,559 (154,559) $ .45-6.88 (628,182)
---------- ---------- ------------
Balance, December 31, 1995.................................. 288,913 1,012,308 $ .16-7.25 4,075,665
Granted................................................... (191,750) 191,750 $ 6.50-13.00 1,851,875
Exercised................................................. (32,005) $ .16-6.88 (33,931)
Canceled.................................................. 15,027 (15,027) $ .45-6.88 (67,087)
---------- ---------- ------------
Balance, March 31, 1996 (unaudited)......................... 112,190 1,157,026 $ .16-13.00 $ 5,826,522
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
At December 31, 1995 and March 31, 1996, options to purchase 326,240 and
357,802 common shares were exercisable under the Plan, respectively.
In addition, the Company granted in 1994 an option for 10,000 shares at
$5.50 per share to the Chief Executive Officer.
EMPLOYEE STOCK PURCHASE PLAN:
In July 1994, the Employee Stock Purchase Plan (the ESPP) was adopted by the
Company's Board of Directors and is subject to shareholders' approval, and a
total of 200,000 shares of common stock were reserved for issuance thereunder.
The purpose of the ESPP is to provide eligible employees of the Company with a
means of acquiring common stock of the Company through payroll deductions. The
purchase price of such stock under the ESPP cannot be less than 85% of the lower
of the fair market values on the specified purchase date and the beginning of
the offering period. During 1995 employees purchased 101,790 shares for a total
of approximately $453,226. At December 31, 1995, 98,210 shares were available
for future grants under the Plan.
F-16
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 AND HEREAFTER IS UNAUDITED)
13. STOCKHOLDERS' EQUITY (CONTINUED) (CONTINUED)
COMMON STOCK RESERVED:
At December 31, 1995, the Company had reserved the following shares of
Common Stock:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Purchase Plan.......................................................................... 98,210
Warrants............................................................................... 42,558
Options................................................................................ 1,311,221
------------
1,451,989
------------
------------
</TABLE>
14. 401(K) PROFIT SHARING PLAN:
The Company has a 401(k) Profit Sharing Plan which covers substantially all
employees. Under the plan, employees are permitted to contribute up to 15% of
gross compensation not to exceed the annual 402(g) limitation for any plan year.
Discretionary contributions may be made by the Company irrespective of whether
it has net profits. No contributions were made by the Company during the years
1993 through 1995 or in the three months ended March 31, 1996 and 1995.
15. INCOME TAXES:
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Property and equipment, principally due to differences in
depreciation.......................................................... $ 332,000 $ 286,000
Other accrued liabilities.............................................. 101,000 228,000
Capitalized research and development expense........................... 805,000 365,000
Net operating loss carryforward........................................ 6,157,000 5,925,000
Valuation allowance.................................................... (7,395,000) (6,804,000)
------------- -------------
Net deferred tax asset............................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax years, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets.
At December 31, 1995, the Company had approximately $22,000,000 and
$3,000,000 net operating loss carryforwards for federal and state income
purposes, respectively. These expire in the years 1996 through 2010. The
utilization of the Company's net operating loss carryforwards may be subject to
certain limitations upon certain changes in ownership, as defined.
16. BUSINESS SEGMENT AND MAJOR CUSTOMERS:
The Company was formed to operate in a single industry segment encompassing
the development, manufacture, and marketing of electronic components and systems
based on superconductors.
Commercial sales to one customer as a percentage of revenues were 11%
($1,172,000), 8% ($732,000), 13% ($816,000), 9% ($241,000) and 7% ($132,000) in
1995, 1994, 1993 and in the three months ended March 31, 1996 and 1995,
respectively. Amounts receivable from this customer were $408,000 and $147,000
at December 31, 1995 and 1994, respectively.
F-17
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 AND HEREAFTER IS UNAUDITED)
16. BUSINESS SEGMENT AND MAJOR CUSTOMERS: (CONTINUED)
The Company's export revenues are all denominated in U.S. dollars and are
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Japan.................................... $ 241,000 $ 132,000 $ 1,172,000 $ 732,000 $ 816,000
Rest of the world........................ 79,000 55,000 256,000 265,000 27,000
---------- ---------- ------------ ---------- ----------
$ 320,000 $ 187,000 $ 1,428,000 $ 997,000 $ 843,000
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
</TABLE>
F-18
<PAGE>
IN DEVELOPING ITS PRODUCTS, CONDUCTUS COMBINES ADVANCED SUPERCONDUCTIVE
THIN-FILM PROCESSING TECHNOLOGY WITH EXPERTISE IN ELECTRONIC DEVICE AND
COMPONENT DESIGN, ANALOG AND DIGITAL ELECTRONIC ENGINEERING, CRYOGENIC
PACKAGING, MECHANICAL ENGINEERING AND SYSTEM INTEGRATION.
<TABLE>
<S> <C>
"Picture of sputter
system" "CAD Design"
</TABLE>
[CONDECTUS LOGO]
<TABLE>
<S> <C>
"Electronics" "Cryocooler"
</TABLE>
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
The Company.................................... 3
Risk Factors................................... 5
Use of Proceeds................................ 12
Price Range of Common Stock.................... 12
Capitalization................................. 13
Dilution....................................... 14
Selected Financial Data........................ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 16
Business....................................... 21
Management..................................... 38
Certain Transactions........................... 44
Principal Stockholders......................... 47
Description of Capital Stock................... 49
Shares Eligible for Future Sale................ 51
Underwriting................................... 52
Legal Matters.................................. 53
Experts........................................ 53
Available Information.......................... 53
Index to Financial Statements.................. F-1
</TABLE>
-------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
1,000,000 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
, 1996
TUCKER ANTHONY
INCORPORATED
PENNSYLVANIA MERCHANT GROUP LTD
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee...................................................... $ 5,949
NASD fee.................................................................. 2,225
Nasdaq National Market listing fee........................................ 17,500
Printing and engraving expenses........................................... 100,000
Legal fees and expenses................................................... 125,000
Accounting fees and expenses.............................................. 120,000
Blue sky fees and expenses................................................ 5,000
Transfer agent fees....................................................... 10,000
Miscellaneous fees and expenses........................................... 14,326
---------
Total................................................................. $ 400,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its officers and directors, a form of which is
attached as Exhibit hereto and incorporated herein by reference. The
Indemnification Agreements provide the Registrant's officers and directors with
further indemnification to the maximum extent permitted by the Delaware General
Corporation Law." Reference is made to that Section of the Underwriting
Agreement contained in Exhibit 1.1 hereto, that indemnifies officers and
directors of the Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1993, the Registrant has issued and sold (without payment
of any selling commission to any person) the following unregistered securities:
(1) In October 1992 and January 1993, the Company issued and sold to certain
investors convertible promissory notes in the aggregate amount of
$1,980,000 and warrants to purchase shares of Series B Preferred Stock
(convertible into warrants exercisable for an aggregate of 33,460 shares
of Common Stock at an effective exercise price of $8.96 per share of
Common Stock upon the closing of the Company's initial public offering
("IPO") in August, 1993). Each of such notes had an interest of 9% per
annum. The aggregate purchase price of such warrants equaled $20,000.
