<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1996.
REGISTRATION NO. 333-3815
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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. / /
--------------------------
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 JUNE 17, 1996
PROSPECTUS
1,000,000 SHARES
[CONDUCTUS 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 June 14, 1996, the last reported
sale price for the Common Stock was $13.50 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 6.
-----------------
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>
UNDERWRITING PROCEEDS TO
PRICE 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.
(prototypes shown). refrigerator (prototype
shown).
"Filter" "Filter Subsystem" "Cellular base station"
HEALTHCARE
Conductus designs and The receiver coils are Conductus probes are
fabricates superconducting incorporated into integrated designed for use in NMR
receiver coils for nuclear probe subsystems that spectrometers and MRI
magnetic resonance include a cryogenic scanners.
instruments (prototype refrigerator (probe body
shown). shown).
"NMR Spectroscopy coil" "Probe Subsystem" "NMR spectrometer"
INSTRUMENTATION
Conductus designs and The sensors are combined Conductus sensor subsystems
fabricates superconducting with specialized control are designed for
magnetic sensors. electronics and analysis applications in geophysics,
software. medicine and non-destructive
testing.
"SQUID Sensor" "IMAG system" "console"
</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 $3.4 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>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 6 to 12 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investing in the Common Stock include the following factors: Early Stage of
the Superconductive Electronics Market; Accumulated Deficit and Anticipated
Future Losses; Uncertainty of Financial Results; Quarterly Fluctuations; High
Degree of Dependence Upon Other Complementary Technologies; Reliance on Limited-
or Sole-Source Suppliers; Dependence on Incorporation of Potential Products in
Third Party Systems; Extensive Reliance on Collaborative Relationships; Rapid
Technological Change; Intense Competition; Competing Technologies; Uncertainty
of Patents and Proprietary Rights; Risk of Litigation; Dependence on Licensed
Technology; Substantial Future Capital Needs; Limited Commercial Manufacturing
Capability; Need to Develop Infrastructure to Support Commercialization; Limited
Outlets for Certain Products; High Degree of Dependence Upon Government
Contracts; Highly Regulated Product Applications; Environmental Regulations;
Attraction and Retention of Key Employees; Volatility of Stock Price; Effect of
Certain Charter Provisions; Antitakover Effects of Restated Certificate of
Incorporation and Bylaw Provisions and of Delaware Law; Shares Eligible for
Future Sale; Registration Rights; Absence of Dividends; Dilution; and Broad
Discretion of Management to Allocate Offering Proceeds.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company............... 1,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 6,732,989 shares (1)
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>
4
<PAGE>
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 $ 15,834
Total assets............................................................................. 8,937 21,697
Long-term debt, net of current portion................................................... 1,258 1,258
Total stockholders' equity............................................................... 4,469 17,229
</TABLE>
- --------------------------
(1) Based on the number of shares outstanding as of March 31, 1996. Excludes
1,157,026 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 $14.00 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.
5
<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 AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FINANCIAL
RESULTS. 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.
QUARTERLY FLUCTUATIONS. 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. 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.
RELIANCE ON LIMITED- OR SOLE-SOURCE SUPPLIERS. Certain components of
Conductus' subsystems, including cryocoolers, are currently obtained from a
single source or a limited number of suppliers. The inability of
6
<PAGE>
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.
DEPENDENCE ON INCORPORATION OF POTENTIAL PRODUCTS IN THIRD PARTY
SYSTEMS. 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
"-- High Degree of Dependence Upon Government Contracts" and "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
7
<PAGE>
personnel, obtain patent or other protection for its technology and products and
manufacture and market its 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 17 U.S. patents and one related foreign
patent with unexpired terms ranging from 13 to 18 years and has 18 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. There can be no assurance, however, that its pending applications will
result in issued patents, that the validity of its issued patents will not be
subject to challenge or that third parties will not be able to design around the
patented aspects of the Company's products. 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
8
<PAGE>
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 be 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."
DEPENDENCE ON LICENSED TECHNOLOGY. Successful marketing of a material
portion of Conductus' products depends in part on nonexclusive licenses obtained
from various licensors. There can be no assurance that such licenses will not be
terminated by licensors or that Conductus will be able to develop alternate
products that do not require these or other licenses.
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
9
<PAGE>
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 sales, marketing and customer service capabilities are also needed.
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 systems is highly
concentrated, with estimates that approximately 85% of the worldwide market is
divided between Varian Associates ("Varian") and Bruker Instruments. There can
be no assurance that Varian will be successful in marketing the NMR probes or
systems containing Conductus probe subsystems, that Varian will continue to
market the probes or systems or that the Company will be able to market the
probes or systems 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. 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. Conductus does not anticipate that government
contract revenues will grow at historical rates in the future and there can be
no assurance that revenues from government contracts will continue at historic
levels. 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
- -- Research and Development -- Government Contracts."
HIGHLY REGULATED POTENTIAL PRODUCT APPLICATIONS. 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
10
<PAGE>
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 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. 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 engaged primarily 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
11
<PAGE>
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 under which certain 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,
5,308,123 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 2,808,123
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 1,424,866 shares are held by persons who may be deemed 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, 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.
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company
anticipates that the proceeds of this offering will be used for working capital
required to support expansion of its operations, new manufacturing equipment and
general corporate purposes. The amounts identified for the foregoing uses under
"Use of Proceeds" in this Prospectus are estimates and the amounts actually
expended for each such purpose and the timing of such expenditures may vary
depending upon numerous factors. The Company's management will have broad
discretion in determining the amount and timing of expenditures and in
allocating the net proceeds of this offering. Such discretion will be
particularly broad with respect to the 53% or $6,760,000 of the proceeds
available for use for working capital and general corporate purposes. There can
be no assurance that the Company will allocate the net proceeds of this offering
in a manner that achieves a positive rate of return on such net proceeds. See
"Use of Proceeds."
12
<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 $12,760,000, assuming a public
offering price of $14.00 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,
increases in inventory and receivables, $500,000 for facilities improvements,
and $2,500,000 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 of $6,760,000 (53% of net proceeds) will be added to
working capital and used for general corporate purposes, including research and
development and expansion of the manufacturing, sales and marketing
infrastructure. Management will have broad discretion in the application of the
net proceeds. The Company may 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. See "Risk Factors -- Broad
Discretion of Management to Allocate Offering Proceeds."
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 June 14, 1996)...................................... 16 1/2 9 3/4
</TABLE>
On June 14, 1996, the last sales price of the Common Stock, as reported on
the Nasdaq National Market, was $13.50 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.
13
<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 $14.00 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 42,829,697
Unrealized gain on investments, net............................................. 319 319
Accumulated deficit............................................................. (25,601,960) (25,601,960)
-------------- --------------
Total stockholders' equity.................................................. 4,468,730 17,228,730
-------------- --------------
Total capitalization........................................................ $ 5,726,958 $ 18,486,958
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) See Note 10 of Notes to Financial Statements.
(2) Based on the number of shares outstanding as of March 31, 1996. Excludes
1,157,026 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.
14
<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 $14.00 per share,
the pro forma net tangible book value of the Company as of March 31, 1996 would
have been $17,190,000, or $2.55 per share. This represents an immediate increase
in net tangible book value of $1.78 per share to existing stockholders and an
immediate dilution in net tangible book value of $11.45 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...................................... $ 14.00
Net tangible book value per share before the offering.................... $ 0.77
Increase per share attributable to New Investors......................... 1.78
---------
Pro forma net tangible book value per share after the offering............... 2.55
---------
Dilution per share to New Investors.......................................... $ 11.45
---------
---------
</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 $14.00 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 68.2% $ 5.25
New Investors.................................... 1,000,000 14.9 14,000,000 31.8 $ 14.00
---------- ----- ------------- -----
Total.......................................... 6,732,989 100.0% $ 44,070,371 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</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 1,157,026 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.
15
<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 Technologies, Inc. prior to its
acquisition by Conductus on May 28, 1993.
16
<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, Inc. ("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 $1,644,000 in the same period in the
prior year and represented 85% and 82% of total revenue for the periods,
respectively. The increase in contract revenues was primarily due to higher
levels of government funded research and development activity in the three
months ended March 31, 1996, compared with the three months ended March 31,
1995. At March 31, 1996, Conductus had approximately $3,364,000 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
increased sales of magnetic sensing systems and instruments. Revenues in the
three months ended March 31, 1996 were lower than revenues in the three months
ended December 31, 1995 due primarily to the impact of delays in shipment of two
large magnetic sensing systems in the first three months of 1996. 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
17
<PAGE>
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 $2,578,000 for the same period in 1995.
The increase is directly related to the development of commercial products,
particularly in both the cellular and PCS communications markets. 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 102 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 and 1994 was largely attributable to the addition
of several new multi-year government contracts. The decrease in contract
revenues as a percentage of total revenues in 1995 compared with 1994 was due to
increasing product sales. 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 $2,353,000 in contracts and grants and
$9,228,000 and $4,838,000 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 $2,434,000 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 and shipments of these
systems could result in significant period to period fluctuations in revenues,
such as the fluctuation which resulted from the delay in shipment of two
magnetic sensing systems in the first quarter of 1996. Product sales for 1993 do
not include $602,000 realized by Tristan from sales of superconducting magnetic
systems before May 28, 1993.
18
<PAGE>
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.
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 expenditures 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 66 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 changes in 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.
19
<PAGE>
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.
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.
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. Increases in
inventory were due to an increase in inventory related to new NMR products and
sensor products and a delay in the first quarter in shipment of two large
magnetic sensing systems. 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.
20
<PAGE>
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 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 to support operations until sufficient product revenues
are generated. 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.
Conductus does not anticipate that government contract revenues will grow at
historical rates in the future and there can be no assurance that revenues from
government contracts will continue at historic levels. 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.
21
<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.
22
<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.
23
<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>
24
<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
17 U.S. patents and one related foreign patent and has 18 patent applications
pending in the U.S. and related patents pending in other countries relating to
various aspects of its technologies.
Since its inception, Conductus has maintained a Scientific Advisory Board
composed of experts in superconducting materials, devices and science. This
group continues to contribute to the activities and knowledge base of the
Company.
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 applications 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 that address 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," "-- High Degree of Dependence Upon Government
Contracts" 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
25
<PAGE>
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 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.
26
<PAGE>
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
CONDUCTUS POTENTIAL TARGET
MARKET PRODUCT PRODUCT BENEFITS MARKET PARTNER CURRENT STATUS
- ----------------- ------------------ -------------------- ------------------ --------------- --------------------
<S> <C> <C> <C> <C> <C>
Communications Cellular receiver Increased range for Rural segment of Completed laboratory
filter subsystem existing and new installed base of and initial field
rural base stations. cellular base tests. Additional
station market and field tests ongoing.
new network build Anticipate
out. commercial sales in
late 1996.
PCS transceiver Increased range, Forecasted build Lucent Developed initial
filter subsystem higher call out of PCS prototype filter
capacity, reduced base 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 Continuing
instruments measurement of laboratories. commercial sales of
magnetic properties HTS and LTS
of materials. First products.
HTS magnetic sensing
products available
to researchers.
SQUID sensors Allows measurement New markets in Kanazawa Providing components
and 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>
27
<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.
Conductus' products are designed to be used as components or subsystems in
systems manufactured by third party systems manufacturers in the communications,
healthcare and instrumentation markets. The following discussion identifies the
broader market for the applications of Conductus' potential customers and then
specifies the Conductus solution targeted to those applications.
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 Federal Communications Commission and
industry reports, there are more than 22,000 installed cellular base stations in
the United States. Of the U.S. installed base, Conductus estimates approximately
2,000-3,000 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
28
<PAGE>
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 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 greatly 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, based on information from third party sources Conductus estimates
that the forthcoming PCS buildout will result in more than 70,000 new installed
base stations throughout the U.S. by the end of the year 2005.
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. See table on p. 27, Target
Markets and Commercialization Status. As a result, by using these filter
systems, cellular service providers in rural environments may require fewer base
stations in order to serve a
29
<PAGE>
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. 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 -- Early
Stage of the Superconductive Electronics Market" and "-- Limited Commercial
Manufacturing Capability."
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, American Telephone and Telegraph
Company, 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.
See "Risk Factors -- Early Stage of the Superconductive Electronics Market" --
"Dependence On Incorporation of Potential Products in Third Party Systems" and
"-- Intense Competition."
HEALTHCARE
Instruments based on NMR technology determine the structure and properties
of chemical and biological materials by measuring the response of such materials
to electromagnetic fields. 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
30
<PAGE>
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 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 as much as $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 up to a four fold signal-to-noise ratio improvement over
conventional probes enabling up to a 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. See table p. 27, Target
Markets and Commercialization Status. 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. See "Risk Factors -- Limited Outlets for
Certain Products", "-- Competing Technologies", "-- Extensive Reliance on
Collaborative Relationships" and "-- Highly Regulated Product Applications."
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 over $1 million. 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
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<PAGE>
HTS receiver coil subsystems for a Siemens' low-field MRI machine. The Company
has also received support from the Naval Research Laboratory and the Department
of Defense Advanced Research Projects Agency to develop superconducting
technology for MRI breast cancer screening in collaboration with researchers
from Stanford University.
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. See "Risk Factors -- Early Stage of the
Superconductive Electronics Market."
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. See table p. 27,
Target Markets and Commercialization Status. 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
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<PAGE>
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
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.
See "Risk Factors -- Early Stage of the Superconductive Electronics Market", "--
Dependence on Licensed Technology" and "-- Highly Regulated Product
Applications."
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. In addition, 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.
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," and "-- Limited Outlets for Certain Products."
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
33
<PAGE>
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 principal member of the HTMA, which was formed in November 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 currently 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
Corporation, Focused Research, Microelectronic Control and Sensing Incorporated,
IBIS and BDM Federal. Under the HTMA, each party will have certain access to the
technology of the other parties 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, subject to certain conditions, 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. Futhermore, there can be no assurance that Conductus will be able to
meet KIT's design requirements, in which case KIT shall be free to use other
suppliers of SQUIDs.
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,
34
<PAGE>
$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 $36,652,000 from U.S.
government agencies, including approximately $25,529,000 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 $3,364,000 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."
As shown in the examples below, these contract programs and others enable
Conductus to develop its core technologies and support Conductus' business
areas.
<TABLE>
<S> <C> <C> <C>
GOVERNMENT-SUPPORTED RESEARCH AND DEVELOPMENT
SELECTED FUNDING AGENCIES
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>
<S> <C> <C> <C>
SELECTED AREAS OF RESEARCH AND DEVELOPMENT
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."
35
<PAGE>
SCIENTIFIC ADVISORY BOARD. Since its founding, Conductus has engaged the
services of a Scientific Advisory Board composed of experts in superconducting
materials, devices and science who advise the Company concerning long-term
scientific planning, research and development. The members of the Scientific
Advisory Board provide research, investigation and consulting services to
Conductus in exchange for consulting fees. Seven members have had consulting
agreements with the Company since 1987 and have equity ownership in the Company
as a result of option grants.
The Scientific Advisory Board is chaired by Dr. John M. Rowell, who
previously served as the Chief Technical Officer of Conductus from 1988 until
August 1995. Dr. Rowell has been a leading figure in superconductive electronics
for over 30 years. The membership of the Scientific Advisory Board includes
Professor Malcolm R. Beasley, Stanford University; Dr. Leonard Cutler,
Hewlett-Packard Company; Dr. Robert C. Dynes, Chancellor of University of
California, San Diego; Professor John Clarke, University of California,
Berkeley; Professor Emeritus Theodore H. Geballe, Stanford University; Dr.
Robert H. Hammond, Stanford University; Professor Aharon Kapitulnik, Stanford
University; Professor Paul L. Richards, University of California, Berkeley; and
Professor Theodore Van Duzer, University of California, Berkeley. See "Risk
Factors -- Attraction and Retention of Key Employees."
PATENTS, PROPRIETARY TECHNOLOGY AND TRADEMARKS
Conductus has received 17 U.S. patents and one related foreign patent which
have unexpired terms ranging from 13 to 18 years and has 18 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. There can be no
assurance, however, that its applications will result in issued patents, that
the validity of its issued patents will not be subject to challenge or that
third parties will not be able to design around the patented aspects of the
Company's products. 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. 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.
36
<PAGE>
("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 have a material adverse effect 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."
Additionally, successful marketing of a material portion of Conductus'
products depends in part on nonexclusive licenses obtained from various
licensors. There can be no assurance that such licenses will not be terminated
by licensors or that Conductus will be able to develop alternate products that
do not require these or other licenses.
Conductus owns the United States registered trademarks "CONDUCTUS," the
Conductus logo, "Mr. SQUID" and "iMAG" and claims the rights to the trademark
"xMAG."
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
37
<PAGE>
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" and "-- Reliance on 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-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.
38
<PAGE>
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 is competitive
with respect to these factors. Nonetheless, because the market for
superconductive electronics is at an early stage, the relative competitive
position of the Company in the future is difficult to predict.
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, 11 domestic and 8 foreign firms
were manufacturer's representatives and distributors, covering 41 states and 18
foreign countries including a majority of western Europe, Japan, Australia, New
Zealand 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's employees have published the results
of their research at Conductus widely in trade and technical journals.
Additionally, Conductus' employees have frequently presented Conductus'
technology as invited speakers at conferences worldwide.
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
39
<PAGE>
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.
40
<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 a Vice President and Chief
Financial Officer since April 1994. From May 1993 through January 1994, 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 in several management and accounting positions. 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
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<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. Mr. Shoch also is a director of Remedy Corporation, a client/server
software company, and Red Brick Systems, Inc., a client/server database
management software 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. 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
"Certain Transactions -- Relationship with H-P" for additional information about
the relationship between Conductus and H-P.
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. Since 1985, Mr. Cooper has served as the Chairman of
Dyna, Inc., a consulting firm. 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 also is a
director of Spectrian Corporation, a manufacturer of amplification hardware for
communications systems. Mr. Cooper earned a B.S. and M.S. in electrical
engineering from the Illinois Institute of Technology.
MR. SALDICH has served as 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
also is a director of 3Com Corp., a manufacturer of computer networking
hardware. Mr. Saldich earned a B.S. in chemical engineering from Rice University
and an M.B.A. from Harvard University.
MR. SUN has served as director of the Company since its inception in 1987.
Mr. Sun has been at Venrock Associates, a venture capital firm, since 1979.
Previously, he was employed by H-P, 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 an M.B.A. from
Harvard University.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table provides a summary of the compensation earned by the
Company's Chief Executive Officer and each of its other three most highly
compensated executive officers as of the end of the Company's fiscal year whose
compensation was in excess of $100,000 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
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
----------------------------------- UNDERLYING 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. All other compensation relates to Mr. Zauderer's
severance package.
43
<PAGE>
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 (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) (2) DATE 5% 10%
- ----------------------------- --------------- ------------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy........... -- -- -- -- -- --
Duncan J. MacMillan.......... -- -- -- -- -- --
Randy W. Simon............... 8,000 3.38% $ 4.9375 1/23/05 $ 24,841 $ 62,953
William J. Tamblyn........... 40,000 16.89% 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 from the vesting date. The options
were granted January 24, 1995, and began vesting on January 1, 1995.
