<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11915
CONDUCTUS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0162388
(State of incorporation) (I.R.S. Employer Identification No.)
969 W. Maude Avenue
Sunnyvale, California 94086
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 523-9950
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock,
$0.0001 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of February 28, 1997, was approximately $40,803,665 based on
the closing sale price of the Company's Common Stock, as reported by the
Nasdaq National Market on February 28, 1997. Shares of Common Stock held by
each officer, director and holder of 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
On February 28, 1997, approximately 6,843,127 shares of the Registrant's
Common Stock, $0.0001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in those parts of
this Annual Report on Form 10-K as set forth below, but only to the extent
specifically stated in such parts hereof:
1. Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Stockholders scheduled to be held on May 22, 1997, are
incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
Item 1. Business .................................................. 1
Item 2. Properties ................................................ 21
Item 3. Legal Proceedings ......................................... 21
Item 4. Submission of Matters to a Vote of Security-Holders ....... 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ....................................... 23
Item 6. Selected Financial Data ................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 25
Item 8. Financial Statements and Supplementary Data ............... 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 27
PART III
Item 10. Directors and Executive Officers of the Registrant ........ 28
Item 11. Executive Compensation .................................... 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................ 28
Item 13. Certain Relationships and Related Transactions ............ 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ............................................... 28
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PART I
ITEM 1. BUSINESS
OVERVIEW
THE BUSINESS SECTION AND OTHER PARTS OF THIS FORM 10-K 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 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.
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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 integral
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.
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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>
HTS THIN-FILM
TECHNOLOGY COMMUNICATIONS HEALTHCARE INSTRUMENTATION
------------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Pre-1991 Developed multi-layer
HTS technology.
1991 Sold first single- and Demonstrated low phase- Made world's first YBCO
multilayer HTS films. noise YBCO resonator. integrated SQUID
Developed biepitaxial magnetometer.
junctions for use in HTS
SQUID manufacture.
1992 Demonstrated YBCO Demonstrated HTS Demonstrated HTS MRI Introduced Mr. SQUID-Registered
film with state-of-the- microwave delay lines. receiver coil. Trademark- HTS SQUID magnetometer.
art low surface
resistance on MgO
substrate.
1993 Demonstrated hybrid Demonstrated HTS Began development of Acquired systems
semiconductor- microwave subsystem. NMR probe subsystem. subsidiary.
superconductor structure
on a single substrate.
1994 Fabricated single-sided Delivered HTS microwave Signed joint Introduced iMAG-Registered
4" YBCO wafers. subsystem to USN development agreement Trademark- high performance
satellite mission. with Varian on HTS HTS and LTS SQUID systems.
NMR spectrometer
probes.
1995 Established Fabricated 19-pole First commercial sales Introduced xMag-TM- magnetic
coevaporation cellular filter on 3" of NMR probe to Varian. measurement system.
deposition process. substrate.
Demonstrated integrated Announced program with
cellular filter subsystem Stanford University to
at industry trade shows develop MRI for
and to OEMs. mammography.
1996 Began production of Performed first field Signed joint development Began OEM shipments of
single-and double sided tests of prototype filter agreement with Siemens magnetic sensors.
wafers by coevaporation. subsystem for rural for low-field MRI coil.
cellular market.
Formed alliance with Introduced first HTS
Lucent and CTI to NMR probe product to
develop filter subsystem the market.
for PCS market.
Began beta deployment
of rural cellular
filter subsystems.
Performed initial
laboratory and field
tests of prototype
filter subsystem for
PCS market.
</TABLE>
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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 21 U.S. patents and one related
foreign patent and has 15 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 5. In the cellular market, Conductus
completed laboratory and initial field tests of its low-noise receiver filter
subsystems for base stations and began limited beta deployment in 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 and Nalorac, an independent
probe vendor. In addition, the Company plans to develop other spectrometer
probe types during 1997 as well as demonstrate prototype receiver coil
subsystems for MRI machines.
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 granted feature of its
products that requires no special expertise or skill on the part of the user.