II-1
<PAGE>
(2) In January 1993, in connection with the renegotiation of an equipment
lease agreement with Dominion Ventures, Inc., the Company issued two
warrants exercisable to purchase shares of Series B Preferred Stock
(convertible into warrants exercisable for an aggregate of 7,577 shares
of Common Stock at an effective exercise price of $8.96 per share of
Common Stock upon the closing of the IPO). Such warrants will expire on
August 5, 1998.
(3) In January, the Company issued to Comdisco, Inc. a warrant to purchase
shares of Series B Preferred Stock (convertible into a warrant to
purchase 2,087 shares of Common Stock at an effective exercise price of
$8.96 per share of Common Stock upon the closing of the IPO). Such
warrant was issued in exchange for forgiveness of interest payments under
an equipment lease agreement and will expire on August 5, 1998.
(4) In May 1993, in connection with the acquisition of Tristan Technologies,
Inc., the Company issued 342,588 shares of Common Stock and options to
purchase 20,936 shares of Common Stock to the former employees of Tristan
in exchange of all the outstanding shares and options of Tristan.
(5) In June 1993, the Company issued and sold to certain investors shares of
Series B Preferred Stock convertible into an aggregate of 412,838 shares
of Common Stock at an effective per share purchase price of $8.96 and
issued and sold to an investor 21,670 shares of Common Stock at an
effective per share purchase price of $4.48, all in exchange for the
cancellation of outstanding indebtedness of $2,065,907, $1,500,065 in
cash and equipment valued at $230,000.
(6) Since January 1, 1993, the Registrant has sold and issued 356,281 shares
(assuming no exercise of stock options after March 31, 1996) of its
Common Stock to employees, independent directors and consultants pursuant
to exercises of options under its 1992 Stock Option Plan, predecessor
plans and employment agreements.
(7) Since January 1, 1993, the Registrant has sold and issued 101,790 shares
(assuming no sales of stock after November 30, 1995) of its Common Stock
to employees pursuant to its 1994 Employee Stock Purchase Plan.
(8) In March 1996, the Registrant sold and issued a warrant to purchase
15,000 shares of its Common Stock to Silicon Valley Bank (the "Bank")
pursuant to modifications of the terms of a line of credit between the
Bank and the Registrant. These modifications included an increase in the
amount of the line of credit from $1,000,000 to $2,000,000 as well as the
creation of an equipment term loan in the amount of $1,000,000.
The issuances of the above securities were deemed to be exempt from
registration under the Act in reliance on Section 4(2) of such Act, or
Regulation D thereunder, or Rule 701 promulgated under Section 3(b) of the Act
as transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under Rule 701. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (to be filed by Amendment).
2.1* Stock Exchange Agreement dated as of May 28, 1993 between the Registrant and Tristan Technologies,
Inc. ("Tristan").
3.3** Restated Certificate of Incorporation.
3.5* Restated Bylaws of Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
4.2* Warrant dated December 1, 1988 by the Registrant in favor of Comdisco, Inc. ("Comdisco").
4.3* Warrant dated December 1, 1988 by the Registrant in favor of Dominion Ventures, Inc. ("Dominion").
4.4* Form of Warrant dated October 15, 1992 by the Registrant in favor of certain institutional investors.
4.5* Form of Warrant dated January 31, 1993 by the Registrant in favor of certain institutional investors.
4.6* Warrant Purchase Agreements dated as of January 26, 1993 between the Registrant and Dominion and
Warrants dated January 26, 1993 by the Registrant in favor of Dominion.
4.7* Warrant dated January 5, 1993 by the Registrant in favor of Comdisco.
5.1 Opinion Regarding Legality of the Shares.
10.1* Second Amended and Restated Registration Rights Agreement dated June 3, 1993.
10.2* Form of Modification Agreement to be entered into among the Registrant and certain of its
warrantholders.
10.3*+ Coordinated Research Program Agreement dated October 14, 1988 and Amendment dated May 26, 1991
between the Registrant and Hewlett-Packard Company ("H-P"), as amended by the Agreement Between
Registrant and Hewlett-Packard Company dated June 2, 1993.
10.4*+ Consortium for Superconducting Electronics Participation Agreement dated October 20, 1989 and
Supplemental Agreement dated October 21, 1991 among the Registrant, American Telephone and Telegraph
Company, International Business Machines Incorporated, MIT-Lincoln Laboratory and Massachusetts
Institute of Technology.
10.5* Cooperation Agreement dated March 2, 1992 between the Registrant and TRW, Inc.
10.6* Agreement dated August 1991 among the Registrant, E-Systems, Melpar Division, Superconductor
Technologies, Inc., Trans-Science Corporation, Datamax, Inc., Georgia Tech Research Corporation,
Georgia Institute of Technology, Massachusetts Institute of Technology, Cornell University and
E-Systems, Inc., Greenville Division.
10.7* Collaborative Research Agreement among the Registrant, TRW, H-P, Stanford University and University
of California, Berkeley.
10.7.1****+ Joint development and Licensing Agreement dated August 31, 1994 between the Registrant and Varian.
10.7.2 Joint Development Agreement dated December 14, 1995 between the Registrant and Siemens
Aktiengesellschaft Medical Engineering Group.
10.7.3+ Superconducting Filter Technology Joint Development Agreement dated April 25, 1996 between the
Registrant and Lucent Technologies Inc.
10.8* Master Equipment Lease Agreement dated November 18, 1988 between the Registrant and Comdisco, as
amended to date.
10.9* Master Equipment Lease Agreement effective December 1, 1988, as amended, between the Registrant and
Dominion, as amended to date.
10.10* Hewlett-Packard Financing Agreement dated March 1993 between the Registrant and H-P.
10.11* Conductus, Inc. Series B Preferred Stock Purchase Agreement dated as of October 14, 1988 between
Registrant and H-P.
10.12* Conductus, Inc. Note and Warrant Purchase Agreements dated as of October 15, 1992 and January 31,
1993 among the Registrant and the parties named therein.
10.13* Conductus, Inc. Series B Preferred Stock and Common Stock Purchase Agreement dated as of June 3, 1993
among the Registrant and the parties named therein.
10.15* Employment, Stock Restriction and Asset Purchase Right Agreement dated May 27, 1993 between the
Registrant and Dr. Duane Crum.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
10.16* Lease Agreement and Letter Agreement dated February 13, 1989 between the Registrant and Mozart-McKee
Limited Partnership for part of the Sunnyvale facilities.
10.17* Lease Agreement dated May 3, 1993 between the Registrant and Mozart-McKee Limited Partnership for
part of the Sunnyvale facilities.
10.18* Standard Industrial Lease between Tristan and GWR Instruments, Inc. dated September 10, 1991.
10.19* 1992 Stock Option/Stock Purchase Plan.
10.20* Amended 1989 Stock Option Plan.
10.21* 1987 Stock Option Plan.
10.22* Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.23** Exclusive Distributor Agreement between Registrant and Niki Glass Co., Ltd. dated as of February 2,
1994.
10.24**** Lease Agreement dated December 8, 1994 between Registrant and Mozart-McKee Limited Partnership for
Sunnyvale facilities.