(2) 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.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. 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. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.
44
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning option 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
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END (1)(2) FISCAL 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 and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.
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. Under the
1992 Stock Option/Stock Issuance Plan (the "1992 Plan"), upon the occurrence of
a merger, reverse merger or sale of all or substantially all of the assets of
the Company, outstanding options held by the Chief Executive Officer and the
Company's other executive officers will automatically accelerate and may be
exercised as fully vested shares, unless such options are assumed by the
successor corporation. In addition, the Compensation Committee has the authority
as Plan Administrator of the 1992 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
45
<PAGE>
predecessor plan, in the event that a Change in Control (as hereinafter defined)
occurs or in the event that their employment were to be terminated (whether
involuntarily or through a forced resignation) following a Change in Control. A
Change in Control is 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 1992 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which key 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, subject to applicable
law, 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 January 1, 1994.
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 purchased shares. The
Compensation Committee may also permit the optionee to pay the exercise price
through a promissory note or installment payments 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
cash-out 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.
46
<PAGE>
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 Predecessor Plans) 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-year
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
On August 1, 1994, the Company adopted 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 for more than 5 months
per calendar year 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 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.
47
<PAGE>
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 June 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"), which agreement is subject to earlier
termination by H-P if H-P's ownership of the Company's stock falls below 7%.
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
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
and three years after other confidential information is disclosed to H-P, 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.
48
<PAGE>
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.
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.
49
<PAGE>
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, 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.
Cooper, 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."
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 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 current directors, (iii) each of the Named
Officers and (iv) all current officers and directors as a group.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1)(2)(3) OFFERING OFFERING
- ----------------------------------------------------------------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Hewlett-Packard Company ..................................................... 695,312 12.1% 10.3%
300 Hanover Street
Palo Alto, CA 94304
Vanguard Explorer Fund, Inc. (4) ............................................ 400,000 7.0 5.9
11 East Chase Street, Suite 9-E
Baltimore, MD 21202-0000
Asset Management Associates 1984 (5) ........................................ 351,581 6.1 5.2
2275 East Bayshore Road
Suite 150
Palo Alto, CA 94303
Venrock Associates and Venrock Associates II, L.P. (6) ...................... 351,581 6.1 5.2
755 Page Mill Road
Suite A230
Palo Alto, CA 94304
John F. Shoch (7)............................................................ 380,393 6.6 5.6
Anthony Sun (8).............................................................. 371,269 6.5 5.5
Richard W. Anderson (9)...................................................... -- -- --
Martin Cooper (10)........................................................... 15,000 * *
Robert J. Saldich (11)....................................................... 15,000 * *
Charles E. Shalvoy (12)...................................................... 260,895 4.4 3.7
Duncan J. MacMillan (13)..................................................... 102,665 1.8 1.5
Randy W. Simon (14).......................................................... 73,308 1.3 1.1
William J. Tamblyn (15)...................................................... 63,923 1.1 *
Henry Zauderer (16).......................................................... -- -- --
All directors and officers as a group
(9 persons) (17)............................................................ 1,282,453 20.4 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."
51
<PAGE>
(4) This information is based solely upon a Schedule 13G filed on February 2,
1996.
(5) 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.
(6) Includes 351,581 shares held by Venrock Associates and Venrock Associates
II, L.P. Mr. Sun, a director of the Company, is a general partner of Venrock
Associates and is affiliated with Venrock Associates II, L.P. Mr. Sun
disclaims beneficial ownership of the shares held by Venrock Associates and
Venrock Associates II, L.P., 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.
(7) Includes 6,000 shares held and 22,812 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.
(8) Includes 19,688 shares in the form of an immediately exercisable option
held by Mr. Sun and 351,581 shares held by Venrock Associates and Venrock
Associates II, L.P., as to which Mr. Sun disclaims beneficial ownership
except to the extent of his pecuniary interest therein.
(9) 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.
(10) Includes 15,000 shares in the form of an immediately exercisable option
held by Mr. Cooper.
(11) Includes 15,000 shares in the form of an immediately exercisable option
held by Mr. Saldich.
(12) 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.
(13) 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.
(14) 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.
(15) Includes 3,923 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.
(16) 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 March 31, 1996.
(17) Includes 552,899 shares in the form of options exercisable at March 31,
1996. See Notes (7) through (15).
52
<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) 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. See " -- Antitakeover
Effects of Provisions of the Restated Certificate of Incorporation and Bylaws
and of Delaware Law -- Restated Certificate of Incorporation." 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 have an adverse effect
on 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 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 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
53
<PAGE>
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
Securities Act. Under the terms of the Registration Rights Agreement, if the
Company proposes to register any of its securities under the Securities 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 "Consultant Securities"), are
entitled to notice of such registration and are entitled to include their
Registrable Securities and/or Consultant Securities therein ("piggyback
registration"). Holders of the Registrable Securities and Consultant Securities
waived their rights under the Registration Rights Agreement to piggyback
registration in connection with this offering. Beginning four months after the
effective date of this offering 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 Securities Act with
respect to their Registrable Securities and the Company is required to use its
best efforts
54
<PAGE>
to effect such registration ("requested registration"). In addition, upon
qualification of the Company to file registration statements on Form S-3 under
the Securities 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 Securities 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
and piggyback registrations 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 Securities Act, own a total of 1,398,474 shares
of Registrable Securities: H-P owns 695,312 shares, Asset Management Associates
1984 owns 351,581 shares and Venrock Associates together with Venrock Associates
II, L.P. 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, 5,308,123 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 2,808,123 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 1,424,866 shares are held by persons who may be
deemed 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
1,424,866 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 1,424,866 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.
55
<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, as amended ("Exchange Act"). 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 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 Tucker
Anthony Incorporated, as Representative of the
56
<PAGE>
Underwriters, issue, offer, agree to sell, sell, grant any option for the sale
of, transfer or otherwise dispose of any shares of Common Stock other than
pursuant to currently outstanding options, warrants or convertible securities
(other than employee stock options and Common Stock currently authorized under
the Company's 1992 Stock Option/Stock Issuance Plan and Employee Stock Purchase
Plan). The Company's officers, directors and certain stockholders have agreed
that during the 90-day period commencing on the date hereof they will not,
without the prior written consent of Tucker Anthony Incorporated, as
Representative of the Underwriters, offer, pledge, contract to sell, sell, grant
any option for the sale of, transfer or otherwise dispose of any shares of
Common Stock other than gifts or transfers by will or intestacy to immediate
family members, shareholders of a corporate stockholder or partners of a
stockholder that is a partnership, provided that the transferee agrees 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, Smith, Edell,
Welter & Schmidt, P.A., 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."
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
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. 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.
57
<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 AFTER MARCH 31, 1996 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 AFTER MARCH 31, 1996 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 AFTER MARCH 31, 1996 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 AFTER MARCH 31, 1996 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 AFTER MARCH 31, 1996 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 AFTER MARCH 31, 1996 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 AFTER MARCH 31, 1996 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 $1,643,000 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 AFTER MARCH 31, 1996 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 the parties.
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 AFTER MARCH 31, 1996 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 AFTER MARCH 31, 1996 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 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 AFTER MARCH 31, 1996 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 AFTER MARCH 31, 1996 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>
[CONDUCTUS LOGO]
<TABLE>
<S> <C>
"PICTURE OF SPUTTER
SYSTEM" "CAD DESIGN"
"ELECTRONICS" "CRYOCOOLER"
</TABLE>
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.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 13
Price Range of Common Stock and Dividend
Policy........................................ 13
Capitalization................................. 14
Dilution....................................... 15
Selected Financial Data........................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business....................................... 22
Management..................................... 40
Certain Transactions........................... 47
Principal Stockholders......................... 50
Description of Capital Stock................... 51
Shares Eligible for Future Sale................ 53
Underwriting................................... 54
Legal Matters.................................. 55
Experts........................................ 55
Available Information.......................... 55
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
[CONDUCTUS 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, the NASD filing fee and the Nasdaq National Market
listing fee.
<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
II-1
<PAGE>
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.
(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.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
1.1- Form of Underwriting Agreement dated June , 1996.
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.
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, as amended by the
Amendment and Waiver Agreement dated May 14, 1996 among Registrant and certain investors.
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.
10.5* 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 Registrant, TRW, H-P, Stanford University and University of
California, Berkeley, as amended by the letter dated November 12, 1992 from H-P to Registrant.
10.7.1****+ Joint Development and Licensing Agreement dated August 31, 1994 between the Registrant and Varian.
10.7.2Q Joint Development Agreement dated December 14, 1995 between the Registrant and Siemens
Aktiengesellschaft Medical Engineering Group.
10.7.3+Q Superconducting Filter Technology Joint Development Agreement dated April 25, 1996 between the
Registrant and Lucent Technologies Inc.
10.7.4- Collaboration Agreement between Registrant and CTI and Agreement for Joint Development Project for
Cryogenic Interconnect Package for NMR Probe between Registrant and CTI, both dated September 19,
1995.
10.7.5- High Temperature Superconductor Thin-Film Manufacturing Alliance Agreement among Registrant,
Superconductor Technologies, Inc., Stanford University, Georgia Research Corporation, Microelectronic
Control and Sensing Incorporated, IBIS, Focused Research and BDM Federal dated November 17, 1995.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
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.
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, as amended.
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 Zauderer.
10.28*** Conductus, Inc. 1994 Employee Stock Purchase Plan.
10.29***** Loan Modification Agreement dated March 8, 1996 between Registrant and Silicon Valley Bank modifying
the Business Loan Agreement dated August 15, 1994.
10.30- Loan Modification Agreements dated August 15, 1995 and June 10, 1996, respectively, between
Registrant and Silicon Valley Bank, each modifying the Business Loan Agreement dated August 15, 1994.
11.1Q Statements of computation of loss per share.
21.1* Subsidiary of the Registrant.
23.1 Consent of Independent Accountants. (See Page II-8).
23.2 Consent of Patent Counsel. (See Page II-9).
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.
II-4
<PAGE>
** 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.
Q Incorporated herein by reference from the same numbered exhibit filed with
the Company's Registration Statement on Form S-1 (Number 333-3815) on May
10, 1996.
*****Incorporated herein by reference from the same numbered exhibit filed with
the Company's 1995 Annual Report on Form 10-K.
- - Filed herewith.
(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.
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 Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, State of
California, on this 15th day of June, 1996.
CONDUCTUS, INC.
By: /s/ WILLIAM J. TAMBLYN
-----------------------------------
William J. Tamblyn
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
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) June 15, 1996
/s/ WILLIAM J. TAMBLYN
--------------------------------- Vice President, Chief Financial Officer (Principal
William J. Tamblyn Accounting Officer) June 15, 1996
*/s/ JOHN F. SHOCH
--------------------------------- Chairman of the Board of Directors
John F. Shoch, Ph.D. June 15, 1996
*/s/ ANTHONY SUN
--------------------------------- Director
Anthony Sun June 15, 1996
--------------------------------- Director
Richard W. Anderson
*/s/ MARTIN COOPER
--------------------------------- Director
Martin Cooper June 15, 1996
--------------------------------- Director
Robert J. Saldich
*By: /s/ WILLIAM J. TAMBLYN
----------------------------
William J. Tamblyn
(ATTORNEY-IN-FACT)
</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>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
1.1- Form of Underwriting Agreement dated June , 1996.
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.
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, as amended by the
Amendment and Waiver Agreement dated May 14, 1996 among Registrant and certain investors.
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.
10.5* 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 Registrant, TRW, H-P, Stanford University and University of
California, Berkeley, as amended by the letter dated November 12, 1992 from H-P to Registrant.
10.7.1****+ Joint Development and Licensing Agreement dated August 31, 1994 between the Registrant and Varian.
10.7.2Q Joint Development Agreement dated December 14, 1995 between the Registrant and Siemens
Aktiengesellschaft Medical Engineering Group.
10.7.3+Q Superconducting Filter Technology Joint Development Agreement dated April 25, 1996 between the
Registrant and Lucent Technologies Inc.
10.7.4- Collaboration Agreement between Registrant and CTI and Agreement for Joint Development Project for
Cryogenic Interconnect Package for NMR Probe between Registrant and CTI, both dated September 19,
1995.
10.7.5- High Temperature Superconductor Thin-Film Manufacturing Alliance Agreement among Registrant,
Superconductor Technologies, Inc., Stanford University, Georgia Research Corporation, Microelectronic
Control and Sensing Incorporated, IBIS, Focused Research and BDM Federal dated November 17, 1995.
10.8* Master Equipment Lease Agreement dated November 18, 1988 between the Registrant and Comdisco, as
amended to date.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
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.
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, as amended.
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 Zauderer.
10.28*** Conductus, Inc. 1994 Employee Stock Purchase Plan.
10.29***** Loan Modification Agreement dated March 8, 1996 between Registrant and Silicon Valley Bank modifying
the Business Loan Agreement dated August 15, 1994.
10.30- Loan Modification Agreements dated August 15, 1995 and June 10, 1996, respectively, between
Registrant and Silicon Valley Bank, each modifying the Business Loan Agreement dated August 15, 1994.
11.1Q Statements of computation of loss per share.
21.1* Subsidiary of the Registrant.
23.1 Consent of Independent Accountants. (See Page II-8).
23.2 Consent of Patent Counsel. (See Page II-9).
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.
<PAGE>
**** 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.
Q Incorporated herein by reference from the same numbered exhibit filed with
the Company's Registration Statement on Form S-1 (Number 333-3815) on May
10, 1996.
*****Incorporated herein by reference from the same numbered exhibit filed with
the Company's 1995 Annual Report on Form 10-K.
- - Filed herewith.
<PAGE>
CONDUCTUS, INC.
COMMON STOCK
(PAR VALUE $.0001 PER SHARE)
UNDERWRITING AGREEMENT
Boston, Massachusetts
June __, 1996
TUCKER ANTHONY INCORPORATED
PENNSYLVANIA MERCHANT GROUP LTD.
As Representatives of the
Several Underwriters
c/o Tucker Anthony Incorporated
One Beacon Street
Boston, Massachusetts 02108
Ladies and Gentlemen:
Conductus, Inc., a Delaware corporation (the "Company") confirms its
agreement with Tucker Anthony Incorporated ("Tucker Anthony") and Pennsylvania
Merchant Group Ltd. ("PMG") and each of the other underwriters, if any, named in
Schedule A hereto (collectively, the "Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in SECTION 11), for
whom Tucker Anthony and PMG are acting as representatives (in such capacity,
Tucker Anthony and PMG shall hereinafter be referred to as the
"Representatives"), with respect to the sale by the Company and the purchase by
the Underwriters, acting severally and not jointly, of an aggregate of 1,000,000
shares (collectively, the "Firm Shares") of the Company's common stock, $.0001
par value per share ("Common Stock"), and with respect to the grant by the
Company to the Underwriters, acting severally and not jointly, of the option
described in SECTION 2(b) hereof to purchase from the Company all or any part of
150,000 additional shares of Common Stock for the purpose of covering over-
allotments, if any. The Firm Shares and all or any part of the shares of Common
Stock subject to the option described in SECTION 2(b) hereof (the "Option
Shares") are hereinafter collectively referred to as the "Shares."
<PAGE>
I. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with, each of the
Underwriters as of the date hereof, and as of the Closing Date, as defined in
SECTION 2(c) hereof, and the Option Closing Date, as defined in SECTION 2(b)
hereof, if any, as follows:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and an amendment or amendments
thereto, on Form S-1 (No. 333-3815), including any related preliminary
prospectus ("Preliminary Prospectus"), for the registration of the Shares under
the Securities Act of 1933, as amended (the "Act"), which registration statement
and amendment or amendments have been prepared by the Company in conformity with
the requirements of the Act, and the Rules and Regulations (as defined below);
such registration statement has become effective . The Company has prepared and
proposes to file with the Commission a final prospectus, copies of which have
heretofore been delivered to you. The Company shall not, without your prior
written consent, which consent shall not be unreasonably withheld, file any
post-effective amendment to such registration statement or any supplement or
amendment to any prospectus or file a final prospectus with the Commission
pursuant to Rule 424(b) of the Rules and Regulations. Except as the context may
otherwise require, such registration statement, as amended, on file with the
Commission at the time the registration statement became effective (including
the prospectus, financial statements, schedules, exhibits and all other
documents filed as a part thereof), and all information (if any ) deemed to be a
part thereof as of such time pursuant to paragraph (b) of Rule 430A of the
Regulations, is hereinafter called the "Registration Statement," and the form of
prospectus contained in the Registration Statement or, if Rule 430A is relied
upon, in the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes hereof,
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or part thereof and no proceedings for
a stop order have been instituted or are pending or, to the best knowledge of
the Company, threatened. The Preliminary Prospectus, at the time of filing
thereof, conformed in all material respects with the requirements of the Act and
the Rules and Regulations, and the Preliminary Prospectus, at the time of filing
thereof, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriters by any Underwriter
expressly for use in such Preliminary Prospectus. When the Registration
Statement became effective and at all times subsequent thereto up to the Closing
Date (as hereinafter defined) and each Option Closing Date (as hereinafter
defined), if any , and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Underwriters or a
dealer: (i) the Registration
<PAGE>
Statement and the Prospectus contain and will contain all material information
that is required to be stated therein in accordance with the Act and the Rules
and Regulations; and does and will in all material respects conform to the
requirements of the Act and the Rules and Regulations; and (ii) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, contains or will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, PROVIDED, HOWEVER, that this representation and warranty
does not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
expressly for use in the Registration Statement or Prospectus or any amendment
thereof or supplement thereto.
(c) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of Delaware. There are no direct or
indirect subsidiaries (as defined in Rule 405 of the Rules and Regulations) of
the Company. Except as disclosed in the Prospectus, the Company owns, directly
or indirectly, no material equity interest in any corporation, partnership,
trust, joint venture or other business entity. The Company is duly qualified
and licensed and in good standing as a foreign corporation in each jurisdiction
in which its ownership or leasing of any properties or the character of its
operations requires such qualification or licensing, except where the failure to
be so qualified would not have a material adverse effect in the condition,
financial or otherwise, or in the business affairs, position, prospects, value,
operation, properties, business, or results of operation of the Company whether
or not arising in the ordinary course of business ("Material Adverse Effect").
The Company has all requisite power and authority (corporate, partnership and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
the United States Environmental Protection Agency (the "EPA") and those other
officials and bodies having jurisdiction over similar matters), to own or lease
its properties and conduct its business as described in the Prospectus
(collectively, "Government Approvals"), except such Government Approvals which
the failure to obtain would not have a Material Adverse Effect; the Company is
and has been doing business in compliance with all such Government Approvals,
except where the failure to so comply would not have a Material Adverse Effect;
and the Company has received no notice of proceedings relating to the revocation
or modification of any such Government Approvals. The disclosures in the
Registration Statement concerning the effects of federal, state, local, and
foreign laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and do not
omit to state a material fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made.