The Company believes that providing its technology at the subsystem level to
system manufacturers in specific markets will allow it to most rapidly and
efficiently expand both its product line and its customer base.
DEVELOP COMMERCIAL INFRASTRUCTURE. Conductus is building the
manufacturing, sales and marketing infrastructure it believes is necessary to
support the commercialization of its products in target markets. This
includes development of thin-film deposition techniques suitable for volume
manufacture, acquisition and 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
and healthcare markets.
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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 December 1996.
TARGET MARKETS AND COMMERCIALIZATION STATUS
<TABLE>
<CAPTION>
CONDUCTUS POTENTIAL TARGET CURRENT
MARKET PRODUCT PRODUCT BENEFITS MARKET PARTNER STATUS
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<S> <C> <C> <C> <C> <C>
COMMUNICATIONS Cellular Increased range for Rural segment of Completed
receiver filter existing and new rural installed base of laboratory and initial
subsystem base stations. 40,000 base stations field tests. Additional
worldwide + buildout. field tests ongoing.
PCS transceiver Increased range, higher Forecast buildout of Lucent Developed initial
subsystem call capacity, reduced 70,000 PCS base Technologies prototype filter
interference, higher stations in the U.S. (April 1996) subsystems and completed
quality connections, by the year 2000. initial field test.
reduced size. Anticipate commercial
sales in late 1997
or early 1998.
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HEALTHCARE NMR probe Allows use of smaller Estimated 400 new Varian First production units of
subsystem samples or higher machines per year; (November 1994) (1)H and (19)F probe
throughput. Allows installed base of subsystems delivered.
analysis of more 3,000+ machines. Nalorac Commenced commercial
complex compounds. (November 1996) shipments in 1996. Expect
Achieves performance introduction of (13)C probe
of high-end system in 1997. Developing
with lower cost prototypes of additional
equipment. probes.
MRI receiver Better images, faster Estimated 100+ new Siemens Developing prototypes
subsystem for scan time, increased machines per year; (December 1995) subsystems in 1996/1997.
low-field throughput in lower estimates installed
scanners cost MRI systems. base of 500 machines.
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INSTRUMENTATION Laboratory Highly sensitive Research Commercial production of
measurement measurement of laboratories. HTS and LTS products
magnetic properties
of materials. First
HTS magnetic sending
products available to
researchers.
SQUID Sensors and subsystems New markets in Kanazawa Providing components for
magnetometers, for incorporation into medicine, geophysics, Institute of KIT and research customers.
gradiometers magnetic sensing testing. Technology
and front-end systems for medical, ("KIT")
electronics geophysical and non-
destructive evaluation
instruments.
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</TABLE>
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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 there in. 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 economical, is
to enhance the signal reception and noise filtering capabilities of existing
base stations. Conventional 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.
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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 its 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 is being 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 drives the need 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 and cryocooled components in their receivers. 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. 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. Finally, the inherent compact nature of thin-film HTS
filters can result in subsystems that are smaller and lighter than their
conventional counterparts. Conductus is developing several versions of HTS
filter subsystems incorporating cryogenic refrigeration components under the
trade name "ClearSite-TM-".
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. 5, 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 given
geographic area. Initial field tests with these filter systems completed in
early 1996 show range expansions of 20% to 60%. Late in the year, Conductus
began a multi-month beta trial of HTS filter subsystems operated by CellCom
in Wisconsin. 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 was a part of the activities of the Consortium for
Superconductor Electronics wireless program, which primarily involved
Conductus, American Telephone and Telegraph Company, MIT Lincoln Laboratories
and CTI-Cryogenics, a division of Helix Technology Corporation. It is
currently part of a joint effort with Lucent Technologies.
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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 in 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 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 and require special construction to house them. 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.
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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 introduced its first NMR
probe products in March 1996, pursuant to an OEM arrangement with Varian. See
table page 5, Target Markets and Commercialization Status. Currently,
Conductus is manufacturing and selling through Varian and Nalorac two NMR
probe types, each of which is available in two frequencies. The Company
anticipates introducing a third NMR probe type for commercial sale early in
1997 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 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 currently are 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
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.