10.25**** Business Loan Agreement dated August 15, 1994 between Registrant and Silicon Valley Bank for working
capital credit facility and term loan facility.
10.26**** Employment Agreement dated May 3, 1994 between Registrant and Mr. Charles E. Shalvoy.
10.27**** Employment Agreement dated November 23, 1994 between Registrant and Mr. Henry Z. Zauderer.
10.28*** Conductus, Inc. 1994 Employee Stock Purchase Plan.
11.1 Statements of computation of loss per share.
21.1* Subsidiary of the Registrant.
23.1 Consent of Independent Accountants.
23.2 Consent of Patent Counsel.
24.1 Power of Attorney (See Page II-6).
</TABLE>
- ------------------------
* Incorporated herein by reference from the same numbered exhibits filed with
the Company's Registration Statement on Form S-1 (Number 33-64020), as
amended.
** Incorporated herein by reference from the same numbered exhibit filed with
the Company's 1993 Annual Report on Form 10-K.
*** Incorporated herein by reference from exhibit number 99.1 to the Company's
Registration Statement on a Form S-8 filed with the SEC Commission on August
5, 1994.
****Incorporated herein by reference from the same numbered exhibit filed with
the Company's 1994 Annual Report on Form 10-K.
+ Confidential treatment granted or requested as to certain portions of these
exhibits.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of 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.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on this 14th day of May, 1996.
CONDUCTUS, INC.
By: /s/ CHARLES E. SHALVOY
-----------------------------------
Charles E. Shalvoy
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles E. Shalvoy and William J. Tamblyn, and
each of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
and all Registration Statements filed pursuant to Rule 462 under the Securities
Act of 1933, as amended, in connection with, or related to the offering
contemplated by this Registration Statement and its amendments, if any, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------------- -----------------
<C> <S> <C>
/s/ CHARLES E. SHALVOY
--------------------------------- President, Chief Executive Officer and Director
Charles E. Shalvoy (Principal Executive Officer) May 14, 1996
/s/ WILLIAM J. TAMBLYN
--------------------------------- Vice President, Chief Financial Officer (Principal
William J. Tamblyn Accounting Officer) May 14, 1996
/s/ JOHN F. SHOCH
--------------------------------- Chairman of the Board of Directors
John F. Shoch, Ph.D. May 14, 1996
/s/ ANTHONY SUN
--------------------------------- Director
Anthony Sun May 14, 1996
--------------------------------- Director
Richard W. Anderson
/s/ MARTIN COOPER
--------------------------------- Director
Martin Cooper May 14, 1996
--------------------------------- Director
Robert J. Saldich
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
Conductus, Inc.:
Our report on the financial statements of Conductus Inc., is included on
page F-2 of this Registration Statement. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page II-4 of this Registration Statement.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 9, 1996, except Note 10
for which the date is March 8, 1996
II-7
<PAGE>
SCHEDULE II
CONDUCTUS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN E
------------ ------------------------ -----------
COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D BALANCE
- -------------------------------------------------- BEGINNING OF COST AND OTHER ----------- AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------------------------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Allowance for doubtful accounts................... $ 50,000 $ -- $ -- $ -- $ 50,000
Allowance for excess and obsolete inventory....... $ -- $ -- $ -- $ -- $ --
Year ended December 31, 1994:
Allowance for doubtful accounts................... $ 50,000 $ -- $ -- $ -- $ 50,000
Allowance for excess and obsolete inventory....... $ -- $ 61,000 $ -- $ -- $ 61,000
Year ended December 31, 1995:
Allowance for doubtful accounts................... $ 50,000 $ -- $ -- $ -- $ 50,000
Allowance for excess and obsolete inventory....... $ 61,000 $ 20,000 $ -- $ -- $ 81,000
</TABLE>
S-1
<PAGE>
May 15, 1996
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, CA 94086
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
33-________) originally filed by Conductus, Inc. (the "Company') with the
Securities and Exchange Commission (the "Commission') on May 15, 1996, as
thereafter amended or supplemented (the "Registration Statement'), in
connection with the registration under the Securities Act of 1933, as
amended, of up to 1,000,000 shares of the Company's Common Stock (the
"Shares'). The Shares include an over-allotment option granted by the
Company to the Underwriters to purchase up to 150,000 additional shares of the
Company's Common Stock and are to be sold to the Underwriters as described in
the Registration Statement for resale to the public. As your counsel in
connection with this transaction, we have examined the proceedings taken and
are familiar with the proceedings proposed to be taken by you in connection
with the sale and issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings being
taken or contemplated by us, as your counsel, to be taken prior to the
issuance of the Shares and upon completion of the proceedings being taken in
order to permit such transactions to be carried out in accordance with the
securities laws of the various states where required, the Shares, when issued
and sold in the manner described in the Registration Statement, will be
legally and validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus
constituting a part thereof, and in any amendment or supplement thereto.
Very truly yours,
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<PAGE>
JOINT DEVELOPMENT AGREEMENT
between
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, CA 94086, USA
(hereinafter referred as "Conductus")
and
Siemens Aktiengesellschaft
Medical Engineering Group
Henkestrasse 127, 91054 Erlangen, Germany
(hereinafter referred to as "Siemens")
<PAGE>
-2-
TABLE OF CONTENTS
Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. SUBJECT SUPERCONDUCTING MRI RECEIVER . . . . . . . . . . . . . . . . . . . 3
3. Conductus Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . 3
4. Siemens Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
6. Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.1 Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.2 Filing of Patent Applications . . . . . . . . . . . . . . . . . . . . . 4
6.3 Licensing of Jointly Owned PROJECT INTELLECTUAL PROPERTY. . . . . . . . 4
7. Negotiation of OEM Relationship. . . . . . . . . . . . . . . . . . . . . . 4
8. Warranty Disclaimer. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9. Term and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9.1 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9.2 Termination for Default.. . . . . . . . . . . . . . . . . . . . . . . . 5
9.3 Rights and Obligations on Expiration or Termination.. . . . . . . . . . 5
10. Miscellaneous.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
10.1 Entire Agreement.. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
10.2 Assignability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
10.3 Severability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
10.4 Notice and Reports.. . . . . . . . . . . . . . . . . . . . . . . . . . 6
10.5 Relationships of the Parties.. . . . . . . . . . . . . . . . . . . . . 6
10.6 Waiver.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
10.7 Limited Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
10.8 Export Control.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10.9 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10.10 Substantive Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Appendix A Statement of Work. . . . . . . . . . . . . . . . . . . . . . . . . 9
1. Project Objective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2. Conductus Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3. Siemens Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
<PAGE>
-3-
JOINT DEVELOPMENT AGREEMENT
BETWEEN
CONDUCTUS, INC. AND SIEMENS AG
This agreement is effective January 1, 1996 and is between Conductus, Inc.,
a Delaware corporation having a place of business at 969 West Maude Avenue,
Sunnyvale, California, USA ("Conductus") and Siemens AG, a corporation
having a place of business at Henkstrasse 127, Erlangen, Germany ("Siemens")
AGREEMENT
WHEREAS, Conductus is an industry leader in superconducting and cryogenic
electronic applications;
WHEREAS, Conductus is interested in developing a commercial market for
superconducting MRI receivers and related cryoelectronic technology as
rapidly and efficiently as practicable;
WHEREAS, Siemens is an industry leader in MRI and low-field MRI systems;
WHEREAS, the parties are interested in collaborating as per the terms of this
agreement;
NOW, THEREFORE, in consideration of the agreements and covenants contained
hereunder, the parties agree as follows:
1. DEFINITIONS
As used herein:
AGREEMENT means this agreement including any exhibits, appendices and
amendments thereto;
<PAGE>
-4-
PARTIES means Conductus, Inc. and Siemens AG;
MRI SYSTEM means and includes instruments for magnetic resonance imaging of
the human body, including parts thereof manufactured and/or sold by Siemens;
MRI RECEIVER means and includes coils for incorporation into MRI SYSTEMS for
detecting magnetic resonant signals and their associated electronics;
SUPERCONDUCTING MRI RECEIVER means and includes an MRI RECEIVER including a
receiver coil fabri-cated from a high temperature superconductor, associated
cryogenic packaging and cooling system, low loss matching network,
preamplifier and system interface;
CRYOELECTRONICS means low-temperature electronic components, including
superconducting and semiconducting elements, and associated cryogenic
packaging and cooling technologies;
PROPRIETARY INFORMATION means and includes inventions, algorithms, know-how
and ideas and all other business, technical and financial information of a
PARTY which the PARTY treats as confidential information;
PROJECT INTELLECTUAL PROPERTY means inventions, creations, processes, mask
works, works of authorship, software or know-how and improvements thereto,
whether or not patentable or copyrightable, conceived, developed or reduced
to practice in the course of performance of this AGREEMENT;
2. SUBJECT SUPERCONDUCTING MRI RECEIVER
The SUPERCONDUCTING MRI RECEIVER shall be that receiver developed during the
course of the project described in the Statement of Work attached hereto as
Appendix A.