(d) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" based upon
the assumptions set forth therein and has the pro forma as adjusted
capitalization set forth therein based upon the assumptions set forth therein,
and the Company is not a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement and as described in the
Prospectus or as contemplated by
<PAGE>
Section 1(n) hereof. The Shares and all other securities issued or issuable by
the Company conform in all material respects to all statements with respect
thereto contained in the Registration Statement and the Prospectus. All issued
and outstanding securities of the Company have been duly authorized and validly
issued and all issued and outstanding shares of Common Stock are fully paid and
non-assessable. The Shares are not and will not be subject to any preemptive or
other similar rights granted by the Company to any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the terms
hereof, will be validly issued, fully paid and non-assessable and will conform
to the description thereof contained in the Prospectus; the holders thereof will
not be subject to any liability solely as such holders; all corporate action
required to be taken for the authorization, issue and sale of the Shares has
been duly and validly taken; and the certificates representing the Shares will
be in due and proper form.
(e) The financial statements of the Company, together with the notes
and schedules thereto, included in the Registration Statement, each Preliminary
Prospectus and the Prospectus fairly present the financial position and the
results of operations, changes in stockholders' equity and changes in cash flows
of the Company at the respective dates and for the respective periods to which
they apply; and each of such financial statements has been prepared in
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved. Except as
contemplated by the Prospectus, there has been no change or development
involving a Material Adverse Effect since the date of the financial statements
included in any of the Prospectus and the Registration Statement, and the
outstanding debt, the property, both tangible and intangible, and the business
of the Company, conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus. The Company's
internal accounting controls are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
(f) Coopers & Lybrand L.L.P., whose reports are filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(g) Except as disclosed in the Prospectus, the Company (i) has paid
all federal, state, local and foreign taxes for which it is liable and which are
due and payable, including, but not limited to, withholding taxes and amounts
payable under Chapters 21 through 24 of the Internal Revenue Code of 1986, as
amended (the "Code"), and has furnished all information returns it is required
to furnish pursuant to the Code and (ii) does not have any material tax
deficiency or claims outstanding, proposed or assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Shares, (ii) the purchase by the Underwriters of the Shares,
(iii) the consummation by the Company of any of its obligations under this
Agreement, or (iv) resales of the Shares by the Underwriters in connection with
the distribution contemplated hereby.
<PAGE>
(i) The Company maintains insurance of the types and in the amounts
which it reasonably believes to be adequate for its business, all of which
insurance is in full force and effect.
(j) Except as described in the Prospectus, there is no action, suit,
litigation or governmental proceeding (including, without limitation, any
action, suit, litigation or governmental proceeding brought by or before or
otherwise involving the United States Patent and Trademark Office (the "PTO"),
the EPA, or any other governmental agency or instrumentality having jurisdiction
over similar matters), domestic or foreign, pending or threatened against (or
presently existing or previously occurring facts or circumstances that provide a
basis for the same), or involving the properties or business of the Company that
(i) questions the validity of the capital stock of the Company or this Agreement
or of any action taken or to be taken by the Company pursuant to or in
connection with this Agreement, (ii) is required to be disclosed in the
Registration Statement that is not so disclosed (and such proceedings, if any,
as are summarized in the Registration Statement are accurately summarized in all
material respects), (iii) would have a Material Adverse Effect or (iv) relates
to or affects the Company or processes or products which the Company designed,
developed, uses, manufactures or markets, or with respect to which the Company
holds the right to license to others which, if adversely determined, would have
a Material Adverse Effect.
(k) The Company has full legal right, power and authority to enter
into this Agreement and to consummate the transactions provided for herein; and
this Agreement has been duly authorized, executed and delivered by the Company.
This Agreement, assuming it has been duly authorized, executed and delivered by
the Underwriters, constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and none of the Company's
execution or delivery of this Agreement, its performance hereunder, its
consummation of the transactions contemplated herein, or the conduct of its
business as described in the Registration Statement, the Prospectus and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any material breach or violation of any of the terms
or provisions of, or constitutes or will constitute a material default under, or
result in the creation or imposition of any material lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction on equity of
any kind whatsoever upon, any property or assets (tangible or intangible) of the
Company pursuant to the terms of (i) the corporate charter or by-laws of the
Company, (ii) any license, contract, indenture, mortgage, deed of trust, voting
trust agreement, stockholders agreement, note, loan or credit agreement or any
other agreement or instrument to which the Company is a party or by which it is
or may be bound or to which any of its properties or assets (tangible or
intangible) is or may be subject, or (iii) to the Company's knowledge, any
statute, judgment, decree, order, rule or regulation applicable to the Company
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over
<PAGE>
environmental or similar matters), domestic or foreign, having jurisdiction over
the Company or any of its activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Shares pursuant to the Prospectus
and the Registration Statement, or the performance of this Agreement and the
transactions contemplated hereby, except such as have been or may be obtained
under the Act or may be required under state securities or Blue Sky laws in
connection with the Underwriters' purchase and distribution of the Shares.
(m) All executed agreements or copies of executed agreements filed
as exhibits to the Registration Statement (including those incorporated by
reference) to which the Company is a party or by which it may be bound or to
which its assets, properties or business may be subject have been duly and
validly authorized, executed and delivered by the Company, and, assuming due
authorization, execution and delivery by the other parties thereto, constitute
the legal, valid and binding agreements of the Company enforceable against the
Company in accordance with their respective terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law). The descriptions in the Registration Statement of
contracts and other documents are accurate in all material respects and fairly
present the information required to be shown with respect thereto by Form S-1,
and there are no contracts or other documents that are required by the Act to be
described in the Registration Statement or filed as exhibits to the Registration
Statement that are not described or filed as required, and the exhibits that
have been filed are complete and correct copies of the documents of which they
purport to be copies.
(n) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money (except for (A) the issuance of shares of Common
Stock upon the exercise of previously granted options, and (B) borrowings made
pursuant to the Company's existing credit agreements), (ii) entered into any
transaction which would have a Material Adverse Effect, or (iii) declared or
paid any dividend or made any other distribution on or in respect of its capital
stock.
(o) No material default exists in the due performance and observance
of any term, covenant or condition of any license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company is a party or by which the
Company may be bound or to which any of the property or assets (tangible or
intangible) of the Company is subject or affected.
<PAGE>
(p) The Company has a generally satisfactory employer-employee
relationship with its employees and is in compliance with all federal, state,
local, and, where applicable, foreign, laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to comply would not have a Material
Adverse Effect. There are no pending investigations involving the Company by
the United States Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state, local or foreign laws
and regulations. There is no unfair labor practice charge or complaint against
the Company pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company, or any predecessor entity, and no such strike,
picketing, boycott, dispute, slowdown or stoppage has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. There are no expired or existing collective
bargaining agreements of the Company.
(q) The Company has not incurred any material liability arising under
or as a result of the application of the provisions of the Act.
(r) Except as disclosed in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" (collectively, the "ERISA Plans") as such terms are defined
in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). The Company does not
maintain or contribute, now or at any time previously, to a "defined benefit
plan," as defined in Section 3(35) of ERISA. The Company has never completely
or partially withdrawn from a "multiemployer plan."
(s) The Company is in compliance with all applicable existing
federal, state, local and foreign laws and regulations relating to the
protection of human health or the environment or imposing liability or requiring
standards of conduct concerning any Hazardous Materials ("Environmental Laws"),
except for such instances of noncompliance which, either singly or in the
aggregate, would not have a Material Adverse Effect. The term "Hazardous
Material" means (i) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
(ii) any "hazardous waste" as defined by the Resource Conservation and Recovery
Act, as amended, (iii) any petroleum or petroleum product, (iv) any
polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous,
dangerous or toxic chemical, material, waste or substance regulated under or
within the meaning of any other Environment Law.
(t) The Company has complied with all provisions of Section 517.075
Florida Statutes (Chapter 92-198; Laws of Florida).
(u) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
<PAGE>
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) The Company has filed an application to list the Shares on the
Nasdaq National Market and received notification that the listing has been
approved subject to the notice of issuance of the Stock.
(w) The Company has not distributed and will not distribute (within
the meaning of Rule 140 of the Rules and Regulations under the Securities Act)
any offering material in connection with the offering and sale of the Shares,
other than the Prospectus, any Preliminary Prospectus, the Registration
Statement and other materials permitted by the Securities Act.
(x) No holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the Company
exercisable for or convertible or exchangeable for securities of the Company
have the right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the Company
within 90 days of the date hereof or to require the Company to file a
registration statement under the Act during such 90-day period.
(y) The Company has taken or will take, directly or indirectly
(except for any action that may be taken by the Underwriters), no action
designed to or which has constituted or which might reasonably be expected to
cause or result in, under the Exchange Act, or otherwise, stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares or otherwise.
(z) Except to the extent disclosed in the Prospectus, (i) the Company
owns or possesses or has a license or other right to use, the patents, patent
rights, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), technology, trademarks (including, without limitation,
"Conductus," the Conductus logo, "Mr. SQUID" and "iMAG"), service marks and
trade names (including without limitation, "xMAG"), together with all
applications for any of the foregoing, and (ii) the Company has not received any
notice of infringement of or conflict with asserted rights of others with
respect to any of the foregoing and is not aware of any basis for such a claim.
(aa) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it free and clear of all material
liens, charges, claims, encumbrances, pledges, security interests, defects, or
other restrictions on equity of any kind whatsoever, other than (i) those
referred to in the Prospectus or (ii) liens for taxes not yet due and payable.
<PAGE>
(bb) Except as described in the Prospectus under "Underwriting" and on
the cover page thereof, there are no claims, payments, issuances, arrangements
or understandings for services in the nature of a finder's or origination fee
with respect to the sale of the Shares hereunder or any other arrangements,
agreements, understandings, payments or issuance with respect to the Company or
any of its officers, directors, employees or affiliates that may affect the
Underwriters' compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD").
(cc) Quotations and last sale data with respect to the Company's
Common Stock are currently reported on the Nasdaq National Market under the
symbol "CDTS" and the Company knows of no currently existing reason or set of
facts which is likely to result in the inability or refusal to quote the Common
Stock or the Shares.
(dd) The Company is not an "investment company" or an "affiliated
person" or "promoter" of, or "principal underwriter" for, an "investment
company", as such terms are defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), or subject to regulation under the 1940 Act.
(ee) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to the Underwriters' Counsel (as hereinafter
defined) shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions herein set
forth, the Company agrees to sell 1,000,000 Firm Shares to the several
Underwriters and each Underwriter, severally and not jointly, agrees to purchase
that number of Firm Shares set forth in SCHEDULE A opposite its name plus any
additional number of Firm Shares that such Underwriter may become obligated to
purchase pursuant to the provisions of SECTION 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained and upon not less than two business
days' notice from the Representatives of the Underwriters, the Company grants to
the Underwriters an option to purchase up to 150,000 Option Shares. Such option
is granted solely for the purpose of covering over-allotments in the sale of
Firm Shares the option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters to the Company, setting forth the
number of Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be delivered.
Option Shares shall be purchased severally for the account of the Underwriters
in proportion to the number of Firm Shares set forth opposite the name of such
Underwriters in Schedule A hereto. The time and date of delivery of any of the
Option Shares is hereinafter referred to as an
<PAGE>
"Option Closing Date"). The price of both the Firm Shares and any Option Shares
shall be $____ per share.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares and the Option Shares shall be made on each of the Closing
Date and the Option Closing Date, respectively, by wire transfer(s) in next day
funds, payable to an account of the Company specified in writing to the
Representatives, upon delivery of certificates (in form and substance
satisfactory to the Representatives) representing such securities to the
Representatives. Delivery and payment for the Firm Shares shall be made at
10:00 a.m. (Eastern Time) on the third business day following the public
offering, or at such other time and date as shall be agreed upon by the
Representatives and the Company. (The time and date of payment for and delivery
of the Firm Shares being herein called the "Closing Date"). In addition, in the
event that any or all of the Option Shares are purchased by the Underwriters,
payment of the purchase price for, and delivery of certificates for, such Option
Shares shall be made at the above mentioned office of Wilson Sonsini Goodrich &
Rosati, P.C. or at such other place as shall be agreed upon by the
Representatives and the Company. Certificates for the Firm Shares and the
Option Shares, if any, shall be in definitive, fully registered form, shall bear
no restrictive legends and shall be in such denominations and registered in such
names as the Representatives may request in writing at least two (2) business
days prior to the Closing Date or the relevant Option Closing Date, as the case
may be. The certificates for the Firm Shares and the Option Shares, if any,
shall be made available to the Representatives at such office or such other
place as the Representatives may designate for inspection and packaging not
later than 9:30 a.m. (Eastern Time) on the last business day prior to the
Closing Date or the relevant Option Closing Date, as the case may be.
3. PUBLIC OFFERING OF THE SHARES.
As soon after the Registration Statement becomes effective as the
Representatives deem advisable, the Underwriters shall make a public offering of
the Shares at the price and upon the other terms set forth in the Prospectus.
4. COVENANTS OF THE COMPANY.
The Company agrees with each of the Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as practicable; it will notify you, promptly after it
shall receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
<PAGE>
is declared effective by the Commission; if for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel of the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable so as to comply with
all applicable laws and regulations (including, without limitation, Section 11
under the Act and Rule 10b-5 under the Exchange Act) in connection with the
distribution of the Shares by the Underwriters; and it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; in case any Underwriter is required so as to comply with
all applicable laws and regulations (including, without limitation, Section 11
under the Act and Rule 10b-5 under the Exchange Act) to deliver a prospectus
nine months or more after the effective date of the Registration Statement in
connection with the sale of the Shares, it will prepare promptly upon request,
but at the expense of such Underwriter, such amendment or amendments to the
Registration Statement and such prospectus or prospectuses as may be necessary
to permit compliance with the requirements of Section 10(a)(3) of the Act. The
Company will (i) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Rules and Regulations
is followed, to prepare and timely file with the Commission under Rule 424(b) of
the Rules and Regulations a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and Regulations and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy at a reasonable time prior to the proposed filing or
to which the Representatives shall have reasonably objected in writing or which
is not in compliance with the Rules and Regulations. The Company will further
advise the Representatives promptly (i) of any request of the commission for
amendment of the Registration Statement or for supplement to the Prospectus or
for any additional information, or (ii) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such stop
order preventing or suspending the use the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(b) If during the period in which a prospectus is required by law to
be delivered by an Underwriter or dealer, any event shall occur as a result of
which, in the judgment of the Company or in the reasonable opinion of the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or, if
it is necessary at any time to amend or supplement the Prospectus to comply with
any law, the
<PAGE>
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus.
(c) The Company shall endeavor in good faith, in cooperation with the
Representatives to qualify the Shares for offering and sale under the securities
laws of such jurisdictions as you may designate and to continue such
qualifications in effect for so long as may be reasonably required for purposes
of the distribution of the Shares, except that the Company shall not be required
in connection therewith or as a condition thereof to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction. In each jurisdiction in which the Shares shall have been
qualified as above provided, the Company will use all reasonable efforts to make
and file such statements and reports at such times in each year as are or may be
reasonably required by the laws of such jurisdiction to continue such
qualification.
(d) The Company will furnish to you, as soon as available, copies of
the Registration Statement (three of which will be signed and which will include
all exhibits), each Preliminary Prospectus, the Prospectus and any amendment or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request.
(e) The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than the 45th day following the
end of the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earning statement (which will
be in reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and covering a twelve-month period beginning after
the effective date of the Registration Statement.
<PAGE>
(f) During a period of five years after the date hereof, the Company
will furnish to its stockholders, to the extent required by applicable laws or
Commission Rules or Regulations, as soon as practicable after the end of each
respective period, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
earnings for each of the first three quarters of the fiscal year, and will
furnish to you, upon request (i) concurrently with furnishing such reports to
its stockholders, statements of income of the Company for each of the first
three quarters in the form furnished to the Company's stockholders; (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flow of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants; (iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders; (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the NASD; and (v) any additional
information of a public nature concerning the Company or its subsidiaries or its
business which you may reasonably request. During such five year period, if the
Company shall have active subsidiaries, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company and
its subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If at any time during the 90-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the Common Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
consult with you concerning the substance of, and disseminate a press release or
other public statement, reasonably satisfactory to you, responding to or
commenting on such rumor, publication or event.
(j) For a period ending 90 days from the effective date of the
Registration Statement, the Company will not, without your prior written
consent, issue, sell, offer or agree to sell, or otherwise dispose of, directly
or indirectly, any Common Stock, any options, rights or warrants with respect to
any shares of Common stock or any securities convertible into, exercisable for
or exchangeable for Common Stock other than (A) the sale of the Shares to be
sold by the Company and the Option Shares hereunder, (B) the Company's issuance
of options or Common Stock under the Company's currently authorized 1992 Stock
Option/Stock Issuance
<PAGE>
Plan and Employee Stock Purchase Plan and (C) the issuance of Common Stock upon
the exercise of warrants outstanding as of the date hereof and described in the
Prospectus.
5. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of counsel to the Underwriters, except as
provided in (iii), (v) and (vii) below) incident to the performance of the
obligations of the Company under this Agreement, including, without limitation,
(i) the fees and expenses of accountants and counsel for the Company, (ii) all
costs and expenses incurred in connection with the preparation, duplication,
printing, filing, delivery and mailing (including the payment of postage with
respect thereto) of the Registration Statement and the Prospectus and any
amendments and supplements thereto, (iii) all costs and expenses incurred in
connection with the printing, mailing and delivery of this Agreement, the
Selected Dealer Agreements, the Agreement Among Underwriters, Underwriters'
Questionnaires, Powers of Attorney, and related documents, including the cost of
all copies thereof and of the Preliminary Prospectuses and of the Prospectus and
any amendments thereof or supplements thereto supplied to the Underwriters in
quantities as hereinabove stated, (iv) the printing, engraving, issuance and
delivery of the Shares including any transfer or other taxes payable thereon,
(v) the qualification of the Shares under state or foreign securities or "Blue
Sky" laws and determination of the status of such securities under legal
investment laws, including the costs of printing and mailing the "Preliminary
Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal
Investments Survey," if any, and disbursements and fees of counsel in connection
therewith, (vi) fees and expenses of the Transfer Agent, (vii) fees and expenses
incurred in connection with the review by the NASD of certain of the matters set
forth in this Agreement, and (viii) the fees and expenses incurred in connection
with the listing of the Shares on the Nasdaq National Market and any other
exchange.
(b) If this Agreement is terminated by the Representatives in
accordance with the provisions of SECTION 6, SECTION 10(b) or SECTION 12, unless
the basis upon which the Representatives terminate this Agreement results from
the default or omission of any Underwriter, the Company shall reimburse and
indemnify the Underwriters for all of their reasonable out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters and any of
the "Blue Sky" fees and expenses identified in SECTION 5(a)(v) above. If the
transactions contemplated hereby are not consummated by reason of any failure,
refusal or inability on the part of the Company to perform any agreement on its
part to be performed hereunder or to fulfill any condition of the Underwriters'
obligations hereunder, or if the Company shall terminate the Agreement under
SECTION 10(a), the Company will reimburse the several Underwriters for all
reasonable out-of-pocket expenses (including reasonable fees and disbursements
of counsel for the several Underwriters and any of the "Blue Sky" fees and
expenses identified in SECTION 5(a)(v) above) incurred by the Underwriters in
investigating, preparing to market or marketing the Shares. Notwithstanding the
foregoing, the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS.