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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 page
5, Target Markets and Commercialization Status. Conductus' standard products
include magnetic sensing components sold under the tradenames
"iMAG-Registered Trademark-" and Mr. "SQUID-Registered Trademark-" and a
complete magnetometer system sold under the tradename "xMAG-TM- List prices
for complete iMAG systems generally range from $7,000 to over $40,000
depending on the configuration. Mr. SQUID has a list price of approximately
$2,000. List prices for complete xMAG systems generally range from $87,000 to
over $140,000 depending on the configuration,
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 Conductus is working with researchers at Kanazawa Institute of
Technology in Japan to develop SQUID-based instruments for seismic studies
and for biomedical applications. Conductus has also sold sensors, electronics
and cryogenic vessels to other 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, as well as 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 Outlet 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 tests of a prototype of the receiver portion of the subsystem were
conducted in April 1996. A more complex prototype subsystem containing six
HTS receiver channels and three conventional transmit filters was delivered
to Lucent at the end of the year. 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.
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 In November 1996, preliminary measurements on "phantom" (i.e.
non-human) samples were made using the HTS coil system Conductus expects
the first human images to be obtained in the first half of 1997. All
intellectual property rights will remain with the party developing the
intellectual property, and jointly developed property will be jointly owned.
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<PAGE>
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 is developing biomedical systems based on SQUID technology.
Conductus has received several orders for LTS SQUIDs under this agreement,
which 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. Furthermore, 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 fiscal years 1996, 1995 and 1994 were approximately $11,774,000,
$9,819,000, and $9,201,000, respectively. Externally funded research and
development programs, primarily under contracts with agencies of the U.S.
government, accounted for approximately $13,178,000, $9,176,000, and
$8,717,000 of total operating expenses in the fiscal years 1996, 1995, and
1994, respectively. The Company's revenue from government-related contracts
represented approximately 77%, 77%, and 82% of total revenues for the fiscal
years 1996, 1995 and 1994, 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
December 31, 1996, the Company had received aggregate awards since its
inception of approximately $46,422,000 from U.S. government agencies,
including approximately $33,006,000, recognized as revenue by the Company
through December 31, 1996, and approximately $8,796,000, in awards for which
it has not yet entered into research contracts. As of December 31, 1996,
Conductus had approximately $4,620,000, 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."
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<PAGE>
As shown in the examples below, these contract programs and others enable
Conductus to develop its core technologies and support Conductus' business
areas.
GOVERNMENT-SUPPORTED RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
SELECTED FUNDING AGENCIES
<S> <C> <C>
Defense Advanced Research Projects National Aeronautics and Space Naval Research Laboratory
Agency Administration
Office of Naval Research
Department of Commerce National Institutes of Health
United States Navy
Department of Energy
</TABLE>
SELECTED AREAS OF RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
TECHNOLOGIES COMMUNICATIONS HEALTHCARE INSTRUMENTATION
- ------------ -------------- ---------- ---------------
<S> <C> <C> <C>
Thin Films Transmit filters NMR spectroscopy SQUID Technology
Multilayer films Cellular receivers MRI SQUID Amplifiers
Cryo Packaging 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 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 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."
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. Eight
members have had consulting agreements with the Company 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;
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<PAGE>
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 21 U.S. patents and one related foreign patent
which have unexpired term ranging from 13 to 18 years and has 15 patent
applications pending before the U.S. Patent and Trademark Office.
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 owner 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 "-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. duPont de Nemours & Co.
("DuPont") has notified Conductus that it is the exclusive licensee of
patents issued in Israel, Sweden, Taiwan and the United Kingdom covering the
composition of YBCO and a method for using YBCO in superconducting
applications. 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 result and financial condition.
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.
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<PAGE>
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 trademarks
"xMAG", "ClearSite-TM-", and "pcSQUID". See "Risk Factors -- Uncertainty of
Patents and Proprietary Rights; Risk of Litigation."
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 "-Properties." Conductus combines what it believes to be the
world's most advanced YBCO thin-film technology with expertise in electronic
and device component design, analog and digital electronic engineering,
cryogenic packaging, mechanical engineering and system integration.