<PAGE>
-5-
3. CONDUCTUS RESPONSIBILITIES
Conductus shall use reasonable efforts to complete the activities assigned to
it in the Statement of Work.
4. SIEMENS RESPONSIBILITIES
Siemens shall use reasonable efforts to complete the activities assigned to
it in the Statement of Work.
5. CONFIDENTIALITY
Each PARTY agrees that all PROPRIETARY INFORMATION it obtains from the other
PARTY is the property of the other PARTY. When the disclosing PARTY
supplies such PROPRIETARY INFORMATION, it shall be in written form and be
marked "Proprietary," or, when such PROPRIETARY INFORMATION is first supplied
orally or by demonstration, such PROPRIETARY INFORMATION shall be identified
as proprietary at the time of disclosure and shall be reduced to writing and
marked "Proprietary" and supplied to the receiving PARTY within thirty (30)
business days of its first disclosure to the receiving PARTY. Except as
expressly and unambiguously allowed herein, the receiving PARTY will hold in
confidence and not use or disclose any PROPRIETARY INFORMATION of the
disclosing PARTY and shall treat the information with the same care as its
own PROPRIETARY INFORMATION for a period of three years from the date such
information was disclosed. The receiving PARTY shall not be obligated under
this Section with respect to information the receiving PARTY can document:
- is or has become readily publicly available without restriction through
no fault of the receiving PARTY or its employees or agents;
<PAGE>
-6-
- is received without restriction from a third PARTY lawfully in
possession of such information and lawfully empowered to disclose such
information; or
- was rightfully in the possession of the receiving PARTY without
restriction prior to its disclosure by the other PARTY; or
- was independently developed by employees or consultants of the receiving
PARTY without access to such Propriety Information.
6. INTELLECTUAL PROPERTY
6.1 OWNERSHIP
Each PARTY shall own the title to any PROJECT INTELLECTUAL PROPERTY created
solely by its employees or agents. PROJECT INTELLECTUAL PROPERTY developed
jointly by the PARTIES shall be jointly owned.
6.2 FILING OF PATENT APPLICATIONS
Each party shall bear the expense of filing, prosecution and maintenance of
patents of its solely-owned PROJECT INTELLECTUAL PROPERTY. The PARTIES shall
share the expense of filing, prosecution and maintenance of patents for
jointly owned PROJECT INTELLECTUAL PROPERTY. The PARTIES agree to cooperate
to secure patent rights in PROJECT INTELLECTUAL PROPERTY.
6.3 LICENSING OF JOINTLY OWNED PROJECT INTELLECTUAL PROPERTY
Subject only to prior written agreement of the PARTIES, either PARTY may
offer nonexclusive licenses to others to jointly owned PROJECT INTELLECTUAL
<PAGE>
-7-
PROPERTY. If the PARTIES so agree, the licensing PARTY shall account to the
other PARTY for any royalties or other payments received from licensing of
the PROJECT INTELLECTUAL PROPERTY and shall share such compensation equally
with the other PARTY unless the PARTIES agree to a different allocation on a
case-by-case basis.
7. NEGOTIATION OF OEM RELATIONSHIP
Upon agreement of the PARTIES that the project defined in Appendix A has been
successfully completed, the PARTIES agree to negotiate in good faith an OEM
agreement for the purchase and sale of the SUPERCONDUCTING MRI RECEIVER
developed under this AGREEMENT.
8. WARRANTY.
Conductus represents and warrants that the design and manufacture of the
proposed SUPERCONDUCTING MRI RECIEVER submitted to Siemens under this
Agreement will be original and that it will avoid knowlingly designing and
portion of said SUPERCONDUCTING MRI RECEIVER which will infringe the
intellectual property rights of any third party.
Conductus agrees that it will promptly notify Siemens in writing if Conductus
becomes aware of any actual or potential proprietary matter or trade secret
infringement or misappropriation during the course of Conductus' performance
hereunder.
Each PARTY represents and warrants that it has sufficient power, right and
authority to enter into this Agreement and to grant the rights and undertake
the obligations set forth herein.
NEITHER PARTY MAKES ANY WARRANTIES WITH RESPECT TO ANY SUBJECT MATTER OF THIS
AGREEMENT, AND EACH PARTY DISCLAIMS ALL WARRANTIES, INCLUDING WITHOUT
LIMITATION, WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT.
<PAGE>
-8-
9. TERM AND TERMINATION
9.1 TERM
Unless terminated by either party pursuant to the provisions of this Section
9, this AGREEMENT shall continue in effect from the effective date until
December 31, 1996 (the "Initial Term"), and shall thereafter be extendable by
written agreement of the Parties.
If either PARTY in good faith determines that the project is either
technically or economically not practical, it may terminate this AGREEMENT on
60 days notice.
Siemens may terminate this AGREEMENT if a competitor of Siemens acquires
Conductus or a controlling interest in Conductus.
9.2 TERMINATION FOR DEFAULT.
If either PARTY materially breaches any material provision of this AGREEMENT
and such breach is not cured within sixty (60) days (or ten days in the case
of non-payment) after notice, the other PARTY may terminate this AGREEMENT.
9.3 RIGHTS AND OBLIGATIONS ON EXPIRATION OR TERMINATION.
The following provisions shall survive the expiration or termination of this
Agreement: Sections 5, 6, 8 and 9.3. Any remedies for breach and any rights to
payments accrued through termination shall remain in effect.