<PAGE>
The obligations of the Underwriters hereunder shall be subject to the
continuing accuracy of the representations and warranties of the Company herein
as of the date hereof and as of the Closing Date and each Option Closing Date,
if any, as if they had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the Closing Date or
Option Closing Date, if any, of the statements of officers of the Company made
pursuant to the provisions hereof; and the performance by the Company on and as
of the Closing Date and each Option Closing Date, if any, of its covenants and
obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., Eastern Time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representatives, which
consent shall not be unreasonably withheld, and, at the Closing Date and each
Option Closing Date, if any, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied with to the satisfaction of Underwriters'
Counsel. If the Company has elected to rely upon Rule 430A of the Rules and
Regulations, the price of the Shares and any other information previously
omitted from the effective Registration Statement pursuant to such Rule 430A
shall have been transmitted to the Commission for filing pursuant to Rule 424(b)
of the Rules and Regulations within the prescribed time period, and, prior to
the Closing Date, the Company shall have provided evidence satisfactory to the
Representatives of such timely filing, or a post-effective amendment providing
such information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact that, in the Representatives' opinion or in the opinion of Underwriters'
Counsel, is material, or omits to state a fact that, in the Representatives'
opinion or in the opinion of Underwriters' Counsel, is material and is required
to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact that, in the Representatives' opinion or in the opinion
of Underwriters' Counsel, is material, or omits to state a fact that, in the
Representatives' opinion or in the opinion of Underwriters' Counsel, is material
and is required to be stated therein or is necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(c) On or prior to the Closing Date and each Option Closing Date, if
any, the Representatives shall have received from Underwriters' Counsel, such
opinion or opinions with respect to the organization of the Company, the
validity of the Shares, the Registration Statement, the Prospectus and other
related matters as the Representatives reasonably may request and such counsel
shall have received such papers and information as they reasonably request to
enable them to pass upon such matters.
<PAGE>
(d) On the Closing Date, the Underwriters shall have received the
favorable opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, counsel to the Company, dated the Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel, to
the effect that:
(i) the Company (A) is validly existing as a corporation in good
standing under the laws of the State of Delaware, and (B) is duly qualified
and licensed and in good standing as a foreign corporation in those
jurisdictions set forth in an exhibit to such opinion, an officer of the
Company having furnished to such counsel a certificate annexed as an
exhibit to such opinion that such jurisdictions are the only jurisdictions
in which such corporation owns or leases properties or conducts business,
except where the failure to be so qualified, considering all such cases in
the aggregate, does not involve a material risk to the business,
properties, financial position or results of operations of the Company;
(ii) the Company has the corporate power or authority to own or
lease its properties and to conduct its business as described in the
Prospectus;
(iii) except as described in the Prospectus, to such counsel's
knowledge, the Company does not own a material interest in any corporation,
partnership, joint venture, trust or other business entity;
(iv) the authorized capital stock of the Company as of March 31,
1996 is as set forth in the Prospectus under the heading "Capitalization,"
subject to the assumptions set forth therein, and, except as provided for
in this Agreement and as described in the Prospectus, to such counsel's
knowledge, the Company is not a party to or bound by any instrument,
agreement or other arrangement providing (except for the options described
in the Prospectus) for it to issue any capital stock, rights, warrants,
options or other securities. All shares of Common Stock issued and
outstanding on the date hereof prior to the issuance of the Shares have
been duly authorized and validly issued and are fully paid and non-
assessable; and none of such shares were issued in violation of any
preemptive right. To such counsel's knowledge, the Firm Shares and the
Option Shares are not and will not be subject to any preemptive rights.
The Firm Shares and the Option Shares have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable; and the form of certificate
representing the Shares is in due and proper form;
(v) the Registration Statement is effective under the Act, and,
if applicable, filing of all pricing and other information has been timely
made in the appropriate form under Rule 430A of the Rules and Regulations,
and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceedings for that purpose have been instituted or threatened by the
Commission;
<PAGE>
(vi) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements thereto
(other than the financial statements and schedules and other financial data
included therein, as to which no opinion need be rendered) comply as to
form in all material respects with the requirements of the Act and the
Rules and Regulations. In addition, such counsel shall state that they know
of no contracts, leases or other documents of a character required to be
described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required;
(vii) (A) to such counsel's knowledge, there is not pending or
threatened against the Company, or involving any of its properties or
assets, any action, suit, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, that (x) is required to be disclosed in the
Registration Statement and is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
material respects), (y) questions the validity of the capital stock of the
Company or this Agreement or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement, or (z) except as
may be disclosed in the Registration Statement, may have a Material Adverse
Effect; and (B) no statute or regulation or legal or governmental
proceeding required to be described in the Prospectus is not described as
required;
(viii) the Company has full legal right, power and authority to
enter into this Agreement and to consummate the transactions provided for
herein; and this Agreement has been duly authorized, executed and delivered
by the Company. None of the Company's execution or delivery of this
Agreement, its performance hereunder, or its consummation of the
transactions contemplated herein, conflicts with or will conflict with or
results or will result in any material breach or violation of any of the
material terms or provisions of, or constitutes or will constitute a
material default under, or result in the creation or imposition of any
material lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction on equity of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company pursuant to the
terms of (A) the corporate charter or by-laws of the Company, (B) to such
counsel's knowledge, any voting trust agreement or any stockholders
agreement, or any material indenture, mortgage, deed of trust, note, loan
or credit agreement or other agreement or instrument to which the Company
is a party or by it may be bound or to which any of its properties or
assets (tangible or intangible) is or may be subject, or (C) to such
counsel's knowledge, any statute, rule, regulation or, any judgment, decree
or order applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body having
jurisdiction over the Company or any of its activities or properties
except, with respect to clause (C) only, where there would be no Material
Adverse Effect;
(ix) no consent, approval, authorization or order, and no filing
with, any federal or state court, regulatory body, government agency or
other body (other than such as have been effected under the Act and such as
may be required under Blue Sky
<PAGE>
laws, as to which no opinion need be rendered) is required in connection
with the issuance of the Shares pursuant to the Prospectus and the
Registration Statement, the performance of this Agreement and the
transactions contemplated hereby;
(x) to such counsel's knowledge, the Company is not in violation
of any term or provision of its Certificate of Incorporation or By-Laws;
(xi) the statements in the Prospectus under the captions
"Business - Strategic Alliances and Development Agreements"; "Management -
1992 Stock Option/Stock Issuance Plan"; "-Employee Stock Purchase Plan";
"-401(k) Profit Sharing Plan"; "-Limitation of Liability and
Indemnification Matters"; and "Description of Capital Stock" have been
reviewed by such counsel, and insofar as they refer to statements of law,
descriptions of statutes, contracts, licenses, rules or regulations or
legal conclusions, are correct in all material respects, except that, as
such counsel has not been involved in the negotiating of each of the
agreements described under the caption "Business-Strategic Alliances and
Development Agreements," this opinion regarding the statements under such
caption is based only on such counsel's review of documents and discussions
with the Company and does not extend to contracts with the U.S. government
or laws governing patents, copyrights, trademarks and other proprietary
rights;
(xii) except as disclosed in the Prospectus to such counsel's
knowledge, no person, corporation, trust, partnership, association or other
entity has the right to include and/or register any securities of the
Company in the Registration Statement (other than such rights which have
been waived), to require the Company to file any registration statement.
In rendering the foregoing opinions, such counsel shall not be required to
express any opinion as to the law of any jurisdiction other than the laws of
California, the corporate laws of Delaware and the federal laws of the United
States.
For purposes of any of the opinions to be rendered by such counsel pursuant
to this subsection (d) of SECTION 6, the term "to such counsel's knowledge,"
"known to us" and similar phrases with reference to matters of fact mean that
after examination of documents in such counsel's files and considering the
actual knowledge of the individual attorneys in such counsel's firm who have
given substantive attention to the public offering of the Shares by the Company
(but excluding any constructive or imputed notice of any information), such
counsel finds no reason to believe that any of such opinions is factually
incorrect. Beyond that, such counsel shall have made no independent factual
investigation for the purpose of rendering an opinion with respect to such
matters.
Such counsel shall also state that in addition to rendering legal advice
and assistance to the Company in the course of the preparation of the
Registration Statement and the Prospectus, involving, among other things,
discussions and inquiries concerning various legal matters and the review of
certain corporate records, documents and proceedings, it also participated in
conferences with certain officers and other representatives of the Company,
including its
<PAGE>
independent public accountants and with you and your counsel at which the
contents of the Registration Statement, the Prospectus and related matters were
discussed.
Such counsel shall further state that (i) as of the effective date of the
Registration Statement, the Prospectus and any amendments and supplements
thereto, complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations of the Commission thereunder
and (ii) although it has not independently checked or verified the accuracy,
completeness or fairness of the information contained in the Registration
Statement and the Prospectus (except with respect to matters expressly covered
above by its opinion), that based on its participation in the preceding
paragraph, it confirms that it has no reason to believe that (except for
financial statements as to which it expresses no belief) the Prospectus, the
Registration Statement and any amendments and supplement thereto, on the date
hereof, (A) contain any untrue statement of a material fact or omit to state any
material fact required to be therein or necessary to make the statements therein
not misleading or (B) contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements, in the light
of the circumstances under which they were made, not misleading.
At each Option Closing Date, if any, the Underwriters shall have received
the favorable opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Company, dated the Option Closing Date, addressed
to the Underwriters and in form and substance satisfactory to Underwriters'
Counsel confirming as of such Option Closing Date the statements made by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP in their opinion
delivered on the Closing Date.
(e) On the Closing Date, the Underwriters shall have received the
favorable opinion, of Merchant, Gould, Smith, Edell, Welter & Schmidt, P.A.,
patent counsel for the Company, dated the Closing Date, to the effect that:
(i) to the extent not disclosed in the Prospectus, the Company
is listed in the records of the PTO as the holder of record of the patents and
patent applications set forth in a schedule to such opinion, and such counsel
knows of no unrecorded claims of third parties to any ownership interest or lien
with respect to any of such patents or patent applications;
(ii) the statements in the Prospectus under the captions "Risk
Factors-Uncertainty of Patents and Proprietary Rights; Risk of Litigation" and
"Business-Patents, Proprietary Technology and Trademarks" (the "Intellectual
Property Portion"), to such counsel's knowledge, insofar as such statements
constitute a summary of the Company's patents and patent applications are in all
material respects accurate summaries and fairly summarize in all material
respects to legal matters, documents and proceedings relating to such patents
and patent applications described therein;
(iii) such counsel is not aware that any of the Company's patents
is invalid or that any patent issued in respect of any of the Company's patent
applications would be invalid;
<PAGE>
(iv) such counsel is not aware that any valid patent is infringed
by the activities of the Company described in the Prospectus or by the
manufacture, use or sale of any product, device, instrument, superconducting
film, circuit, subsystem or system or other item made and used according to the
Company's patent applications or patents;
(v) such counsel is not aware of any material defects or form in
the preparation or filing of patent applications on behalf of the Company. Such
patent applications have been diligently pursued by the Company;
(vi) such counsel is not aware of any pending or threatened
action, suit, proceeding or claim by others that the Company is infringing or
otherwise violating any patents, trademarks, trade secrets, know-how or other
proprietary rights;
(vii) Except as specifically disclosed in the Prospectus, such
counsel is not aware of any pending or threatened action, suit, proceeding, or
claim by others challenging the validity or scope of the patent applications or
the patents held by or licensed to the Company;
(viii) according to such counsel's records, the Company is listed
or is in the process of being listed in the records of the appropriate foreign
office as the sole holder of record of the foreign patent applications set forth
in a schedule of such opinion. Such counsel knows of no claims of third parties
to any ownership interest or lien with respect to any of such patents or patent
applications.
Such counsel shall also state that since November of 1993 it has
represented the Company in the prosecution of many of its patents, the remainder
being prosecuted by in-house counsel and other private firms, and that such
counsel has participated in conferences with employees of the Company at which
the Company's patents, patent applications and the contents of the Intellectual
Property Portion of the Registration Statement were discussed, and, although
such counsel is not passing upon and do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement (except to the extent stated in the Prospectus under the
caption "Experts" and to the extent stated in subparagraph (ii)), on the basis
of such conferences and such representation of the Company, nothing has come to
the attention of such counsel which leads them to believe that the Intellectual
Property Portion of the Registration Statement, as of the time the Registration
Statement became effective under the Act, and such portion of the Prospectus or
any amendment or supplement thereto, on the date such Prospectus, amendment or
supplement thereto was filed pursuant to Rule 424(b), and such portion of the
Registration Statement and the Prospectus, or any amendment or supplement
thereto, as of the Closing Date or the option Closing Date, as the case may be,
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading.
At each Option Closing Date, the Underwriters shall have received the
favorable opinion of Merchant, Gould, Smith, Edell, Welter & Schmidt, P.A.,
patent counsel to the Company, dated the Option Closing Date, addressed to the
Underwriters and in form and substance
<PAGE>
satisfactory to Underwriters' Counsel, each confirming as of Option Closing Date
the statements made in their opinion delivered on the Closing Date.
(f) On or prior to each of the Closing Date and each Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such customary
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this SECTION 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
(g) Prior to each of the Closing Date and each Option Closing Date,
if any, (i) there shall have been no Material Adverse Effect from the latest
dates as of which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and Prospectus that, individually or in the aggregate, has had a
Material Adverse Effect; (iii) the Company shall not be in material default
under any provision of any instrument relating to any of its outstanding
indebtedness; (iv) no material amount of the assets of the Company shall have
been pledged or mortgaged, except as set forth in the Registration Statement and
Prospectus; (v) no action, suit or proceeding, at law or in equity, shall have
been pending or to its knowledge threatened against the Company, or affecting
any of its properties or business before or by any court or federal, state or
foreign commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding would have a Material Adverse Effect; and (vi) no
stop order shall have been issued under the Act and no proceedings therefor
shall have been initiated, threatened or contemplated by the Commission.
(h) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial officer of the Company,
dated the Closing Date or Option Closing Date, as the case may be, to the effect
that each of such persons has carefully examined the Registration Statement, the
Prospectus and this Agreement, and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or
the Option Closing Date, as the case may be, and the Company has complied
with all agreements and covenants and satisfied all conditions contained in
this Agreement on its part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of such officer,
are threatened under the Act;
(iii) none of the Registration Statement, the Prospectus nor any
amendment or supplement thereto includes any untrue statement of a material
fact or
<PAGE>
omits to state any material fact required to be stated therein or necessary
to make the statements therein not misleading and neither the Preliminary
Prospectus or any supplement thereto included any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and
(iv) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company has
not incurred up to and including the Closing Date or the Option Closing
Date, as the case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent;
the Company has not paid or declared any dividends or other distributions
on its capital stock; the Company has not entered into any transactions not
in the ordinary course of business; and there has not been any material
change in the capital stock or long-term debt or any increase in the short-
term borrowings of the Company not in the ordinary course of business;
other than for operating losses in the ordinary course of business the
Company has not sustained any material loss or damage to its property or
assets, whether or not insured; there is no litigation that is pending or
threatened against the Company that is required to be set forth in an
amended or supplemented Prospectus that has not been set forth; and there
has occurred no event required to be set forth in an amended or
supplemented Prospectus that has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (i) are to such documents as amended and supplemented at the date of
such certificate.
(i) At the time of execution of this Agreement, the Underwriters shall
have received from Coopers & Lybrand L.L.P., independent certified public
accountants, a letter, dated the date hereof, in form and substance satisfactory
to the Underwriters and the Underwriters' Counsel.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Coopers & Lybrand L.L.P. a letter, dated
as of the Closing Date, or such Option Closing Date, as the case may be (in
either case, an "Updated Comfort Letter"), reaffirming the statements made in
the comfort letter furnished by Coopers & Lybrand L.L.P. to the Underwriters
concurrently with the execution of this Agreement, such Updated Comfort Letter
to be in form and substance satisfactory to the Underwriters and the
Underwriters' Counsel.
(k) On each of the Closing Date and the relevant Option Closing Date, if
any, there shall have been duly tendered to the Representatives for the several
Underwriters' accounts the appropriate number of Shares.
(l) No order suspending the sale of the Shares in any jurisdiction
designated by the Representatives pursuant to subsection (c) of SECTION 4 hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or to the
knowledge of the Representatives or that of the Company shall be contemplated.
<PAGE>
(m) The Underwriters shall have received the written agreements of the
officers, directors and holders of Common Stock listed in SCHEDULE B that each
will not offer, sell, assign, transfer, encumber, contract to sell, grant an
option to purchase or otherwise dispose of, other than by operation of law,
gifts, pledges or dispositions by estate representatives to immediate family
members, any shares of Common Stock (including, without limitation, Common Stock
of the Company which may be deemed to be beneficially owned by the undersigned
in accordance with the Rules and Regulations) during the 90 days following the
date of the final Prospectus.
(n) The Shares delivered on the Closing Date or the Option Closing Date
shall have been duly listed, subject to notice of official issuance, on the
Nasdaq National Market.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representatives may terminate this Agreement
or, if the Representatives so elect, they may waive any such conditions that
have not been fulfilled or extend the time for their fulfillment.
<PAGE>
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (including specifically each person who may be substituted for an
Underwriter as provided in SECTION 11 hereof) and each person, if any, who
controls any Underwriter ("controlling person") within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions in
respect thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which such Underwriter or such controlling person may become
subject under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented); or (ii) in any application or
other document or written communication (in this SECTION 7 collectively called
"application") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Common
Stock under the securities laws thereof or filed with the Commission, any state
securities commission or agency, or any securities exchange; or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made),
unless; (y) such statement or omission was made in reliance upon and in strict
conformity with written information furnished to the Company with respect to any
Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be; or (z) such statement or omission was contained or made in a Preliminary
Prospectus and corrected in the Prospectus and (A) such loss, claim, damage or
liability was suffered or incurred by an Underwriter (or a controlling person of
an Underwriter) resulting from an action, claim or suit by a person receiving a
Preliminary Prospectus from such Underwriter and who purchased Shares which are
the subject of such loss, claim, damage or liability from such Underwriter in
the offering contemplated hereby and (B) such Underwriter failed to delivery or
provide a copy of the Prospectus to such person at or prior to the time such
delivery was required by the Act.