The primary materials and equipment used in Conductus' products include
substrates, YBCO and processing equipment. The Company procures its
substrates from several suppliers. The Company procures its YBCO source
material from two suppliers and believes that YBCO can be obtained from at
least two other vendors. For certain processes, Conductus utilizes elemental
metals (yttrium, barium and copper) to produce YBCO. These substances are
available from numerous vendors. The Company's processing equipment is
assembled from off-the-shelf components which can be obtained from multiple
sources.
Conductus believes that most of its products for the communications and
healthcare markets will be in the form of subsystems that incorporate
superconducting and cryoelectronic components with cryogenic refrigerators
and conventional electronic assemblies. Apart from the superconducting
components which are manufactured by Conductus, the Company anticipates that
most other components of its subsystems will be purchased as standard
products from commercial vendors or specially ordered from various suppliers.
These include cryogenic refrigerators, printed circuit boards, product cases
and housings, vacuum vessels and other components. Certain components of
Conductus' subsystems, including cryocoolers, are currently obtained from a
single source or a limited number of suppliers, Although the Company does not
believe that it is ultimately dependent upon any supplier of these components
as a sole source or limited source for any critical components, the inability
of the Company to develop alternative sources, if required, an inability to
meet demand, a prolonged interruption in supply or a significant increase in
price of one or more components would have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors -- High Degree of Dependence Upon Other Complementary Technologies
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
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<PAGE>
commercialization of superconductive electronics products. These include,
among others, Biomagnetic Technology, Inc. and Quantum Design, Inc. in
magnetic sensing products; Hypres, Inc. in digital circuits; and Illinois
Superconducting Corp., Superconducting Core Technologies, Inc. and
Superconductor Technologies Inc. in wireless communications. Furthermore,
academic institutions, governmental agencies and other public and private
research organizations are engaged in development programs which may lead to
competitive arrangements for commercializing superconductive electronics
products. In addition, if the superconductor industry does develop further,
new competitors with significantly greater resources are likely to enter the
field. Conductus' ability to compete successfully will require it to develop
and maintain technologically advanced products, attract and retain highly
qualified personnel, obtain patent or other protection for its technology and
products and manufacture and market its products, either alone or with third
parties. See "Risk Factors -- Intense Competition."
The Company's existing collaborative arrangements permit, and future
arrangements also may permit, the Company and each partner to use the
technology developed under these arrangements. Accordingly, the Company may
compete with its partners for commercial sales of any products developed
under these arrangements,
The Company's potential products, if successfully developed, may compete
directly with other existing and subsequently developed products using
competitive, conventional technologies. There can be no assurance that the
Company's products will have sufficient performance advantages over these
other products to attract significant commercial interest. These and related
factors may limit market acceptance of products incorporating superconductive
technology. See "Risk Factors -- Competing Technologies." Conductus believes
that the principal competitive factors in the market for superconductive
electronics will be the following: the ability to develop commercial
applications of superconductive technology; product performance, including,
where appropriate, speed, sensitivity, size and power dissipation; price;
product quality and reputation. Conductus believes that it 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 December 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 eight
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 a invited speakers
at conferences worldwide.
For the and fiscal years 1996, 1995, and 1994, commercial sales to one
customer of $1,560,000, $1,172,000, and $732,000 were 12%, 11%, and 8% 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."
EMPLOYEES
As of December 31, 1996, the Company had a total of 133 full-time
equivalent employees of which 51 hold advanced degrees. Of the total
full-time employees, 66 were engaged in research and product development, 38
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manufacturing, 8 in sales and marketing and 21 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.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS FORM 10-K, PROSPECTIVE
INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS INHERENT IN AND
AFFECTING THE BUSINESS OF THE COMPANY. THE DISCUSSION IN THE FORM 10-K
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 BELOW AND IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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. 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 December 31, 1996, the Company had accumulated net
losses of approximately $29.2 million. Conductus expects to incur substantial
additional losses at least during 1997 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 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 markets 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 OF 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 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
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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.