10. MISCELLANEOUS.
10.1 ENTIRE AGREEMENT.
This Agreement represents the entire agreement of the PARTIES regarding the
subject matter hereof and supersedes all prior agreements, understandings and
negotiations regarding the same. This Agreement may not be changed, modified,
<PAGE>
-9-
amended or supplemented except by a written instrument signed by
both PARTIES. Furthermore, it is the intention of the PARTIES that this
AGREEMENT be controlling over any order, confirmation, invoice or similar
document, even if accepted in writing by both PARTIES, and that waivers and
amendments shall be effective only if made by non-pre-printed agreements
clearly understood by both PARTIES to be an amendment or waiver.
<PAGE>
-10-
10.2 ASSIGNABILITY.
This Agreement or any part hereof may not be assigned by either party without
the prior consent of the other party; provided, however, that either party
may assign this AGREEMENT to any entity which acquires substantially all of
its assets or business, provided that the assignor remains obligated
hereunder.
10.3 SEVERABILITY.
If any provision of this AGREEMENT shall be held illegal or unenforceable,
that provision shall be limited or eliminated to the minimum extent necessary
so that this AGREEMENT shall otherwise remain in full force and effect and
enforceable.
10.4 NOTICE AND REPORTS.
All notices, consents or approvals required by this AGREEMENT shall be in
writing sent by certified or registered air mail, postage prepaid or by
facsimile or cable (confirmed by such certified or registered mail) to the
PARTIES at the addresses first specified above or such other addresses as may
be designated in writing by the respective PARTIES.
10.5 RELATIONSHIPS OF THE PARTIES.
Both PARTIES are independent contractors under this AGREEMENT. Nothing
contained in this AGREEMENT is intended nor is to be construed so as to
constitute the PARTIES as partners, agents or joint ventures with respect to
this AGREEMENT. Neither PARTY hereto shall have any express or implied right
or authority to assume or create any obligations on behalf of or in the name
of the other PARTY or to bind the other PARTY to any contract, agreement or
undertaking with any third party
10.6 WAIVER.
The waiver by either PARTY of a breach of any provisions contained herein
shall be in writing and shall in no way be construed as a waiver of any
succeeding breach of such provision or the waiver of the provision itself.
10.7 LIMITED LIABILITY.
NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY
WILL BE OBLIGATED OR LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS
AGREEMENT TOWARDS THE OTHER PARTY FOR (I) ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES, OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR
SERVICES OR (III) FOR ANY FAILURE OR DELAY DUE TO MATTERS BEYOND ITS
REASONABLE CONTROL.
10.8 EXPORT CONTROL.
Siemens agrees to comply with all export laws and restrictions and
regulations of the Department of Commerce or other United States or foreign
agency or authority, and not to export, or authorize the export or re-export
of any product (or technical data or information related thereto) or any
direct product thereof in violation of any such restrictions, laws of
regulations, or, without all necessary licenses and approvals, to
Afghanistan, the People's Republic of China or any Group Q, S, W, Y or Z
country specified in the then current Supplement No. 1 to Section 770 of the
U.S. Export Administration Regulations (or any successor supplement or
regulations). Siemens will notify its customers of the obligation to
<PAGE>
-11-
comply with such export laws and regulations. Conductus shall, at all times,
timely advise Siemens of applicable U.S. export laws and restrictions and
regulations.
11. ARBITRATION
It is the objective of the PARTIES to establish informal and inexpensive
procedures for resolution of any disputes which may from time to time arise
out of or in connection with this AGREEMENT (including any question
regarding its existence, validity or termination) by mutual cooperation and
without resort to litigation. To accomplish this objective, the PARTIES
agree to the following procedures for dispute resolution:
(a) The complaining PARTY shall write a description of the alleged breach of
the AGREEMENT and send it to the other PARTY by certified or registered mail.
This letter shall explain the nature of the complaint and refer to the
relevant sections of this AGREEMENT. The complaining PARTY shall also set
forth a proposed solution to the problem, including a specific time frame
within which the PARTIES must act.
The PARTY receiving the letter shall respond in writing within (10) days with
an explanation, including references to relevant parts of this AGREEMENT, and
a response to the proposed solution.
Within the (10) days of receipt of this response, the PARTIES shall meet and
discuss options for resolving the dispute. The complaining PARTY shall
initiate the scheduling of this resolution meeting.
(b) All disputes not resolved by the mechanism set forth in section 11(a)
within a period of two months from the date of description of the alleged
breach of the AGREEMENT sent by the complaining PARTY to the other PARTY
shall be finally settled under the Rules of Conciliation and Arbitration of
the International Chambers of Commerce, Paris, by three arbitrators in
accordance with said Rules.
<PAGE>
-12-
(c) Each PARTY shall nominate one arbitrator for confirmation by the
competent authority under the applicable Rules (Appointing Authority). Both
arbitrators shall agree on the third arbitrator within thirty (30) days.
should the two arbitrators fail, within the above time-limit, to reach
agreement on the third arbitrator, the third arbitrator shall be appointed by
the Appointing Authority. If there are two or more defendants, any nomination
of an arbitrator by or on behalf of such defendants must be by joint agreement
between them. If such defendants fail, within the time-limit fixed by the
Appointing Authority, to agree on such joint-nomination, the proceedings
against each of them must be separated.
(d) The seat of arbitration shall be Vancouver, Canada.
The procedural law of this place shall apply where the Rules are silent.
(e) The language to be used in the arbitration proceeding shall be English.
10.10 SUBSTANTIVE LAW
All disputes shall be settled in accordance with the provisions of this
AGREEMENT and all other agreements regarding its performance, otherwise in
accordance with the substantive law in force in Canada and the province of
British Columbia, without reference to other laws. The applica-tion of the
United Nations Convention on Contracts for the International Sale of Goods of
April 11, 1980 shall be excluded.
<PAGE>
-13-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written in multiple counterparts, each of which
shall be considered an original.
CONDUCTUS SIEMENS
By: By:
------------------- --------------------
Name: William J. Tamblyn Name: Bernd Puschmann
Title: VP & CFO Title: Business Administrator
Date: Date:
------------------- ----------------------
By:
----------------------
Name: Dr. Hermann Requardt
Title: General Manager
Date:
-----------------------
<PAGE>
-14-
APPENDIX A
STATEMENT OF WORK
1. PROJECT OBJECTIVE
Conductus and Siemens will specify a SUPERCONDUCTING MRI RECEIVER and
determine its performance specifications. Conductus will develop and build a
prototype of said specified SUPERCONDUCTING MRI RECEIVER and demonstrate its
performance on a Siemens Magnetom Open 0.2 T MRI system. The SUPERCONDUCTING
MRI RECEIVER is expected to be a small, general-purpose superconducting MRI
surface coil and cryogenic receiver assembly for operation on a Siemens Open
0.2 T MRI system. The receive coil will have an effective diameter of
approximately 4 cm. The period for develop-ing and building of the prototype
SUPERCONDUCTING MRI RECEIVER is expected to conclude by December 31, 1996.