The indemnity agreement in this subsection (a) shall be in addition to any
liability that the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors and officers who
has signed the Registration Statement, and each other person, if any, who
controls the Company within the meaning of the Act to the same extent as the
foregoing indemnity from the Company to the Underwriters but only with respect
to statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished with respect to any Underwriter by such
Underwriter expressly for use in such Preliminary
<PAGE>
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
any supplement thereto or in any such application directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Shares set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus and the last paragraph on the outside front cover page
of the Prospectus have been furnished by the Underwriters expressly for use
therein and constitute the only information furnished in writing by or on behalf
of the Underwriters for inclusion in the Prospectus
(c) Promptly after receipt by an indemnified party under this SECTION 7 of
notice of the commencement of any action, suit or proceeding, such indemnified
party shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this SECTION 7, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but in
the failure so to notify an indemnifying party shall not relieve it from any
liability that it may have under this SECTION 7 except to the extent that it has
been prejudiced in any material respect by such failure or from any liability
that it may have otherwise). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying party in connection with the
defense of such action at the expense of the indemnifying party, (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them that are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and expenses of
one additional counsel shall be borne by the indemnifying party. In no event
shall the indemnifying party be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, except to the extent that any indemnified
party or parties shall have reasonably concluded that there may be defenses
available to it or them that are different from or additional to those available
to the indemnifying party. Anything in this SECTION 7 to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim nor action effected without its written consent; PROVIDED, HOWEVER,
that such consent shall not be unreasonably withheld.
<PAGE>
(d) In order to provide for just and equitable contribution in any case in
which (i) an indemnified party makes a claim for indemnification pursuant to
this SECTION 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this SECTION 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then the indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Shares or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand, in connection with the statement(s) or
omission(s) that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In any
case where the Company is the contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares (before
executing expenses) bear to the total underwriting discounts received by the
Underwriters hereunder, in each case as set forth in the table on the cover page
of the Prospectus. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement(s) or omission(s). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions in respect thereof) referred to above in this SECTION
7(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this SECTION 7(d), no
Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter and
no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
SECTION 7, each person, if any, who controls the Company within the meaning of
the Act, each officer of the Company who has signed the Registration Statement,
and each director of the Company shall have the same rights to contribution as
the Company, subject in each case to this SECTION 7(d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this SECTION
7(d), notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have hereunder or otherwise than under this SECTION 7(d), but only to the extent
that such party or parties were not adversely affected by such omission. The
contribution agreement set forth
<PAGE>
above shall be in addition to any liabilities which any indemnifying party may
have at common law or otherwise.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this Agreement
or contained in certificates of officers of the Company submitted pursuant
hereto, shall be deemed to be representations, warranties and agreements at the
Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company, and the indemnity
agreements contained in SECTION 7 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter, the Company or any controlling person, and shall survive
termination of this Agreement or the issuance or sale and delivery of the Shares
to the Underwriters.
9. EFFECTIVE DATE.
This Agreement shall become effective at 9:30 a.m., Eastern Time, on the
date hereof, or at such earlier time after the Registration Statement becomes
effective as the Representatives, in their sole discretion, shall release the
Shares for the sale to the public, provided, however that the provisions of
SECTIONS 5, 7 and 9 of this Agreement shall at all times be effective. For
purposes of this SECTION 9, the Shares to be purchased hereunder shall be deemed
to have been so released upon the earlier of dispatch by the Representatives of
telegrams to securities dealers releasing such Shares for offering or the
release by the Representatives for publication of the first newspaper
advertisement that is subsequently published relating to the Shares.
10. TERMINATION.
(a) Subject to subsection (d) of this SECTION 10, the Company may at any
time before this Agreement becomes effective in accordance with SECTION 9,
terminate this Agreement.
(b) Subject to subsection (d) of this SECTION 10, the Representatives
shall have the right to terminate this Agreement, (i) if any calamitous domestic
or international event or act or occurrence has materially disrupted, or in the
Representatives' opinion will in the immediate future materially disrupt,
general securities markets in the United States; or (ii) if trading on the New
York Stock Exchange, the American Stock Exchange, or in the over-the-counter
market shall have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have been
required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction; or (iii) if
the United States shall have become involved in a war or major hostilities; (iv)
if a banking moratorium has been declared by a California State, New York State,
Commonwealth of Massachusetts or federal authority; or (v) if a moratorium in
foreign exchange trading has been declared; or (vi) if the Company shall have
sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act that, whether or not such loss shall have been insured, will, in the
<PAGE>
Representatives' opinion, make it inadvisable to proceed with the delivery of
the Shares; or (vii) if there shall have been a Material Adverse Effect.
(c) If any party hereto elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this SECTION 10, such
party shall notify, on the same day as such election is made, the other parties
hereto in accordance with the provisions of SECTION 13 hereof.
(d) Notwithstanding any contrary provision contained in this Agreement,
any election hereunder or any termination of this Agreement (including, without
limitation, pursuant to SECTIONS 11 and 12 hereof), and whether or not this
Agreement is otherwise carried out, the provisions of SECTIONS 5 and 7 shall not
be in any way affected by such election or termination or failure to carry out
the terms of this Agreement or any part hereof.
11. SUBSTITUTION OF THE UNDERWRITERS.
If one or more of the Underwriters shall fail (otherwise than for a reason
sufficient to justify the termination of this Agreement under the provisions of
SECTION 6, SECTION 10 or SECTION 12 hereof) to purchase the Shares that it or
they are obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the Representatives shall use their best efforts within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24 hour period, then:
(i) if the number of Defaulted Securities does not exceed 10% of
the total number of Firm Shares to be purchased on such date, the non-
defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the
total number of Firm Shares and arrangements satisfactory to the
Representatives for the purchase of the Defaulted Securities are not made
within 36 hours, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default that does not result in a termination of
this Agreement, the Representatives shall have the right to postpone the Closing
Date for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements.
12. DEFAULT BY THE COMPANY.
<PAGE>
If the Company shall fail at the Closing Date or any Option Closing Date,
as applicable, to sell and deliver the number of Shares that it is obligated to
sell hereunder on such date, then this Agreement shall terminate without any
liability on the part of any non-defaulting party other than pursuant to
SECTION 5 and SECTION 7 hereof. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
13. NOTICES.
All notices and communications hereunder may be mailed or transmitted by
any standard form of telecommunication and, except as herein otherwise
specifically provided, shall be in writing and shall be deemed to have been duly
given when delivered to a notice party hereto at the address specified herein or
at the address subsequently communicated in writing to the notice parties.
Notices to the Underwriters shall be directed to the Representatives c/o Tucker
Anthony Incorporated, One Beacon Street, Boston, Massachusetts 02108, Attention:
Corporate Finance Department, with a copy to Wilson Sonsini Goodrich & Rosati,
P.C., 650 Page Mill Road, Palo Alto, California 94304; Attention: Howard S.
Zeprun, Esq. Notices to the Company shall be directed to Conductus, Inc., 969
West Maude Avenue, Sunnyvale, California 94086, Attention: Charles E. Shalvoy,
President and Chief Executive Officer, with a copy to Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian LLP, 600 Hansen Way, Second Floor, Palo Alto,
California 94304, Attention: Robert V. Gunderson, Jr. In each case a notice
party may change its address for notice hereunder by a written communication to
the other such parties.
14. PARTIES.
This Agreement shall inure solely to the benefit of and shall be binding
upon, the Underwriters, the Company and the controlling persons, directors and
officers referred to in SECTION 7 hereof, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed to
have any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provisions herein contained. No purchaser of
Shares from any Underwriter shall be deemed to be a successor by reason merely
of such purchase.
15. CONSTRUCTION.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT GIVING
EFFECT TO THE CHOICE OF LAW OR CONFLICT OF LAWS PRINCIPLES.
16. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, and all of which taken together shall be
deemed to be one and the same instrument.
<PAGE>
17. ENTIRE AGREEMENT.
This Agreement and the Schedule hereto contains the entire agreement
between the parties hereto in connection with the subject matter hereof.
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
CONDUCTUS, INC.
By:
Charles E. Shalvoy
President and Chief Executive Officer
CONFIRMED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN
TUCKER ANTHONY INCORPORATED
PENNSYLVANIA MERCHANT GROUP LTD.
Acting severally on behalf of themselves and the
several Underwriters named herein.
By TUCKER ANTHONY INCORPORATED
By:
Title:
<PAGE>
SCHEDULE A
Name Number of Firm
Shares
Tucker Anthony Incorporated
Pennsylvania Merchant Group Ltd.
Total 1,000,000
<PAGE>
SCHEDULE B
NAME
- ----
Hewlett-Packard Company
Asset Management Associates 1984
Venrock Associates
Venrock Associates II, L.P.
John F. Shoch
Anthony Sun
Richard W. Anderson
Martin Cooper
Robert J. Saldich
Charles E. Shalvoy
Duncan J. MacMillan
Randy W. Simon
William J. Tamblyn
<PAGE>
AMENDMENT AND WAIVER AGREEMENT
(the Second Amended and Restated Investor Rights
Agreement dated June 3, 1993)
THIS AMENDMENT AND WAIVER AGREEMENT ("Agreement") is made as of and is
effective as of May 14, 1996, by and among CONDUCTUS, INC., a California
Corporation (the "Company"), and the undersigned investors (collectively, the
"Investors").
R E C I T A L S
WHEREAS, the Company, the Investors and certain other of the investors
of the Company are parties to that certain Amended and Restated Investor Rights
Agreement dated as of June 3, 1993 (the "Investor Rights Agreement");
WHEREAS, the Investor Rights Agreement grants to the holders of the
Company's Preferred Stock and certain holders of the Company's Common Stock
(such holders of Preferred Stock and Common Stock being referred to herein as
the "Holders" and the shares held by such Holders are collectively referred to
herein as the "Registrable Securities") certain registration rights and other
rights;
WHEREAS, pursuant to Section 2.6 of the Investor Rights Agreement, if
the Company proceeds to register any of its securities under the Securities Act
of 1933, as amended (other than a registration relating solely to the sale of
securities to participants in a Company stock plan), the Holders shall have the
right, subject to certain terms and conditions, to have their Registrable
Securities included in such registration ("Registration Rights");
WHEREAS, the Company and the Investors desire to amend and restate
certain Sections of the Investor Rights Agreement;
WHEREAS, pursuant to Sections 3.4 of the Investor Rights Agreement,
the Registration Rights and the notice rights related thereto may be amended or
waived with the written consent of the Company and the Holders of a majority of
the outstanding Registrable Securities and such amendment or waiver effected in
accordance with these terms shall be binding upon each holder of any Registrable
Securities then outstanding, each future holder of all such Registrable
Securities, and the Company (collectively, "the Amending Parties");
WHEREAS, the Company intends to file a Registration Statement on Form
S-1 with the Securities and Exchange Commission relating to the Company's
proposed public offering of its Common Stock (the "Offering") to be underwritten
by Tucker Anthony Incorporated and Pennsylvania Merchant Group as
representatives of the several underwriters; and
WHEREAS, the Company and the Investors desire to enter into this
Agreement to provide for the amendment and waiver of the Holder's rights to
include their Registrable Securities in the Offering and any right to notice
with respect thereto;
<PAGE>
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. WAIVER OF REGISTRATION RIGHTS AND NOTICE THEREOF. By execution of
this Agreement, the Investors amend, on behalf of all Holders, Section 2.6 of
the Investor Rights Agreement to waive the right to have any Registrable
Securities included in the Offering and any right to notice with respect
thereto.
2. TERMINATION OF THIS AGREEMENT. This Agreement will terminate
and be of no force or effect in the event the Offering is not consummated on or
prior to August 31, 1996.
3. MISCELLANEOUS.
(a) Except as expressly amended herein, the Investor Rights
Agreement shall remain in full force and effect.
(b) This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(c) This Agreement shall be governed by the laws of the State of
California as applied to agreements among California residents entered into and
to be performed entirely within California.
<PAGE>
IN WITNESS WHEREOF, the undersigned or each of their respective
duly authorized officers or representatives have set their hands hereunder
effective upon the date referenced-above.
CONDUCTUS, INC.
By:
---------------------------------
Charles E. Shalvoy, President
and Chief Executive Officer
INVESTOR
By:
-------------------------------------
Title:
-----------------------------------
<PAGE>
[HEWLETT PACKARD LOGO]
HEWLETT-PACKARD COMPANY
Laboratories
3500 Deer Creek Road
Palo Alto, California 94304-1392
Telephone: (415) 857-4327 FAX: (415) 857-6241
- ------------------------------------------------------------------------------
DATE: November 12, 1992
Linda A. Capuano
Vice President of Operations
and Business Development
Conductus
969 West Maude Avenue
Sunnyvale, CA 94086
Dear Linda:
This letter is in reference to the Collaborative Research Agreement among
Conductus, TRW, Hewlett-Packard, Stanford University and University of
California, Berkeley effective August 1, 1992. Pursuant to the paragraph
entitled "Withdrawal, Breach and Agreement/Program Termination",
Hewlett-Packard hereby gives notification of our intention to withdraw from
the agreement on May 12, 1993, six months from the date of this letter.
Sincerely,
/s/ James N. Hollenhorst
James N. Hollenhorst
Manager, Superconductivity Department
High Speed Devices Laboratory
Copy to:
Gary Baldwin, HP
Ed Karrer, HP
Ed Wong, HP
Michael Leonard, TRW
Cornelia Shonkwiler, Stanford
Maureen Barnato, UCB
<PAGE>
COLLABORATION AGREEMENT
BETWEEN
CONDUCTUS, INC. AND CTI
EFFECTIVE SEPTEMBER 19, 1995
<PAGE>
TABLE OF CONTENTS
ARTICLE 1.0 Definitions. (Refer also to Figure 1).......................... 1
ARTICLE 2.0 Selection of JOINT DEVELOPMENT PROJECTS........................ 2
ARTICLE 3.0 Marketing and Supply Agreements................................ 2
ARTICLE 4.0 Discussion of Future Projects.................................. 2
ARTICLE 5.0 Intellectual Property Rights................................... 3
5.1 Ownership............................................................ 3
5.2. Grant of License..................................................... 3
5.3 Confidentiality...................................................... 3
ARTICLE 6.0 Term of This Agreement......................................... 3
6.1 Term.................................................................. 3
6.2 Termination for Default............................................... 3
6.3 Termination at Option of a Party...................................... 4
6.4 Rights and Obligations on Expiration or Termination.................. 4
ARTICLE 7.0 Warranty Disclaimer............................................ 4
ARTICLE 8.0 Miscellaneous.................................................. 4
8.1 Entire Agreement...................................................... 4
8.2 Assignability......................................................... 4
8.3 Severability.......................................................... 4
8.4 Notice and Reports.................................................... 5
8.5 Relationships of the Parties.......................................... 5
8.6 Waiver................................................................ 5
8.7 Limited Liability..................................................... 5
8.8 Export Control........................................................ 5
Figure 1.................................................................... 7
Exhibit B: Proprietary Information Disclosure Agreement..................... 8
Page i
<PAGE>
COLLABORATION AGREEMENT
BETWEEN
CONDUCTUS, INC. AND CTI
This Agreement is effective beginning September ___, 1995 and is between
Conductus, Inc., a Delaware corporation with a place of business at 969 West
Maude Avenue, Sunnyvale, California 94086 ("Conductus") and CTI-CRYOGENICS, a
division of Helix Technology Corporation, with a place of business at Nine
Hampshire Street, Mansfield Corporate Center, Mansfield, Massachusetts
02048-9171 ("CTI").
WHEREAS Conductus is a corporation in the business of developing,
manufacturing and marketing products based upon superconductivity and its
applications;
WHEREAS superconductor applications require the use of application-specific
cryogenic packages for optimal performance;
WHEREAS CTI is a corporation in the business of providing cryogenic
solutions, including the design of total cryogenic packages and the
manufacture and sale of refrigeration systems;
WHEREAS the parties are interested in collaborative development of total
cryogenic packages for Conductus products;
NOW, THEREFORE, in consideration of the agreements and covenants contained
hereunder, the parties agree as follows:
ARTICLE 1.0 DEFINITIONS. (REFER ALSO TO FIGURE 1)
AGREEMENT means this Collaboration Agreement including any Exhibits and/or
Riders.
DEWAR means and includes containers for holding liquefied gases such as
helium and nitrogen or vacuum chambers for superconductivity and related
components that are cooled by a refrigeration system.
REFRIGERATION SYSTEM means and includes CTI Gifford-McMahon refrigerators,
Stirling refrigerators and the like, which are not specifically adapted for
use in a particular product. REFRIGERATION SYSTEM does not include DEWAR.
CRYOGENIC INTERCONNECT PACKAGE means and includes devices and components for
connecting a REFRIGERATION SYSTEM with a CONDUCTUS PRODUCT.
CONDUCTUS PRODUCT means and includes superconducting and other components,
certain of which components are housed in a DEWAR. When combined with a
CRYOGENIC INTERCONNECT PACKAGE and REFRIGERATION SYSTEM, a salable system or
subsystem is formed.
Page 1 of 7
<PAGE>
INTERFACE means that specification which defines the connector from the
CONDUCTUS PRODUCT to the CRYOGENIC INTERCONNECT PACKAGE.
JOINT DEVELOPMENT PROJECT ("JDP") means and includes any project authorized
under this AGREEMENT for the development of a CRYOGENIC INTERCONNECT PACKAGE
for a CONDUCTUS PRODUCT.
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 a JDP.
BACKGROUND INTELLECTUAL PROPERTY means intellectual property of a party,
other than PROJECT INTELLECTUAL PROPERTY necessary or useful to the
development or manufacture of CRYOGENIC INTERCONNECT PACKAGES for CONDUCTUS
PRODUCTS subject to a JDP.
ARTICLE 2.0 SELECTION OF JOINT DEVELOPMENT PROJECTS.
JDPs shall be selected by approval of an authorized representative of each
party. The initial JDP shall be for the development of a CRYOGENIC
INTERCONNECT PACKAGE for an NMR Probe ("NMR JDP"). The NMR JDP is attached
hereto as Exhibit A.
ARTICLE 3.0 MARKETING AND SUPPLY AGREEMENTS.
The parties agree to negotiate in good faith for an exclusive dealing
relationship for a limited time with respect to CRYOGENIC INTERCONNECT
PACKAGES developed under JDPs.
ARTICLE 4.0 DISCUSSION OF FUTURE PROJECTS.
Conductus shall discuss its requirements for CRYOGENIC INTERCONNECT PACKAGES
for additional CONDUCTUS PRODUCTS, excluding products for which it intends
to solely develop or design the CRYOGENIC INTERCONNECT PACKAGE, with CTI for
a period of thirty (30) days prior to pursuing discussions with any third
party.
CTI shall notify Conductus at least thirty (30) days prior to entering into
any agreement with a third party to provide consulting services, develop or
manufacture CRYOGENIC INTERCONNECT PACKAGES for applications which directly
compete with CONDUCTUS PRODUCTS.
ARTICLE 5.0 INTELLECTUAL PROPERTY RIGHTS.
5.1 OWNERSHIP.
Each Party shall own the title to any Project Intellectual Property made
solely by its employees or agents. Title to jointly made Project Intellectual
Property shall be jointly owned.