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 YBCO. There can be no assurance that YBCO
will ultimately prove commercially competitive against other currently known
materials or materials that may be discovered in the future. The Company
will have to continue to develop and integrate advances in technology for the
fabrication of electronic circuits and devices and manufacture of commercial
quantities of its products. The Company will also need to continue to develop
and integrate advances in complementary technologies. There can be no
assurance that the Company's development efforts will not be rendered
obsolete by research efforts and technological advances made by others or
that materials other than those currently used by Conductus will not prove
more advantageous for the commercialization of superconductive electronic
products.
INTENSE COMPETITION. The market for electronic products is intensely
competitive. Although the market for superconductive electronics currently
is small and in the early stages of development, Conductus believes this
market will become intensely competitive if products with significant market
potential are successfully developed. A number of large American, Japanese
and European companies, many of which have substantially greater financial
resources, research and development staffs and manufacturing and marketing
capabilities than the Company, are engaged in programs to develop and
commercialize superconductive electronic technology and products. A number
of smaller companies are also engaged in various aspects of the development
and commercialization of superconductive electronic products. Furthermore,
academic institutions, governmental agencies and other public and private
research organizations are engaged in development programs that may lead to
competitive arrangements for commercializing superconductive electronic
products. In addition, if the superconductor industry develops further, new
competitors with significantly greater resources are likely to enter the
field. Conductus' ability to compete successfully will require it to develop
and maintain technologically advanced products, attract and retain highly
qualified personnel, obtain patent or other protection for its technology and
products and manufacture and market its 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
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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. The
Company's efforts to protect its proprietary rights may not be successful in
preventing their misappropriation or ensuring that these rights will provide
the Company with a competitive advantage. There can be no assurance that the
Company's pending applications will result in issued patents, that the
validity of the Company's 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. 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 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. The Company understands that several of
such U.S. applications are the subject of an interference proceeding
currently pending in the U.S. Patent and Trademark Office (Interference No.
101,981). Additionally, E. I. du Pont de Nemours & Co. ("DuPont") has
notified Conductus that it is the exclusive licensee of patents issued in
Israel, Sweden, Taiwan and the United Kingdom covering the composition of
YBCO and a method for using YBCO in superconducting applications. DuPont has
stated 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 should be adequate to
fund the Company's operations through at least the end of 1997. 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 cost 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
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collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies or potential products that the Company
would not otherwise relinquish. There can be no assurance that additional
financing will be available on acceptable terms or at all, if and when
required. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
LIMITED COMMERCIAL MANUFACTURING CAPABILITY. Conductus has established a
limited production facility. To date, Conductus has focused primarily on the
development of its fabrication processes and the production of limited
quantities of superconducting thin films and components. Although Conductus'
processing technology is derived principally from semiconductor manufacturing
technology, the fabrication of HTS components entails additional difficulties
because of specific properties unique to HTS materials. There can be no
assurance that Conductus can develop enhanced processing technology necessary
to develop more advanced superconducting devices and circuits, that the
Company will be able to attain commercial yields in the future, that the
Company will not suffer recurring yield problems caused by mask defects,
impurities in materials and other factors or that the Company can expand its
processing, production control, assembly, testing and quality assurance
capabilities to produce existing or planned superconductive electronic
products in adequate commercial quantities. The Company's failure to develop
an adequate manufacturing capacity would have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business -- Manufacturing."
NEED TO DEVELOP INFRASTRUCTURE TO SUPPORT COMMERCIALIZATION. Conductus
has very limited experience in commercial sales, marketing and distribution.
Expanded 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 and Nalorac 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 77%, 77%, and 82% of
total revenue for fiscal 1996, 1995 and 1994, 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
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necessary approvals. There can be no assurance that any buyers of the
Company's subsystems will be able to obtain any necessary governmental
approvals, or otherwise comply with applicable government regulations.
In addition, in some states, a certificate of need ("CON") or similar
regulatory approval is required prior to acquisition of medical equipment or
introduction of a new service by hospitals or healthcare providers. CON
regulations limiting the number of new MRI machines or limiting the
acquisition of magnetoencephalography devices could adversely impact
commercialization of those products, whether or not they incorporate
superconducting products supplied by the Company.