1.1 CONDUCTUS OBLIGATIONS
Conductus shall use reasonable efforts to:
a) Design and build a SUPERCONDUCTING MRI RECEIVER;
b) Demonstrate performance and operating characteristics of the
SUPERCONDUCTING MRI RECEIVER on a Siemens Magnetom Open 0.2 T MRI machine;
and
c) Provide the SUPERCONDUCTING MRI RECEIVER and necessary support to enable a
U.S. Siemens customer, preferably Dr. Jonathan Lewin, Cleveland to make MRI
images at a Siemens research site in the U.S.
1.2 SIEMENS OBLIGATIONS
Siemens shall use reasonable efforts to:
a) Provide Conductus with coil interface specifications available at Siemens
for the Magnetom 0.2 T MRI, such other information as is reasonably
necessary for Conductus to perform its tasks under this AGREEMENT and such
other information as is mutually agreed by the PARTIES;
b) Provide, at times and locations as agreed to by the PARTIES, site access,
machine time and operator time at a Magnetom Open 0.2 T system that is
geographically convenient to Conductus, for the purpose of conducting
hardware tests;
c) Subject to prior agreement of the PARTIES, provide a conventional (i.e. not
superconducting) MRI receiver with a coil diameter of equivalent geometry
to that of the coil of the SUPERCONDUCTING MRI RECEIVER, to allow for a
performance comparison; and
<PAGE>
-15-
d) Subject to prior agreement between the PARTIES, site access, machine time
and operator time at a Siemens research site, to enable a US Siemens
customer, preferably Dr. Jonathan Lewin, Cleveland to make MRI images with
the prototype of the SUPERCONDUCTING MRI RECEIVER.
If, as mutually agreed by the PARTIES, the prototype meets specifications,
Siemens will display images from the prototype SUPERCONDUCTING MRI RECEIVER
as a "works-in-progress" display in its booth at the 1996 RSNA, including a
mention of Conductus as the provider of the SUPERCONDUCTING MRI RECEIVER.
<PAGE>
SUPERCONDUCTING FILTER TECHNOLOGY
JOINT DEVELOPMENT AGREEMENT
This Joint Development Agreement is entered into by and between LUCENT
TECHNOLOGIES INC., ("LUCENT") a Delaware corporation having offices at 600
Mountain Ave., Murray Hill, NJ 07974, acting through its division Bell
Laboratories, and CONDUCTUS, INC. ("CONDUCTUS") a Delaware corporation having
a place of business at 969 West Maude Avenue, Sunnyvale, CA 94086. Whereas,
Lucent is an industry leader in wireless communications systems; a founding
member of the Consortium for Superconducting Electronics and a leader in
superconducting Research and Development with considerable knowledge and
skill in superconducting RF design, thermal management techniques, and cooled
amplifier engineering;
Whereas, Conductus is an industry leader in superconducting and cryogenic
electronic applications; has been an Associate Member of the Consortium for
Superconducting Electronics, working with Lucent on the development of
superconducting filters, and is interested in developing a commercial market for
superconducting filters for wireless base stations and related cryogenic
technology as rapidly as practicable;
Whereas, Conductus has been developing superconducting filters and associated
cryogenics for wireless communications applications and desires to develop a
manufacturing capability for such devices; and Lucent is interested in
developing an outside supplier(s) of such products should they provide
sufficient system-level benefit;
Whereas, Lucent and Conductus are interested in seeking ARPA funding for a cost-
shared program for the prototyping and evaluation of superconducting filters for
wireless applications; and
Whereas, the Parties wish to enter into a joint development agreement to define
their respective roles and responsibilities and thus successfully satisfy the
objectives of such a program;
Now, therefore, the Parties agree as follows:
1. DEFINITIONS.
1.1 "Agreement" means this Joint Development Agreement.
1.2 "Program" means all work undertaken by the Parties during the term of
this Agreement to achieve the goals set forth in the Statement of Work,
including any amendments thereto.
1.3 "Background Technology" means and includes Technical Information not
generated in the course of Agreement.
1.4 "Subject Invention" means any invention arising from work performed
specifically in the course of the Program.
1.5 "Patents" shall mean all patents and applications relating thereto
worldwide resulting from Subject Inventions.
1.6 "Technical Information" shall mean and include, but not be limited to,
inventions, creations, processes, mask works, works of authorship, software
or know-how and improvements thereto, whether or not patentable or
copyrightable.
1.7 "PROGRAM INTELLECTUAL PROPERTY" means patents and patent applications
resulting from Subject Inventions, copyrighted computer software and
Technical Information first created in the course of the Program.
page 1 of 7
<PAGE>
SUPERCONDUCTING FILTER TECHNOLOGY
JOINT DEVELOPMENT AGREEMENT
2. ADMINISTRATION AND GOVERNANCE.
2.1 OBLIGATIONS OF THE PARTIES. The parties agree to work together to
accomplish the objectives of the Agreement by performing the various Tasks
described in the Statement of Work (Exhibit A). The Parties each agree to
provide funds or in kind services as necessary to perform their respective
roles as set forth in the Statement of Work. These funds include, in part,
funding being sought from ARPA under a cost-shared R&D Program.
2.2 MANAGEMENT COMMITTEE
The Management Committee shall be composed of one representative from each
Party. The Management Committee shall discuss all business, financial,
legal, and technical issues of the Program. The Management Committee shall
meet at least semi-annually, and otherwise as mutually agreed. Technical
direction for the Program shall be provided by Lucent. Lucent shall provide
the primary interface from the Joint Development Agreement to ARPA for the
technical management of the cost-shared R&D Program.
2.3 DISPUTE RESOLUTION
Disputes arising between the parties shall be referred first to the
Management Committee for resolution. If the Management Committee fails to
achieve satisfactory resolution of any dispute, such dispute shall be
referred to the upper management of the Parties for resolution. Failing
adequate resolution by upper management, the Parties shall submit the dispute
to a sole mediator selected by the Parties. If not thus resolved, the
dispute shall be referred to a sole arbitrator selected by the Parties within
thirty (30) days of the mediation.
The requirement for arbitration shall not be deemed a waiver of any right of
termination under this Agreement. The place of mediation and arbitration
shall be selected by mutual agreement between the Parties. Each Party shall
bear its own expenses, but those related to the compensation and expenses of
the mediator and arbitrator shall be borne equally.
No provision herein stated shall prevent either Party from seeking
preliminary relief in a court of competent jurisdiction.
The Parties, their representatives, other participants, and the mediator and
arbitrator shall hold the existence, content, and result of mediation and
arbitration in confidence.
3. CONFIDENTIAL INFORMATION
In connection with activities under the Program, each Party may disclose to
the other, during the duration of the Program, proprietary information which
the disclosing Party considers to be confidential. Such information will be
referred to in this Article as CONFIDENTIAL INFORMATION. The receiving Party
shall protect such information as confidential, provided that:
a. if in a tangible form or medium, the disclosed information shall be
clearly marked by the disclosing Party as Confidential or Proprietary
information of such Party; and
b. if disclosed orally, the disclosing person shall so state at the time of
disclosure and within 30 days thereafter shall identify such information as
Confidential or Proprietary and summarize such information in a written
memorandum.
page 2 of 7
<PAGE>
SUPERCONDUCTING FILTER TECHNOLOGY
JOINT DEVELOPMENT AGREEMENT
The receiving Party may use CONFIDENTIAL INFORMATION only for the purposes of
the Program, shall limit disclosure of such information to those of its
employees to whom such disclosure is necessary for the purposes of the
Program, and shall protect such information with the same degree of care it
uses to protect its own confidential information. The receiving Party may
disclose CONFIDENTIAL INFORMATION to third parties only with the prior
written consent of the disclosing Party.