Page 2 of 7
<PAGE>
5.2. GRANT OF LICENSE.
The parties expect that each JDP under this AGREEMENT will contain provisions
under which, upon termination of any supply agreement for a CRYOGENIC
INTERCONNECT PACKAGE developed under such JDP, CTI will grant Conductus a
license to make, have made, use, sell or have sold products incorporating the
CRYOGENIC INTERCONNECT PACKAGE developed under the JDP for use with the
CONDUCTUS PRODUCT on mutually agreed terms.
5.3 CONFIDENTIALITY.
This AGREEMENT is subject to the provisions of the Proprietary Information
Disclosure Agreement between Conductus and CTI, dated June 21, 1994, which is
attached hereto as Exhibit B and incorporated herein by reference. The
Proprietary Information Disclosure Agreement is hereby amended to expire
concurrently with the later of expiration of this AGREEMENT or of the last
JDP under this AGREEMENT.
Notwithstanding any provision of the Proprietary Information Disclosure
Agreement to the contrary, Conductus may release a mutually agreed upon
INTERFACE to a third party, provided it shall provide CTI with 30 days
notice of the identity of the third party and its intention to release the
INTERFACE.
ARTICLE 6.0 TERM OF THIS AGREEMENT.
6.1 TERM.
Unless terminated by either party pursuant to the provisions of this section,
this Agreement shall continue in effect for a period of three (3) years from
the effective date (the "Initial Term"), and shall thereafter be extendable
by written agreement of the parties.
6.2 TERMINATION FOR DEFAULT.
If either party materially breaches any 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.
6.3 TERMINATION AT OPTION OF A PARTY
Either party may terminate this AGREEMENT upon sixty (60) days notice to the
other party. Such termination shall not effect a termination of any JDP in
effect at the time of termination of this AGREEMENT.
6.4 RIGHTS AND OBLIGATIONS ON EXPIRATION OR TERMINATION.
The following provisions shall survive the expiration or termination of this
Agreement: Sections 5 through 8.
Should CTI decide to forego or to discontinue manufacture of a JDP CRYOGENIC
INTERCONNECT PACKAGE during the term of this Agreement or
Page 3 of 7
<PAGE>
at any time after
its expiration, CTI will use its best efforts to transfer CRYOGENIC
INTERCONNECT PACKAGE manufacture to Conductus.
ARTICLE 7.0 WARRANTY DISCLAIMER.
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.
ARTICLE 8.0 MISCELLANEOUS.
8.1 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
or amended except by a written instrument signed by both parties.
8.2 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.
8.3 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.
8.4 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.
8.5 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
Page 4 of 7
<PAGE>
or to bind the other party to any contract, agreement or undertaking with any
third party.
8.6 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.
8.7 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 UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR
EQUITABLE THEORY 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.
8.8 EXPORT CONTROL.
Conductus 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). Conductus will notify its customers of the obligation to
comply with such export laws and regulations.
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.
FOR CONDUCTUS: FOR CTI:
By: /S/ By: /S/
-------------------------------- -------------------------------
Name: William J. Tamblyn Name: Charles G. Chappell
Title: V.P. & CFO Title: Director of Contracts
Date: 9/20/95 Date: 9/19/95
Page 5 of 7
<PAGE>
[GRAPHIC FOR FIGURE 1]
Interface
Dewar Cyrogenic Refrigeration
Interconnect System
Conductus Product Package
Salable Product
FIGURE 1
Page 6 of 7
<PAGE>
PROPRIETARY INFORMATION DISCLOSURE AGREEMENT
This agreement, dated this 21st day of June, 1994 is by and between:
Conductus, Inc. (or one of its divisions, subsidiaries or affiliated
companies, or by its predecessors or successors in business) having its
principal place of business located at 969 West Maude Avenue, Sunnyvale, CA
94086, and CTI-CRYOGENICS, A Division of Helix Technology Corporation
("CTI"), Nine Hampshire Street, Mansfield Corporate Center, Mansfield,
Massachusetts 02048-9171 (hereinafter "the Parties").
Whereas, the Parties anticipate entering into business discussions which may
require disclosure of certain Information considered company confidential or
proprietary to one or both of the Parties.
Whereas, the Parties wish to set forth their understanding with respect to
protection of such information.
Now therefore, in consideration of the mutual covenants and promises
hereinafter set forth and other good and valuable consideration, the Parties
agree as follows:
1. Proprietary Information that will be exchanged under the terms and
conditions of this agreement shall be limited to the following
subject(s) Information related to Conductus' developing products for
high temperature superconducting systems, including microwave filters
and resonators and NMR probes and cryogenics for the same.
2. Proprietary Information shall include, without limitation, technical
information, designs, drawings, calculations test results,
manufacturing processes and procedures, material specifications,
financial and marketing information. Such Information may be exchanged
orally, by video display, electronically, in writing, or through
exchange of other business documents, hardware or software.
3. The Parties shall use their best efforts to protect and keep
confidential, all information exchanged between them. Parties shall not
disclose proprietary information (of the other Party) to a third party
without first obtaining written permission of the disclosing Party.
4. To the extent that Proprietary Information is disclosed , said
Information must be in writing and marked either "Company
Confidential" or "Proprietary" (of with a "Limited Rights" or
"Government Purpose License Rights" legend), or if disclosed orally,
must be identified as "Company Confidential" or "Proprietary" at the
said first oral disclosure, be reduced to a written summary form, marked
(as above) and provided to the other Party with thirty days of said
first oral disclosure.
<PAGE>
Page 2.
5. Proprietary Information exchanged hereunder, shall be disclosed only
to those employees of the Parties having need to know in order to
carry out the purpose of the business discussions. Each such employee
shall be notified of the proprietary nature of information being
disclosed, and shall be informed of, and required to carry out, the
responsibility to maintain confidentiality in accordance with the terms
and conditions of this agreement.
6. Except for subsequent purchase orders, contracts or other related
written agreements between the Parties, neither party to this
Agreement will make use of Proprietary Information of the other party
for its own benefit or for the benefit of any other person or
organization (other than the disclosing party).
7. Proprietary Information disclosed hereunder shall remain the exclusive
property of the disclosing party, and no rights under any United
States or foreign patents or any license, certification or other
rights are conveyed hereby.
8. All Proprietary Information and copies thereof, disclosed hereunder,
shall be returned to the disclosing party at the conclusion of
business discussions or any resulting purchase order, contract or other
agreement between the parties, or upon written request of the disclosing
party, within 10 days of receipt of such request.
9. The obligations of the Parties with respect to maintenance of
confidentiality set forth heretofore, shall not apply to any information
disclosed by either party which:
(a) is known to the other party prior to disclosure hereunder, as
evidenced by written records;
(b) is disclosed without restriction by an unrelated third party
who is in lawful possession thereof and who has the right to
make such disclosure;
(c) is, when disclosed, or shall subsequently have become, public
knowledge by publication, product release or otherwise, and
through no fault of the party to whom disclosure was made;
(d) is disclosed after having received written notification that
the other party does not wish to receive further Proprietary
Information;
(e) is independently discovered or developed without reference to
Proprietary Information disclosed hereunder.
<PAGE>
Page 3.
10. The authorization for representatives of the Parties to exchange
Proprietary Information hereunder shall terminate three (3) years from
the effective date of this Agreement or at such earlier time as may be
stated by either party in writing. The obligation of the Parties to
protect Proprietary Information and to maintain confidentiality set
forth heretofore, shall terminate upon written agreement of the Parties
that no further state of confidentiality exists with respect to a
disclosure or set of disclosures or, in any event, with respect to all
disclosures, two (2) years from the date of the last documented
disclosure hereunder.
11. This Agreement constitutes the complete agreement between the Parties
with respect to the disclosure of Proprietary Information regarding
the subject(s) set forth in paragraph 2 hereof, and may not be amended
except in writing.
12. All notices under Section 10 or any other section of this Agreement
shall be deemed delivered if deposited with the U.S. Postal Service,
first-class postage prepaid, addressed to the Designated Agent of the
Party intended to receive such notice as follows:
If to CONDUCTUS: If to HELIX:
Dr. Linda Capuano Dr. Peter Kerney
Vice President Mansfield Corporate Center
Conductus, Inc. Nine Hampshire Street
969 West Maude Ave. Mansfield, MA 02048
Sunnyvale, CA 94086
In witness whereof, the Parties have caused this agreement to be
executed as of the date first set forth above.
CTI-CRYOGENICS
A Division of Helix Technology Corporation
BY: /s/ Charles G. Chappell
NAME: Charles G. Chappell
TITLE: Director of Contracts
DATE: June 21, 1994
AGREED TO AND ACCEPTED BY:
Conductus, Inc
NAME: /s/ Linda A. Capuano
--------------------
TITLE: VP
-------------------
DATE: 7-21-94
--------------------
<PAGE>
AGREEMENT BETWEEN
CONDUCTUS, INC. AND CTI
FOR
JOINT DEVELOPMENT PROJECT FOR
CRYOGENIC INTERCONNECT PACKAGE FOR NMR PROBE
EFFECTIVE SEPTEMBER 19, 1995
<PAGE>
TABLE OF CONTENTS
ARTICLE 1.0 Definitions.................................................... 1
ARTICLE 2.0 CONTACT POINT.................................................. 2
ARTICLE 3.0 TECHNICAL TEAM................................................. 2
ARTICLE 4.0 Conductus Responsibilities..................................... 2
ARTICLE 5.0 CTI Responsibilities........................................... 3
ARTICLE 6.0 Exclusive Dealing Relationship................................. 3
ARTICLE 7.0 Intellectual Property Rights................................... 3
7.1 Ownership............................................................ 3
7.2. Grant of License..................................................... 3
7.3 Confidentiality...................................................... 3
ARTICLE 8.0 Term of This Agreement......................................... 4
8.1 Term.................................................................. 4
8.2 Termination by Mutual Agreement...................................... 4
8.3 Termination for Default............................................... 4
8.4 Termination at Option of a Party...................................... 4
8.3 Rights and Obligations on Expiration or Termination.................. 4
ARTICLE 9.0 Warranty Disclaimer............................................ 4
ARTICLE 10.0 Miscellaneous................................................. 5
10.1 Entire Agreement..................................................... 5
10.2 Assignability........................................................ 5
10.3 Severability......................................................... 5
10.4 Notice and Reports................................................... 5
10.5 Relationships of the Parties......................................... 5
10.6 Waiver............................................................... 6
10.7 Limited Liability.................................................... 6
10.8 Export Control....................................................... 6
Exhibit A: Statement of Work Subject Probe Cryogenic Interconnect Package
Development................................................................. 7
1. General................................................................ 7
2. CTI Scope of Work...................................................... 7
2.1 Cryogenic Interconnect Package Development......................... 7
Page i
<PAGE>
2.2 Documentation...................................................... 7
2.3 Procedures/Manual.................................................. 7
2.4 Qualification Tests................................................ 7
2.5 Engineering Support................................................ 8
2.6 Prototype Delivery................................................. 8
2.7 Volume Shipment.................................................... 8
2.8 Final Documentation................................................ 8
Exhibit B: Proprietary Information Disclosure Agreement..................... 9
Page ii
<PAGE>
AGREEMENT BETWEEN
CONDUCTUS, INC. AND CTI
FOR
JOINT DEVELOPMENT PROJECT FOR
CRYOGENIC INTERCONNECT PACKAGE FOR NMR PROBE
This Agreement is effective beginning September ___, 1995 and is between
Conductus, Inc., a Delaware corporation with a place of business at 969 West
Maude Avenue, Sunnyvale, CA 94086 ("Conductus") and CTI-CRYOGENICS, a
division of Helix Technology Corporation, with a place of business at Nine
Hampshire Street, Mansfield Corporate Center, Mansfield, Massachusetts
02048-9171 ("CTI").
WHEREAS Conductus and CTI have entered into a COLLABORATION AGREEMENT for the
development of certain CRYOGENIC INTERCONNECT PACKAGES;
WHEREAS Conductus is developing an NMR probe ("SUBJECT PROBE") under an
exclusive development relationship with Varian, Inc.;
WHEREAS Conductus has manufactured a prototype of the SUBJECT PROBE,
including a cryogenic package;
WHEREAS CTI is a corporation in the business of providing cryogenic
solutions, including the design of total cryogenic packages and the
manufacture and sale of refrigeration systems;
WHEREAS the parties are interested in collaborative development of an
improved, lower cost total cryogenic package for the SUBJECT PROBE;
NOW, THEREFORE, in consideration of the agreements and covenants contained
hereunder, the parties agree as follows:
ARTICLE 1.0 DEFINITIONS.
AGREEMENT means this Joint Development Agreement including any Exhibits
and/or Riders.
COLLABORATION AGREEMENT means the Collaboration Agreement between Conductus,
Inc. and CTI dated on even date herewith, including any Exhibits and/or
Riders.
SUBJECT PROBE means and includes the NMR probe subsystem being developed by
Conductus for Varian.
REFRIGERATION SYSTEM means a CTI Gifford-McMahon refrigerator, which is not
specifically adapted for use in a particular product.
CRYOGENIC INTERCONNECT PACKAGE means and includes devices and other
components for connecting a REFRIGERATION SYSTEM with other components of the
SUBJECT PROBE.
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CONTACT POINT means that representative of each party, having the authority
to oversee and coordinate the development work, to set the general direction
of the work, and to specify allocation of personnel, funds and other assets
of projects pursued under this AGREEMENT. The Conductus CONTACT POINT is
Duncan MacMillan. The CTI CONTACT POINT is Peter Kerney.
TECHNICAL TEAM means representatives of each party assigned to carry out
tasks under the JDP.
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.
BACKGROUND INTELLECTUAL PROPERTY means intellectual property of a party,
other than PROJECT INTELLECTUAL PROPERTY necessary or useful to the
development or manufacture of CRYOGENIC INTERCONNECT PACKAGES for the SUBJECT
PROBE. BACKGROUND INTELLECTUAL PROPERTY of Conductus includes, but is not
limited to, the existing cryogenic package for the prototype SUBJECT PROBE.
ARTICLE 2.0 CONTACT POINT.
Each party's CONTACT POINT shall be responsible for project oversight and
general direction of the development project, allocation of resources and
manpower, and review and approval of specifications for the CRYOGENIC
INTERCONNECT PACKAGE and overall salable product.
ARTICLE 3.0 TECHNICAL TEAM.
Each party shall appoint one or more members to the TECHNICAL TEAM. Members
of each party's TECHNICAL TEAM shall cooperate and communicate to achieve the
objectives of the JDP..
ARTICLE 4.0 CONDUCTUS RESPONSIBILITIES.
Conductus shall provide interface requirements and proposed performance
specifications for the CRYOGENIC INTERCONNECT PACKAGE. Conductus shall make
personnel available to CTI, as needed, to advise CTI on technical issues
related to CRYOGENIC INTERCONNECT PACKAGE integration. Conductus shall be
responsible for final approval of the design specifications of the
CRYOGENIC INTERCONNECT PACKAGE.
ARTICLE 5.0 CTI RESPONSIBILITIES.
CTI shall provide management, engineering personnel and resources to design,
manufacture and deliver a CRYOGENIC INTERCONNECT PACKAGE as provided in the
Statement of Work, attached hereto as Exhibit A and incorporated herein by
reference.
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CTI shall advise and assist Conductus in selection of one or more
manufacturers for the CRYOGENIC INTERCONNECT ACE PACKAGE, which manufacturer
may be a third party or CTI.
ARTICLE 6.0 EXCLUSIVE DEALING RELATIONSHIP.
Subject to the parties' agreement on specification, price and delivery, for a
period of eighteen (18) months from the effective date of this AGREEMENT
Conductus shall purchase all of its requirements for a CRYOGENIC INTERCONNECT
PACKAGE and/or REFRIGERATION SYSTEM for the NMR PROBE from CTI and CTI shall
not design or sell a CRYOGENIC INTERCONNECT PACKAGE for NMR Spectroscopy to a
third party.
The parties agree to negotiate in good faith a supply agreement covering
CRYOGENIC INTERCONNECT PACKAGE specifications, price, delivery terms and
warranty.
Unless extended by mutual agreement of the parties, if the parties fail to
reach agreement on a supply agreement within one hundred twenty (120) days of
the effective date of this AGREEMENT, the obligation under this Article shall
terminate.
ARTICLE 7.0 INTELLECTUAL PROPERTY RIGHTS.
7.1 OWNERSHIP.
Each Party shall own the title to any Project Intellectual Property made
solely by its employees or agents. Title to jointly made Project
Intellectual Property shall be jointly owned.
7.2. GRANT OF LICENSE.
Unless otherwise agreed in a supply agreement negotiated in accordance with
the provisions of Article 6.0, upon termination of this JDP, CTI shall grant
Conductus a license on mutally agreed terms to make, have made, use, sell or
have sold the CRYOGENIC INTERCONNECT PACKAGE and improvements thereon
developed under this AGREEMENT for use with the SUBJECT PROBE.
7.3 CONFIDENTIALITY.
This AGREEMENT is subject to the provisions of the Proprietary Information
Disclosure Agreement between Conductus and CTI, dated June 21, 1994, which is
attached hereto as Exhibit B and incorporated herein by reference. The
Proprietary Information Disclosure Agreement is hereby amended to expire
concurrently with the later of expiration of this JDP or the COLLABORATION
AGREEMENT.
Notwithstanding any provision of the Proprietary Information Disclosure
Agreement to the contrary, Conductus may release a mutually agreed upon
INTERFACE (reference Figure 1 of Collaboration Agreement) to a third party,
provided it shall provide CTI with 30 days notice of the identity of the
third party and its intention to release the INTERFACE.
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ARTICLE 8.0 TERM OF THIS AGREEMENT.
8.1 TERM.
Unless terminated by either party pursuant to the provisions of this section,
this Agreement shall continue in effect for a period of eighteen (18) months
from the effective date (the "Initial Term"), and shall thereafter be
extendable by written agreement of the parties.
8.2 TERMINATION BY MUTUAL AGREEMENT
This JDP may be terminated at any time by mutual agreement of the parties.
8.3 TERMINATION FOR DEFAULT.
If either party materially breaches any 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.
8.4 TERMINATION AT OPTION OF A PARTY
Either party may terminate this AGREEMENT upon sixty (60) days notice to the
other party.
8.3 RIGHTS AND OBLIGATIONS ON EXPIRATION OR TERMINATION.
(a) The following provisions shall survive the expiration or termination of
this Agreement: Sections 7 through 10.
(b) Should CTI decide to forego or to discontinue manufacture of the
CRYOGENIC INTERCONNECT PACKAGE during the term of this AGREEMENT or at any
time after its expiration, CTI will use its best efforts to transfer
CRYOGENIC INTERCONNECT PACKAGE manufacture to Conductus.
ARTICLE 9.0 WARRANTY DISCLAIMER.
EXCEPT AS SEPARATELY AGREED IN THE SUPPLY AGREEMENT TO BE NEGOTIATED UNDER
ARTICLE 6, 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.
ARTICLE 10.0 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, amended or
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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.
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 UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR
EQUITABLE THEORY FOR (I) ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR (II)
COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES OR (III)
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FOR ANY FAILURE OR DELAY DUE TO MATTERS BEYOND ITS REASONABLE CONTROL.