The obligations of the preceding paragraph shall not apply to disclosed
information from the time and to the extent that such information:
a. is or becomes known to the public through no fault of the receiving Party;
b. was known to the receiving Party prior to disclosure by the disclosing
Party or is subsequently rightfully obtained by the receiving Party from a
third party without obligation of confidentiality; or
c. is developed by the receiving Party independently of such disclosed
information, as evidenced by written records.
Upon written request, each Party shall return all copies of CONFIDENTIAL
INFORMATION received hereunder, or certify the destruction of all such
copies, to the disclosing Party.
The obligations of this Article shall survive for five (5) years following
the termination of this Agreement as set forth in Article 5.
4. INTELLECTUAL PROPERTY
4.1 BACKGROUND TECHNOLOGY No license under either Party's rights in
Background Technology is granted or implied by this Agreement. If licensing
of Background Technology from one Party to the other is reasonably necessary
for the successful conduct of the Program or future manufacture of products
which are the subject of this Agreement, such license or licenses may be
separately negotiated. Nothing herein shall abridge any existing or
separately obtained rights of either Party to Background Technology.
4.2 OWNERSHIP OF INTELLECTUAL PROPERTY Title in patents and patent
applications resulting from Subject Inventions shall vest in that Party whose
employees made such inventions. In the case of inventions jointly made by
employees of both Parties, title shall vest jointly. Each Party shall be
responsible for its own costs in preparing, filing, and prosecuting patent
applications. The Parties shall cooperate with each other, and shall not
unreasonably withhold assistance, in obtaining patents for Subject
Inventions.
Title in copyrighted computer software and in Technical Information first
created in the course of the Program shall vest in that Party whose employees
created such software or Technical Information. In the case of software or
Technical Information jointly created by employees of both Parties, title
shall vest jointly. Each Party shall have unrestricted rights in jointly
owned software and technical information including the right to commercialize
the same without accounting to the other Party.
Parties agree to abide by Intellectual Property Rights conditions of the ARPA
funding vehicle for the cost-shared R&D Program, when negotiated.
page 3 of 7
<PAGE>
SUPERCONDUCTING FILTER TECHNOLOGY
JOINT DEVELOPMENT AGREEMENT
4.3 LICENSING OF INTELLECTUAL PROPERTY Each Party shall, and hereby does,
grant to the other a non-exclusive, royalty-free license to personally use
its PROGRAM INTELLECTUAL PROPERTY solely for research purposes within the
scope of the Statement of Work, and to make products and have the same made
solely for such use. Commercial use of the PROGRAM INTELLECTUAL PROPERTY of
each Party by the other shall be subject to the provisions set forth herein.
a) Conductus agrees to pay Lucent a fee of % on all sales of
communications systems, subsystems, and components for communications
systems operating in a frequency range between 500MHz and 2.5GHz, sold
within a period of seven (7) years from the date of this Agreement .
Thereafter, Conductus shall have a worldwide, paid-up, non-exclusive license
to Lucent's PROGRAM INTELLECTUAL PROPERTY to make, use and sell
communications systems, subsystems, and components for communications
systems operating in a frequency range between 500MHz and 2.5GHz.
b) Conductus agrees to offer Lucent a license to make, have made, use,
sell, offer for sale, and import communications systems, subsystems and
components for communications systems operating in a frequency range between
500MHz and 2.5GHz incorporating superconductive or cryocooled electronics.
Such license shall be without right of sublicense except as to affiliates,
and as to such rights as are necessary in the distribution of products or
offering of services using such products.
Such license shall be on reasonable commercial terms and conditions, and
shall be no less favorable than licenses granted by Conductus to its other
licensees. It shall also include rights to Conductus' Background Technology
useful in the manufacturing of the foregoing products.
c) The Parties agree to negotiate a fee for the sale of derivative products
incorporating Subject Inventions outside the above license scope.
4.4 SURVIVAL The provisions of this Article shall survive the expiration or
termination of this Agreement.
5. Final Program Evaluation
As part of the referenced Statement of Work (Exhibit A), the final decision
point incorporates an evaluation of the commercial viability of the resulting
prototypes and will include the discussion of the ongoing supplier
relationship between Conductus and Lucent for use of these products.
6. Term and Termination.
Except as set forth below, this Agreement shall continue in full force and
effect until the Parties' obligations as set forth in this Agreement have
been completed.
This Agreement shall terminate if the Parties fail to obtain ARPA funding for
the cost-shared R&D Program by June 30, 1996.
The Parties shall formally consider the technical merits of the Program at
each of the Technical Decision Points (Milestones) set forth in the Statement
of Work (See Exhibit A) These Technical Decision Points shall also be
included in the ARPA cost-shared R&D Program. Upon mutual agreement between
the Parties or upon a good faith determination by either party that the
page 4 of 7
<PAGE>
SUPERCONDUCTING FILTER TECHNOLOGY
JOINT DEVELOPMENT AGREEMENT
technology does not merit further development, either Party may terminate its
participation in this agreement with 90 days written notice to the other
Party. The terminating Party bears a responsibility to make available its
PROGRAM INTELLECTUAL PROPERTY and necessary Background Intellectual Property
to enable a successor organization to assume its role in the Joint
Development Agreement and associated ARPA Program. The Terminating Party
shall bear all its own costs relating to its termination.
In the event of termination of this Agreement prior to completion of the
Program, the Parties shall enter into good faith negotiations aimed at
revising the licensing and fee provisions of Article 4 in a commercially
reasonable manner.
7. LIABILITY, WARRANTY, INSURANCE.
7.1 LIABILITY. Each Party acknowledges that it shall be responsible for any
loss, cost, damage, claim or other charge that arises out of or is caused by
the actions of that Party or its employees or agents. Neither Party shall be
liable for any loss, cost, damage, claim or other charge that arises out of
or is caused by the actions of the other Party or its employees or agents.
Neither Party shall be responsible for the actions of the other Party, but is
only responsible for those tasks assigned to it and to which it agrees in the
Statement of Work contained in Exhibit A. The Parties agree that in no event
will consequential or punitive damages be applicable or awarded with respect
to any dispute that may arise between the Parties in connection with this
Agreement. Each Party indemnifies the other against claims brought by third
parties that arise solely from negligence or wrongful acts of the
indemnifying party.
7.2 INSURANCE. Each Party agrees to obtain and maintain appropriate public
liability and casualty insurance, or adequate levels of self insurance, to
insure against any liability caused by that Party's obligations under this
Agreement.
8. NOTICES.
Any notice or request with reference to this Agreement shall be made by first
class mail postage prepaid, telex, or facsimile to the addresses shown below.
These addresses can be changed by written notification.
FOR LUCENT: FOR CONDUCTUS:
Lucent Technologies Bell Laboratories Conductus, Inc.
600 Mountain Ave. 969 West Maude Avenue
Murray Hill, NJ 07974-0636 Sunnyvale, CA 94086
Attn: Paul Mankiewich Attn: William J. Tamblyn
9. GENERAL PROVISIONS.
9.1 AMENDMENTS. No amendment or modification of this Agreement shall be
valid unless made in writing and signed by both parties.
9.2 ASSIGNMENT The Parties have entered into this Agreement in contemplation
of personal performance, each by the other, and intend that the licenses and
rights granted hereunder to a
page 5 of 7
<PAGE>
SUPERCONDUCTING FILTER TECHNOLOGY
JOINT DEVELOPMENT AGREEMENT
Party not be extended to entities other than such Party's subsidiaries
without the other Party's express written consent.
Each Party may assign all of its right, title, and interest in this
Agreement, and any licenses and rights granted to it hereunder, to any direct
or indirect successor to the business of such Party as the result of a
reorganization. Such successor shall thereafter be deemed substituted for
the assigning Party as the party hereto, effective upon such assignment.
However, neither this Agreement nor any licenses or rights hereunder shall be
otherwise assignable or transferable (in insolvency proceedings, by reason of
a corporate merger, or otherwise) by either Party without the express written
consent of the other Party.
9.3 EFFECTIVE DATE. This Agreement shall be effective as of the date of the
last signature below.
9.4 FORCE MAJEURE. No Party shall be liable, in respect to any delay in
completion of work hereunder or of the non-performance of any term or
condition of this Agreement directly or indirectly resulting from delays by
Acts of God; acts of the public enemy; strikes; lockouts; epidemic and riots;
power failure; water shortage or adverse weather conditions; or other causes
beyond the control of the Parties. In the event of any of the foregoing, the
time for performance shall be equitably and immediately adjusted, and in no
event shall any Party be liable for any consequential or incidental damages
from its performance or non-performance of any term or condition of this
Agreement. The Parties shall resume the completion of work under this
Agreement as soon as possible subsequent to any delay due to force majeure.
9.5 GOVERNING LAW This Agreement shall be governed by and interpreted in
accordance with the laws of New Jersey, except for its principles of
conflicts of laws.
9.6 HEADINGS. Article and section headings contained in this Agreement are
included for convenience only and form no part of this Agreement among the
parties.
9.7 SEVERABILITY. If any provision of this Agreement is declared invalid by
any court or government agency, all other provisions shall remain in full
force and effect.
9.8 USE OF NAMES. No party shall use in any advertising, promotional or
sales literature the name of any other party without prior written consent.
9.9 WAIVERS. Waiver by any party of any breach or failure to comply with
any provision of this Agreement by another party shall not be construed as,
or constitute, a continuing waiver of such provision or a waiver of any other
breach of or failure to comply with any other provision of this Agreement.
page 6 of 7
<PAGE>
SUPERCONDUCTING FILTER TECHNOLOGY
JOINT DEVELOPMENT AGREEMENT
In Witness Whereof, the Parties have caused this Agreement to be executed by
their duly authorized officers or representatives on the dates shown below.
Lucent Technologies Bell Laboratories Conductus, Inc.
Name: /s/ William Brinkman Name: /s/ William J. Tamblyn
----------------------- -----------------------
Title: Physical Sciences and Title: VP/CEO
Engineering Research
Vice President
Date: April 25, 1996 Date: 4-25-96
----------------------- -----------------------
page 7 of 7
<PAGE>
STATEMENT OF WORK FOR
SUPERCONDUCTING FILTERS FOR WIRELESS BASE STATION
APPLICATIONS PROGRAM
1. PROGRAM OBJECTIVE
1.1. The objective of the Program is to develop a PCS
intelligent antenna front-end subsystem with the following
characteristics:
Page 1 of 5
<PAGE>
2.3. A description of the Key Program Tasks noted in 2.1 in greater detail
follows. This listing should not be construed as exhaustive, but rather, as
an initial identification of essential tasks whose completion is vital to the
success of the Program:
Page 2 of 5
<PAGE>
3. CTI OBLIGATIONS
Page 3 of 5
<PAGE>
4. LUCENT OBLIGATIONS
4.1. Lucent responsibilities:
5. MILESTONES
5.1. Summary
Page 4 of 5
<PAGE>
5.2. Program Reviews
Page 5 of 5
<PAGE>
April 25, 1996
Lucent Technologies, Inc. Conductus, Inc.
600 Mountain Avenue 969 West Maude Avenue
Murray Hill, NJ 07974-0636 Sunnyvale, CA 94086
RE: JOINT DEVELOPMENT AGREEMENT BETWEEN LUCENT TECHNOLOGIES, INC. AND
CONDUCTUS, INC.
Lucent Technologies, Inc. ("Lucent") and Conductus, Inc. agree that the fee
set forth in section 4.3(a) of the Joint Development between the parties
dated April 25, 1996 shall not apply to sales of receive-only communications
systems sold by Conductus under the provisions of Booz-Allen subcontract
agreement B09004-0278, including extensions arising from any option provision
therein for which the sales price is set in the referenced subcontract.
Lucent Technologies, Inc. Conductus, Inc.
By: /s/ Christine Mann By: /s/ William J. Tamblyn
--------------------- ------------------------
Contracts Specialist William J. Tamblyn
VP and CEO
Date: 4/25/96 Date: 4/25/96
<PAGE>
EXHIBIT 11.1
CONDUCTUS, INC.
STATEMENTS OF COMPUTATION OF LOSS PER SHARE
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net loss.................................................... $ (1,379) $ (1,570) $ (4,422) $ (4,544) $ (4,122)
--------- --------- --------- --------- ---------
Reconciliation of weighted average number of shares
outstanding to amount used in loss per share computation:
Weighted average number of shares outstanding............. 5,706 5,397 5,543 5,323 2,438
Additional shares included in accordance with requirements
of the Securities and Exchange Commission under Staff
Accounting Bulletin 83................................... -- -- -- -- 502
--------- --------- --------- --------- ---------
Weighted average number of shares outstanding as adjusted... 5,706 5,397 5,543 5,323 2,940
--------- --------- --------- --------- ---------
Net loss per common share................................... $ (0.24) $ (0.29) $ (0.80) $ (0.85) $ (1.40)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONDUCTUS, INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 for the
registration of 1,150,000 shares of Common Stock of our reports dated February
9, 1996, except as to note 10 for which the date is March 8, 1996, on our audits
of the financial statements and financial statement schedule of Conductus, Inc.
We also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
San Jose, California
May 14, 1996
<PAGE>
EXHIBIT 23.2
CONDUCTUS, INC.
CONSENT OF PATENT COUNSEL
We consent to the reference to our firm under the caption "Experts" in this
registration statement on Form S-1 for the registration of 1,150,000 shares of
Common Stock of Conductus, Inc.
MERCHANT, GOULD, SMITH,
EDELL, WELTER & SCHMIDT, P.A.
Minneapolis, Minnesota
May 15, 1996
MERCHANT, GOULD, SMITH,
EDELL, WELTER & SCHMIDT, P.A.
By /s/ Charles G. Carter
--------------------------------------
Charles G. Carter