10.8 EXPORT CONTROL.
Conductus 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). Conductus will notify its customers of the obligation to
comply with such export laws and regulations.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year written below in multiple counterparts, each of which shall be
considered an original.
FOR CONDUCTUS: FOR CTI:
By: /S/ By: /S/
-------------------------------- ------------------------------------
Name: William J. Tamblyn Name: Charles G. Chappell
Title: V.P. and CFO Title: Director of Contracts
Date: 9/20/95 Date: 9/19/95
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EXHIBIT A
STATEMENT OF WORK
SUBJECT PROBE CRYOGENIC INTERCONNECT PACKAGE DEVELOPMENT
1. GENERAL
This Statement of Work describes the effort to be provided by CTI and
Conductus under their Joint Development Project for the development of a
cryogenic interconnect package for the Conductus superconducting NMR probe.
These tasks will be performed on a best efforts basis.
2. CTI SCOPE OF WORK
Work to be performed by CTI shall include the following tasks associated
with the design of a superconducting NMR spectroscopy probe CRYOGENIC
INTERCONNECT PACKAGE:
2.1 Cryogenic Interconnect Package Development
Develop a cost optimized closed-cycle, gas-flow cooling loop to Conductus'
performance specifications. Components include:
- Heat exchange system on Gifford-McMahon coldhead;
- Vacuum enclosure;
- Gas flow control manifold;
- Cryogenic transfer line and probe interconnect;
- Support stand;
- Fault protection/automatic fault shutdown.
Mutually define the INTERFACE.
2.2 Documentation
Provide full engineering documentation, including:
Y engineering drawings;
Y bill of materials;
Y test results;
Y manufacturing procedures.
2.3 Procedures/Manual
Develop customer operating procedures including installation, startup,
shutdown, customer troubleshooting. Provide operating manual.
2.4 Qualification Tests
Develop qualification tests, subject to Conductus' approval. Provide
documentation for qualification tests.
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2.5 Engineering Support
Provide engineering support for delivered units, including:
Y diagnosis of vibration interference;
Y diagnosis of poor thermal performance;
Y diagnosis of user interface problems.
2.6 Prototype Delivery
Provide prototype on a best efforts basis within 3 months after agreement on
specifications.
2.7 Volume Shipment
Provide mutually acceptable volume shipment capability within 3 months after
Conductus acceptance of prototype.
2.8 Final Documentation
Provide all documentation within 3 months after Conductus acceptance of the
prototype.
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PROPRIETARY INFORMATION DISCLOSURE AGREEMENT
This agreement, dated this 21st day of June, 1994 is by and between:
Conductus, Inc. (or one of its divisions, subsidiaries or affiliated
companies, or by its predecessors or successors in business) having its
principal place of business located at 969 West Maude Avenue, Sunnyvale, CA
94086, and CTI-CRYOGENICS, A Division of Helix Technology Corporation
("CTI"), Nine Hampshire Street, Mansfield Corporate Center, Mansfield,
Massachusetts 02048-9171 (hereinafter "the Parties").
Whereas, the Parties anticipate entering into business discussions which may
require disclosure of certain Information considered company confidential or
proprietary to one or both of the Parties.
Whereas, the Parties wish to set forth their understanding with respect to
protection of such information.
Now therefore, in consideration of the mutual covenants and promises
hereinafter set forth and other good and valuable consideration, the Parties
agree as follows:
1. Proprietary Information that will be exchanged under the terms and
conditions of this agreement shall be limited to the following
subject(s) Information related to Conductus' developing products for
high temperature superconducting systems, including microwave filters
and resonators and NMR probes and cryogenics for the same.
2. Proprietary Information shall include, without limitation, technical
information, designs, drawings, calculations test results,
manufacturing processes and procedures, material specifications,
financial and marketing information. Such Information may be exchanged
orally, by video display, electronically, in writing, or through
exchange of other business documents, hardware or software.
3. The Parties shall use their best efforts to protect and keep
confidential, all information exchanged between them. Parties shall not
disclose proprietary information (of the other Party) to a third party
without first obtaining written permission of the disclosing Party.
4. To the extent that Proprietary Information is disclosed , said
Information must be in writing and marked either "Company
Confidential" or "Proprietary" (of with a "Limited Rights" or
"Government Purpose License Rights" legend), or if disclosed orally,
must be identified as "Company Confidential" or "Proprietary" at the
said first oral disclosure, be reduced to a written summary form, marked
(as above) and provided to the other Party with thirty days of said
first oral disclosure.
<PAGE>
Page 2.
5. Proprietary Information exchanged hereunder, shall be disclosed only
to those employees of the Parties having need to know in order to
carry out the purpose of the business discussions. Each such employee
shall be notified of the proprietary nature of information being
disclosed, and shall be informed of, and required to carry out, the
responsibility to maintain confidentiality in accordance with the terms
and conditions of this agreement.
6. Except for subsequent purchase orders, contracts or other related
written agreements between the Parties, neither party to this
Agreement will make use of Proprietary Information of the other party
for its own benefit or for the benefit of any other person or
organization (other than the disclosing party).
7. Proprietary Information disclosed hereunder shall remain the exclusive
property of the disclosing party, and no rights under any United
States or foreign patents or any license, certification or other
rights are conveyed hereby.
8. All Proprietary Information and copies thereof, disclosed hereunder,
shall be returned to the disclosing party at the conclusion of
business discussions or any resulting purchase order, contract or other
agreement between the parties, or upon written request of the disclosing
party, within 10 days of receipt of such request.
9. The obligations of the Parties with respect to maintenance of
confidentiality set forth heretofore, shall not apply to any information
disclosed by either party which:
(a) is known to the other party prior to disclosure hereunder, as
evidenced by written records;
(b) is disclosed without restriction by an unrelated third party
who is in lawful possession thereof and who has the right to
make such disclosure;
(c) is, when disclosed, or shall subsequently have become, public
knowledge by publication, product release or otherwise, and
through no fault of the party to whom disclosure was made;
(d) is disclosed after having received written notification that
the other party does not wish to receive further Proprietary
Information;
(e) is independently discovered or developed without reference to
Proprietary Information disclosed hereunder.
<PAGE>
Page 3.
10. The authorization for representatives of the Parties to exchange
Proprietary Information hereunder shall terminate three (3) years from
the effective date of this Agreement or at such earlier time as may be
stated by either party in writing. The obligation of the Parties to
protect Proprietary Information and to maintain confidentiality set
forth heretofore, shall terminate upon written agreement of the Parties
that no further state of confidentiality exists with respect to a
disclosure or set of disclosures or, in any event, with respect to all
disclosures, two (2) years from the date of the last documented
disclosure hereunder.
11. This Agreement constitutes the complete agreement between the Parties
with respect to the disclosure of Proprietary Information regarding
the subject(s) set forth in paragraph 2 hereof, and may not be amended
except in writing.
12. All notices under Section 10 or any other section of this Agreement
shall be deemed delivered if deposited with the U.S. Postal Service,
first-class postage prepaid, addressed to the Designated Agent of the
Party intended to receive such notice as follows:
If to CONDUCTUS: If to HELIX:
Dr. Linda Capuano Dr. Peter Kerney
Vice President Mansfield Corporate Center
Conductus, Inc. Nine Hampshire Street
969 West Maude Ave. Mansfield, MA 02048
Sunnyvale, CA 94086
In witness whereof, the Parties have caused this agreement to be
executed as of the date first set forth above.
CTI-CRYOGENICS
A Division of Helix Technology Corporation
BY: /s/ Charles G. Chappell
NAME: Charles G. Chappell
TITLE: Director of Contracts
DATE: June 21, 1994
AGREED TO AND ACCEPTED BY:
Conductus, Inc
NAME: /s/ Linda A. Capuano
--------------------
TITLE: VP
-------------------
DATE: 7-21-94
--------------------
<PAGE>
HIGH-TEMPERATURE SUPERCONDUCTOR THIN-FILM MANUFACTURING ALLIANCE
AGREEMENT
This Agreement for the formation of a High-Temperature Superconductor
Thin-Film Manufacturing Alliance ("this Agreement") is made by and between
the undersigned parties who agree as follows:
OBJECTIVE
The objective of this Alliance is to i) develop cost-effective manufacturing
technologies for yttrium-barium-copper-oxide (YBCO) high temperature
superconductor (HTS) thin films for rf applications, ii) establish industry
standards for substrates, films and testing, and iii) provide second-sourcing
and technology transfer between the companies.
CLASSES OF MEMBERSHIP
The membership of the Alliance shall consist of three classes of members:
Principal Members, Associate Members and Technical Members. As used herein,
the term "Members" shall apply to all classes of membership unless otherwise
indicated.
PRINCIPAL MEMBERS
The initial Principal Members of the Alliance are Conductus, Inc.
("Conductus") and Superconductor Technologies Inc. ("STI"). Subject to any
restrictions imposed in connection with a project (e.g., the ARPA Agreement),
the Executive Committee (as hereinafter defined) may decide to add additional
Principal Members. Principal Members shall have voting representation on the
Executive Committee and the Project Management Committee.
ASSOCIATE MEMBERS
Upon their execution of this Agreement, the initial Associate Members of the
Alliance will be Stanford University ("Stanford"), and Georgia Tech Research
Corporation ("Georgia Tech"). Subject to any restrictions imposed in
connection with a project (e.g., the ARPA Agreement), the Executive Committee
may decide to add additional Associate Members. Associate Members shall be
non-voting participants on the Executive Committee and have voting
representation on the Project Management Committee.
TECHNICAL MEMBERS
Upon their execution of this Agreement, the initial Technical Members of the
Alliance will be Microelectronic Control and Sensing Incorporated, IBIS,
Focused Research and BDM Federal. Subject to any restrictions imposed in
connection with a project (e.g., the ARPA Agreement), the Executive Committee
may decide to add additional Technical Members. Technical Members shall be
non-voting participants on the Project Management Committee.
ADMINISTRATION
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There will be an Executive Committee and a Project Management Committee.
THE EXECUTIVE COMMITTEE
Each Principal Member will designate one person as its voting representative
on the Executive Committee. Each Associate Member may designate one person as
its non-voting attendee at meetings of the Executive Committee . Each voting
representative is authorized to make binding decisions for the Member it
represents. The Executive Committee is empowered to select Authorized
Projects and determine all policy, business, financial and legal issues of
the Alliance. The Executive Committee will consider recommendations of the
Project Management Committee and make final decisions on technical issues.
This Agreement can be amended by and only by the decision of the Executive
Committee. Decisions of the Executive Committee must be passed by unanimous
written vote of the voting representatives except as provided in the
Withdrawal, Breach and Agreement/Program Termination Section, and will be
binding on all Members.
THE PROJECT MANAGEMENT COMMITTEE
Each Principal and each Associate Member will designate one person as a
voting member of the Project Management Committee. The Project Management
Committee will develop and manage the technical projects which will meet the
Objective of the Alliance as determined by the Executive Committee. The
Project Management Committee will consider technical issues, provide guidance
and propose direction to the Executive Committee on technical matters . Any
such projects are subject to approval of the Executive Committee. Each
Technical Member may designate one person to attend meetings of the Project
Management Committee and advise on issues related to their technical
responsibilities on Authorized Projects.
AUTHORIZED SIGNATURE MEMBER
Under the ARPA Agreement one Principal Member will be authorized by the
others to negotiate with the government and by its signature commit the
Alliance. This Member will be called the "Authorized Signature Member."
The Authorized Signature Member will only make commitments for the Alliance
as approved by the Executive Committee.
The Authorized Signature Member will also submit bills to the government and
will be the communication contact with the government agency for the ARPA
contract.
For the specific case of the ARPA Agreement, Conductus is designated as the
Authorized Signature Member for the first twelve months of the ARPA Agreement
and each Member authorizes Conductus to represent the Members in connection
with the ARPA Agreement consistent with the direction provided by the
Executive Committee.
ACCOUNTING LIABILITY AND INDEMNIFICATION
No Principal Member will have the right to audit the financial accounts of
the others. Each Principal Member will be responsible and liable for its own
accounting and auditing responsibilities and will indemnify and hold harmless
the other Principal Members for and against any and all liability arising out
of its accounting and auditing.
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<PAGE>
AUTHORIZED PROJECTS
The Executive Committee will designate which projects will be Authorized
Projects to meet the Objective under this Agreement
As the initial Authorized Project, each Member commits to use its diligent
effort to perform the tasks assigned to it under the proposal titled "HTS
Thin-Film Manufacturing Alliance: Intelligent Manufacturing of High
Temperature Superconductor Thin Films" which was submitted to Department of
Defense Advanced Research Projects Agency (ARPA) in response to ARPA BAA
94042 on September 21, 1994 (attached as Appendix A) and the Award which will
become Appendix B when executed by the Department of Defense and any
additional terms of the prime award as flowed down to the collaborators under
sub-contracts or lower tier contracts. These documents will be referred to
as the "ARPA Agreement."
The Executive Committee may decide to add additional Authorized Projects from
time to time as it sees fit.
INTELLECTUAL PROPERTY OWNERSHIP, LICENSING AND ROYALTIES
"Technology" 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 identified tasks assigned to any Member. The
identified tasks shall be those tasks (i) agreed to by the Member in the
Statement of Work of the ARPA Agreement, (ii) agreed to in writing by the
Member with other Members of the Alliance, or (iii) assigned in writing to
the Member by the Executive Committee. Each Member shall own the title to
any Technology created solely by its employees or agents. Jointly developed
Technology shall be jointly owned. Intellectual property rights to
Technology developed by Members of the Alliance shall be as set forth herein.
Inventions which have been reduced to practice by a Member prior to the
effective date of this Agreement or have been conceived and reduced to
practice by a Member independent of this Agreement are excluded from
Technology and no rights or privileges are granted other Members under this
Agreement.
Each sole or joint Owner of any Technology has sole or joint ownership of and
unrestricted rights to fully exploit that Technology and, subject to the
following, may grant licenses without the consent of any other Owners.
Members who are not Owners will have non-exclusive, irrevocable, worldwide,
paid-up licenses with no right to sublicense to make, have made, use, sell
and have sold products incorporating such Technology.
Such licenses and the rights of Owners and nonowners are subject, in the case
of Technology developed under the ARPA Agreement, to the Government rights as
specified in Appendix B.
Joint Owners of Technology shall mutually agree whether to obtain, maintain,
enforce or defend intellectual property rights in such Technology and to
share income from licensing such Technology. Each such Owner will execute
any necessary documents
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<PAGE>
reasonably requested for the purpose of obtaining and maintaining rights to
the Technology. With respect to enforcement, it is expected that expenses
incurred in taking such actions will be equally shared by the Owners, but if
an Owner declines to bear its share of enforcement expenses, its ownership
and rights will not be affected except that such Owner will not be entitled
to any proceeds of an action to enforce such intellectual property rights if
it did not share the expenses of the enforcement action. However, such Owner
will still be entitled to receive its share of royalties to the extent that
the royalties are not for infringements litigated in the enforcement action.
Any Technology conceived but not reduced to practice by a Member who is
withdrawing from this Agreement or whose participation in this Agreement has
been terminated shall report such Technology to the Executive Committee.
Members shall have ninety (90) days after notification of the Executive
Committee in which to exercise rights to further support research under this
Agreement directed to reduction to practice of such Technology. If such
rights are exercised, Members shall be entitled to all of the rights to the
Technology of Members and/or Owners, as applicable, under this Section as if
the Technology had been conceived and reduced to practice under this
Agreement. If such rights are not exercised, the withdrawing Member who is
an Owner of such Technology shall have no further obligations to Members in
relation to such Technology.
WITHDRAWAL, BREACH AND AGREEMENT/PROGRAM TERMINATION
Any Member may voluntarily withdraw and cease being a Member of the Alliance
upon three (3) months prior written notice to the other Members, subject to
any restrictions on withdrawal imposed in connection with a project (e.g.,
the ARPA Agreement requires that any withdrawal be approved by the
Administrator defined in the ARPA Agreement document in Appendix B). A
withdrawn Member shall retain any licenses it obtained prior to withdrawal
and will continue to have all rights and obligations of an Owner hereunder
with respect to Technology of which it is an Owner.
If a Member materially breaches obligations under this Agreement and does not
cure such breach within 60 days of notice, the Executive Committee may, by
vote of all Principal Members except the representative of the breaching
Member, terminate that Member's participation in this Agreement. Such
termination will have the same effect as withdrawal by the breaching Member.
CONFIDENTIALITY
The Members agree that all business, technical and financial information
disclosed by a Member in connection with activity under this Agreement,
except Technology, is deemed "Proprietary Information" of such Member. Such
Proprietary Information will be in writing and designated as Proprietary
Information. A receiving Member will hold in confidence and not use or
disclose any Proprietary Information to any third party or another Member for
a period of 3 years from initial disclosure hereunder.
Notwithstanding the foregoing, a receiving Member shall not be restricted
with respect to information which:
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<PAGE>
(a) is or has become lawfully publicly available without restriction
through no fault of the receiving Member or its employees or agents;
or
(b) is received without restriction from a third party lawfully in
possession of such information and lawfully empowered to disclose
such information; or
(c) was rightfully in the receiving Member's possession without
restriction prior to its disclosure by the other Member; or
(d) is developed by employees of the receiving Member independently of
another Member's confidential information.
(e) is required to be disclosed under the order of a court of competent
jurisdiction.
Any proprietary information exchanged by the Members hereunder shall be
identified by the furnishing Member as such by (i) appropriate stamp or
marking on the documents exchanged, or (ii) written notice of any other
disclosures made under prior assertion of proprietorship.
Members shall have an unrestricted right to publish the results of their own
Project Research and technology in scientific publications or through other
means of publication. In order to protect other Member's Proprietary
Information and/or allow for the timely filing of patent applications, a copy
of the manuscript shall be submitted to each Member of the Project Management
Committee for review and comment thirty (30) days prior to submission of the
manuscript to a publisher. Should a Member wish to file a patent application
that it has the right to file, the proposed publication may be delayed for an
additional sixty (60) days, the total delay not to exceed ninety (90) days
from submission of the manuscript to the Project Management Committee. At
the request of a Member, its Proprietary Information shall be deleted from
any publication.
Except as reasonably necessary in connection with the exercise of rights
described or granted in this Agreement, no Member will disclose or publish
non-public Technology which is not owned by that member, except as authorized
by the Executive Committee.
A withdrawn Member will continue to be obligated by the terms of this
Confidentiality section.
INDEPENDENT CONTRACTORS; NO SEPARATE ENTITY
This Agreement does not create any new entity or any partnership or similar
relationship between all or any of the parties. Notwithstanding the
Authorized Signature Member's authority regarding the ARPA Agreement, no
Member or group of Members is the agent or has the right to bind or create
any obligation on behalf of any other Member and no Member will take any
action, make any assertion or create any implication to the contrary. In
addition, the Authorized Signature Member will not be considered the prime
contractor and will not represent itself as the prime contractor. All
members will represent themselves as equal participants under the ARPA
Agreement.
TERM OF THE AGREEMENT
(a) This Agreement and the Alliance shall continue from the execution date
of this Agreement for a period of three years, unless terminated earlier
under any provision of
Page 5 of 14
<PAGE>
section (b) hereof or under the Termination Provisions of this Agreement. It
may be renewed at any time prior to the expiration of the term of this
Agreement by letter agreement signed by all members of the Executive
Committee at that time.
(b) This Agreement shall terminate if:
(i) disapproved by the Attorney General or the Federal Trade
Commission;
(ii) the funding of the Statement of Work is terminated by ARPA;
(iii) funding is not provided by ARPA by September 30, 1995.
In the event of termination of the ARPA Agreement for any reason, this
agreement shall remain in full force until the Executive Committee specifies
that all business matters between the Members have been properly settled and
closed out.
DISCLAIMER OF WARRANTY
THE MEMBERS DISCLAIM ANY EXPRESS OR IMPLIED WARRANTIES, INCLUDING WITHOUT
LIMITATION A WARRANTY AGAINST INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS,
THE IMPLIED WARRANTIES FOR MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, TO EACH OTHER, TO ANY AGENCY, AND TO THIRD PARTIES FOR ACTIONS,
OMISSIONS, PRODUCTS, NONCONFORMITIES, DEFECTS, LIABILITIES, OR INFRINGEMENT
ARISING OUT OF THE ACTIVITIES OF THE ALLIANCE. The Members are bound to each
other and to ARPA entering into an agreement with the Alliance by a duty of
only good faith and "reasonable efforts" research in achieving the goals of
the Alliance. Joint and several liability will not attach to the Members of
the Alliance so that no Member is responsible for the actions of another
Member but is responsible only for those tasks assigned to it and to which it
agrees in the ARPA Agreement. THE MEMBERS FURTHER DISCLAIM ANY LIABILITY FOR
CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES. IN NO EVENT SHALL A MEMBER'S
LIABILITY UNDER THIS AGREEMENT EXCEED THE FUNDING IT HAS RECEIVED UP TO THE
TIME OF INCURRING SUCH LIABILITY. Any Member may waive any right, breach or
default which such Member has the right to waive, provided that such waiver
shall not be effective against the waiving Member unless it is in writing, is
signed by such Member, and specifically refers to these Articles. No waiver
of any breach of any agreement or provision herein contained shall be deemed
a waiver of any preceding or succeeding breach thereof nor of any other
agreement or provision herein contained. Nothing contained herein shall
constitute a release of any Party for claims of infringement of the
intellectual property rights of the Members.
GENERAL PROVISIONS
Any notice, report, approval or consent required or permitted hereunder shall
be in writing and will be deemed to have been duly given if delivered
personally or mailed by first-class, registered or certified US mail, postage
prepaid to the respective addresses of the Members as set forth in the
Notification section of this Agreement or such other address as modified by a
Member by giving the other Members ten (10) business days written notice.
Page 6 of 14
<PAGE>
If any provision of this Agreement shall be adjudged by any court of
competent jurisdiction to be unenforceable or invalid, 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.
This Agreement shall be deemed to have been made in, and shall be construed
pursuant to the laws of the United States.
This Agreement and the rights and obligations hereunder are not transferable
or assignable without the prior written consent of the Members, except that
any Member may assign this Agreement without consent to a successor to
substantially all its business or assets and the Georgia Tech Research
Corporation my assign this Agreement to the Georgia Institute of Technology.
ENTIRE AGREEMENT
Unless otherwise specified, this Agreement embodies the entire understanding
among the parties, and any prior or contemporaneous representations, either
oral or written, are hereby superseded. Notwithstanding any other provision
herein, no amendments or changes to this Agreement, including without
limitation, changes in the statement of work, total estimated cost, and
period of performance, shall be effective unless made in writing and signed
by authorized representatives of the parties.
NOTIFICATION
All communications with respect to this document will be sent to the
following representative of each Principal Member:
Conductus:
Name: William J. Tamblyn
Title: Vice President and Chief Financial Officer
Address: Conductus, 969 West Maude Avenue, Sunnyvale, CA 94086
STI:
Name: Boo J.L. Nilsson
Title: Director of Operations
Address: Superconductor Technologies, Inc., 460 Ward Drive, Suite F,
Santa Barbara, CA 93111-2310
EFFECTIVE DATE
This Agreement is effective when signed by each Principal Member. All other
Members shall become Members on the date executed by any such Member.
Page 7 of 14
<PAGE>
PRINCIPAL MEMBER SIGNATURES
The parties hereto have executed this Agreement with intent to be bound
thereby and each is a duly authorized officer or representative of his/her
organization.
Conductus:
Signature: /S/ Date: 11/17/95
---------------------------- ---------
Name: William J. Tamblyn
Title: Vice President and Chief Financial Officer
Address: Conductus, 969 West Maude Avenue, Sunnyvale, CA 94086
Superconducting Technologies, Inc.:
Signature: /S/ Date: 11/14/95
---------------------------- ---------
Name: James G. Evans, Jr.
Title: Vice President and Chief Financial Officer
Address: Superconductor Technologies, Inc., 460 Ward Drive, Suite F, Santa
Barbara, CA 93111-2310
Page 8 of 14
<PAGE>
ASSOCIATE MEMBERSHIP SIGNATURES
Associate Members shall become parties to this Agreement upon execution of
the Agreement as authorized by the Executive Committee.
The parties hereto have executed this Agreement with intent to be bound
thereby and each is a duly authorized officer or representative of his/her
organization.
Stanford University:
Signature: /S/ Date: 1/9/95
---------------------------- --------
Name: Lillie Ryans-Culclager
Title: Senior Contract Officer
Address: Edward L. Ginzton Laboratory
Stanford, CA 94035-4085
Accepted by: /S/
--------------------------
William J. Tamblyn
Page 9 of 14
<PAGE>
Georgia Research Corporation:
Signature: /S/ Date: 10/25/95
---------------------------- ---------
Name: David B. Bridges
Title: Asst. to VP/Gen.Mgr.
Address: 400 Tenth Street
Atlanta, GA 30332-0420
Accepted by: /S/
--------------------------
William J. Tamblyn
Signature: /S/ Date: 10/25/95
---------------------------- ---------
Name: J.W. Dees
Title: Asst. Secretary
Address: 400 Tenth Street
Atlanta, GA 30332-0420
Accepted by: /S/
--------------------------
William J. Tamblyn
APPROVED AS TO LEGAL FORM
/S/ Gail Gunnells
- -----------------
Page 10 of 14
<PAGE>
TECHNICAL MEMBERSHIP SIGNATURES
Technical Members shall become parties to this Agreement upon execution of
the Agreement as authorized by the Executive Committee.
The parties hereto have executed this Agreement with intent to be bound
thereby and each is a duly authorized officer or representative of his/her
organization.
COMPANY: Microelectronic Control and Sensing Incorporated
Signature: /S/ Date: 12/22/95
---------------------------- ---------
Name: Charles Schaper
Title: President
Address: 950 High School Way #3327
Mountain View, CA 94041
Accepted by: /S/
--------------------------
William J. Tamblyn
Page 11 of 14
<PAGE>
COMPANY: IBIS
Signature: /S/ Date: 12/29/95
---------------------------- ---------
Name: John Busch
Title: President
Address: 55 William Street, Suite 220
Wellesley, MA 02181-4403
Accepted by: /S/
--------------------------
William J. Tamblyn
Page 12 of 14
<PAGE>
COMPANY: Focused Research
Signature: /S/ Date: 1/3/96
---------------------------- -------
Name: Timothy Day
Title: Vice President
Address: 2630 Walsh Avenue
Santa Clara, CA 95051
Accepted by: /S/
--------------------------
William J. Tamblyn
Page 13 of 14
<PAGE>
COMPANY: BDM Federal
Signature: Date:
---------------------------- -------
Name:
Title:
Address: 4001 N. Fairfax Drive, Suite 750
Arlington, VA 22203-1714
Accepted by:
--------------------------
Page 14 of 14
<PAGE>
LOAN MODIFICATION AGREEMENT
This Loan Modification agreement is entered into as of August 15, 1995, by
and between Conductus, Inc. (the "Borrower") whose address is 969 West Maude
Avenue, Sunnyvale, CA 94086, and Silicon Valley Bank (the "Lender") whose
address is 3000 Lakeside Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated August 15, 1994, in the
original principal amount of One Million Five Hundred Thousand and 00/100
Dollars ($1,500,000.00) (The "Term Note") and a Promissory Note, dated August
15, 1994, in the original principal amount of One Million and 00/100 Dollars
($1,000,000.00)(the "Line"). The Term Note and the Line shall be referred to
herein as the Notes. The Notes, together with other promissory notes from
Borrower to Lender, are governed by the terms of a Business Loan Agreement,
dated August 15, 1994, between Borrower and Lender, as such agreement may be
amended from time to time (the "Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred
to as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES: Repayment of the Indebtedness
is secured by a Commercial Security Agreement, dated August 15, 1994 (the
"Security Agreement"). In addition to the foregoing, Borrower has agreed not
to sell, transfer, assign, mortgage, pledge, lease, grant a security interest
in, or encumber any of Borrower's intellectual property.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Notes (and other notes executed by Borrower
in favor of Lender) shall be referred to as the "Security Documents".
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Line.
1. Payable in one payment of all outstanding principal plus all
accrued unpaid interest on August 14, 1996. In addition, Borrower will pay
regular monthly payments of all accrued unpaid interest due as of each
payment date, beginning September 14, 1995 and all subsequent interest
payments will be due on the same day of each month thereafter.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay Lender a fee in the amount of
Three Thousand Three Hundred Thirty Three and 00/100 Dollars (3,333.00)(The
"Loan Fee") plus all out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of this date, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in the Existing Loan Documents. Except as expressly
modified pursuant to this Loan Modification Agreement, the terms of the
Existing Loan Documents remain unchanged
<PAGE>
and in full force and effect. Lender's agreement to modifications to the
existing Indebtedness pursuant to this Loan Modification Agreement in no way
shall obligate Lender to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction
of the Indebtedness. It is the intention of Lender and Borrower to retain as
liable parties all makers and endorsers of Existing Loan Documents, unless
the party is expressly released by Lender in writing. No maker, endorser, or
guarantor will be released by virtue of this Loan Modification Agreement. The
terms of this Paragraph apply not only to this Loan Modification Agreement,
but also to all subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
CONDUCTUS, INC. SILICON VALLEY BANK
By: /s/ William J. Tamblyn By: /s/ Simon James
Name: William J. Tamblyn Name: Simon James
Title: Vice President/CFO Title: Vice President
<PAGE>
[Logo of Silicon Valley Bank]
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: CONDUCTUS, INC.
LOAN OFFICER: SIMON JAMES
DATE: AUGUST 15, 1995
Loan Fee $3,333.00
______________
Total $3,333.00
Please indicate the method of payment:
{ } A check for the total amount is attached.
{x} Debit DDA #03516792-70 for the total amount.
{ } Loan Proceeds
/s/ William J. Tamblyn 6/21/95
________________________________
Authorized Signer (Date)
________________________________
Silicon Valley Bank (Date)
Account Officer's Signature
<PAGE>
[Logo of Silicon Valley Bank]
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: CONDUCTUS, INC.
LOAN OFFICER: SIMON JAMES
DATE: JUNE 20, 1995
Loan Fee $3,750.00
____________
Total $3,750.00
Please indicate the method of payment:
{ } A check for the total amount is attached.
{x} Debit DDA #03516792-70 for the total amount.
{ } Loan Proceeds
/s/ William J. Tamblyn 6/21/95
__________________________________
Authorized Signer (Date)
__________________________________
Silicon Valley Bank (Date)
Account Officer's Signature
<PAGE>
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of June 10, 1996,
by and between Conductus, Inc. (the "Borrower") whose address is 969 West
Maude Avenue, Sunnyvale, CA 94086, and Silicon Valley Bank (the "Lender")
whose address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated August 15, 1994, in the
original principal amount of One Million and 00/100 Dollars ($1,000,000.00)
(the "Line"), a Promissory Note, dated August 15, 1994, in the original
principal amount of One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00) (the "Term Note 1") and a Promissory Note dated March 1,
1996, in the original principal amount of One Million and 00/100 Dollars
($1,000,000.00) (the "Term Note 2"). The Line has been modified pursuant
to Loan Modification Agreements dated August 15, 1995 and March 1, 1996
pursuant to which, among other things, the principal amount of the Line was
increased to Two Million and 00/100 Dollars ($2,000,000.00). The Term Note 1
has been modified pursuant to Loan Modification Agreements dated June 20,
1995, pursuant to which, among other things, the principal amount of the
Term Note was increased to Two Million and 00/100 Dollars ($2,000,000.00) and
further modified by that certain Loan Modification Agreement dated March 1,
1996. The Term Note 1, the Term Note 2 and the Line shall be referred to
herein as the "Notes". The Notes, together with other promissory notes from
Borrower to Lender, are governed by the terms of a Business Loan Agreement,
dated August 15, 1994, between Borrower and Lender, as such agreement may
be amended from time to time (the "Loan Agreement"). Defined terms used
but not defined herein shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred
to as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES: Repayment of the Indebtedness
is secured by a Commercial Security Agreement, dated August 15, 1994 (the
"Security Agreement"). In addition to the foregoing, Borrower has agreed not
to sell, transfer, assign, mortgage, pledge, lease, grant a security interest
in, or encumber any of Borrower's intellectual property.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Indebtedness shall be referred to as the
"Security Documents". Hereinafter, the Security Documents, together with
all other documents evidencing or securing the Indebtedness shall be
referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. WAIVER OF DEFAULT
Lender hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the
maximum loss covenant as of the quarter ended March 31, 1996.
Lender's waiver of Borrower's compliance with this covenant
shall apply only to the foregoing period. Accordingly, for the
quarter ending June 30, 1996, Borrower shall be in compliance
with this covenant as amended pursuant to this Loan Modification
Agreement.
Lender's agreement to waive the above-described default (1) in
no way shall be deemed an agreement by the Lender to waive
Borrower's compliance with the above-described covenant as
of all other dates and (2) shall not limit or impair the Lender's
right to demand strict performance of this covenant as of all
other dates and (3) shall not limit or impair the Lender's
right to demand strict performance of all other covenants as of
any date.
<PAGE>
B. MODIFICATION(S) TO LINE.
1. Effective as of this date, the interest rate to be applied to
the unpaid principal balance of the Line is hereby increased
to one and one-half percentage points (1.500) over the Lender's
current Index (as defined therein). Notwithstanding the
foregoing, in the event Borrower has not raised additional
equity of at least $5,000,000.00 on or prior to June 28, 1996,
the interest rate shall further increase to two percentage
points (2.000) over the Lender's then current Index. At such
time as Borrower has received the above-described additional
equity, the interest rate shall be decreased to one-half of one
percentage point (0.500) over the Lender's then current Index.
The effective date of such interest rate change shall be the
first day of the month following Lender's receipt of Borrower's
financial statements showing such above-described criteria has
been met.
C. MODIFICATION(S) TO LOAN AGREEMENT
1. The paragraph entitled "Financial Covenants" is hereby amended,
in its entirety, to read as follows:
Borrower shall maintain, on a monthly basis, a minimum quick
ratio of 0.85 to 1.00; a minimum tangible net worth of
$3,000,000.00; and a maximum total debt minus subordinated
debt to tangible net worth plus subordinated debt ratio of
2.00 to 1.00. Furthermore, Borrower may incur losses, provided,
such losses shall not exceed $1,400,000.00 for the quarter
ending June 30, 1996 and $1,000,000.00 for the quarter ending
September 30, 1996. Additionally, Borrower shall maintain, on
a quarterly basis, a minimum liquidity ratio of 1.50 to 1.00.
Notwithstanding the foregoing, if the liquidity ratio falls
below 1.50 to 1.00, it shall not be deemed an Event of Default,
provided that Borrower pledges to Lender cash in an amount
equal to fifty percent (50%) of the outstanding principal amount
of the Term Notes. Furthermore, beginning as of the period
ending June 28, 1996, if the liquidity covenant ratio falls
below 1.25 to 1.00, it shall not be deemed an Event of Default,
provided that Borrower pledges to Lender cash in an amount equal
to one hundred percent (100%) of the outstanding principal
amount of the Term Notes. Borrower shall grant to Lender a
security interest in such cash deposit, which cash deposit
shall be held in an account with Lender.
2. Until such time as Borrower has raised a minimum of $5,000,000.00
in additional equity, Borrower shall comply with the following
revised "Borrowing Base Formula":
Funds shall be advanced under the Line according to a borrowing
base formula, as determined by Lender, defined as follows: The
lesser of (i) $2,000,000.00 minus the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of
Credit) or (ii) eighty percent (80%) of eligible accounts
receivable minus the face amount of outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit).
Eligible accounts receivable shall include, but not be
limited to, those accounts outstanding less than 90 days from
the date of invoice, excluding foreign, contra, and intercompany
accounts; and excluding accounts wherein 50% or more of the
account is outstanding more than 90 days from the date of invoice.
Foreign accounts may be eligible if approved by Lender on a
case by case basis. Also excluded are any credit balances which
are aged past 90 days. Also ineligible are any accounts which
Lender in its sole judgment excludes for valid credit reasons.
2
<PAGE>
Notwithstanding the foregoing, at such time as Borrower raises
at least $5,000,000.00 in additional equity the borrowing
formula will revert to the currently existing formula as described
in the Loan Modification Agreement dated March 1, 1996.
3. If Borrower has not raised at least $5,000,000.00 in additional
equity by June 28, 1996, Borrower agrees to issue to Lender
a Warrant to purchase 5,000 additional shares of Borrower's
Common Stock with an exercise price to be determined on
June 28, 1996. The Warrant shall be subject to net exercise
provisions, and registration rights. The Warrant shall be on
Lender's standard form and shall be for a term of 5 years.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay Lender a fee in the amount of
Five Thousand and 00/100 Dollars ($5,000.00) (the "Loan Fee") plus all
out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of this date, it has no defense against the
obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and agreements,
as set forth in the Existing Loan Documents. Except as expressly modified
pursuant to this Loan Modification Agreement, the terms of the Existing
Loan Documents remain unchanged and in full force and effect. Lender's
agreement to modifications to the existing Indebtedness pursuant to this
Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers
and endorsers of Existing Loan Documents, unless the party is expressly
released by Lender in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to
all subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
CONDUCTUS, INC. SILICON VALLEY BANK
By: By:
--------------------------- --------------------------------
Name: Name:
--------------------------- --------------------------------
Title: Title:
--------------------------- --------------------------------
3
<PAGE>
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: CONDUCTUS, INC.
LOAN OFFICER: Simon James
DATE: June 10, 1996
Documentation Fee $5,000.00
FEES DUE $5,000.00
-------- ---------
---------
Please indicate the method of payment:
( ) A check for the total amount is attached.
( ) Debit DDA# ____________________ for the total amount.
( ) Loan proceeds
- -----------------------------------------
Authorized Signer (Date)
- -----------------------------------------
Silicon Valley Bank (Date)
Account Officer's Signature