In the communications area, the operation of cellular and PCS base
stations is regulated in the United States by the Federal Communications
Commission ("FCC"). Base stations and equipment marketed for use therein
must meet specific technical standards. The Company's ability to sell its
HTS filter subsystems will depend upon the ability of base station equipment
manufacturers and of cellular base station operators 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 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."
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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."
ITEM 2. 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 under a lease expiring in 1998 for its
Instrument and Systems Division. The Company believes its existing facilities
are adequate and suitable for its current needs, and additional space can be
obtained on commercially reasonable terms as needed to expand the Company's
operations.
ITEM 3. LEGAL PROCEEDINGS
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."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to the stockholders of the Company during the
Company's fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Charles E. Shalvoy ............ 49 President, Chief Executive Officer and Director
William J. Fowler ............. 66 Vice President, Manufacturing
Duncan J. MacMillan ........... 52 Vice President, Marketing
Graham Y. Mostyn .............. 43 Vice President, Engineering
Dennis C. Nau ................. 56 Vice President and General Manager of the
Instruments & System Division
Randy W. Simon, Ph.D. ......... 43 Vice President, Technology Programs
William J. Tamblyn ............ 38 Vice President, Chief Financial Officer and Secretary
</TABLE>
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EXECUTIVE OFFICERS OF THE REGISTRANT
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. FOWLER joined the Company in September 1996 as Vice President of
Manufacturing. From 1994 to 1996, he was Vice President of Operations at
Geometrics, a manufacturer of magnetic sensing equipment used in geophysical
exploration. From 1990 to 1994, Mr. Fowler was Vice President of
Manufacturing and Service at Resonex, a producer of Magnetic Resonance
Imaging (MRI) systems. Earlier in his career he held senior manufacturing and
operations position with other high technology companies, including Daisy
Systems and Qume Corporation. Mr. Fowler holds a B.S.E.E. from San Jose State
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.
MR. MOSTYN joined the Company in November 1996 as Vice President of
Engineering. From 1992 to 1996, he was the Director of RF and Analog
Engineering and later the Director of Engineering, Network Systems Division
of MicroUnity, Inc., a communications products start-up company. Prior to
that, he spent 10 years with Harris Corporation in engineering management
positions. Mr. Mostyn holds a B.A. and M.A. in physics from Cambridge
University, England.
MR. NAU joined the Company in July 1996 as Vice President and General
Manager of the Instruments and Systems Division. From 1987 to 1996, he
served as President and CEO of Sorrento Electronics, an electronic
instrumentation company in San Diego. Mr. Nau served as Director of Projects
at Sorrento Electronics for six years prior to assuming the presidency in
1987, and earlier held engineering and engineering management positions at
General Atomics Corporation, Kaiser Aluminum and Coors Porcelain Company.
Mr. Nau holds a B.S.E.E. from Gonzaga University and an M.S.E.E. from San
Diego State University.
DR. SIMON joined the Company in October 1990 as Senior Scientist and
served as Director of Research and Development from March 1991 to January
1993 and as Vice President, Marketing and Development from January 1993 to
November 1994 and Vice President, Technology Programs and Investor Relations
from November 1994 to November 1995 and Vice President, Technology Programs
since November 1995. From January 1985 to October 1990, he held a variety of
scientific and managerial positions at TRW, where he headed TRW's
Superconductivity Research Department's high-temperature superconductivity
program and managed TRW's internal research and development program on
high-temperature superconductive electronics. Dr. Simon holds a B.S in
Physics from Pomona College and an M.S. and a Ph.D. in Physics from the
University of California, Los Angeles.
MR. TAMBLYN joined the Company in March 1994 as Director of Finance and
Principal Accounting Officer and has served as Chief Financial Officer since
April 1994. From May 1993 through December 1993, Mr. Tamblyn was Vice
President of Finance and Chief Financial Officer of Ramtek Corporation. From
October 1988 to April 1993, he was employed by Coopers & Lybrand 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.
-22-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been traded on Nasdaq National Market
since August 5, 1993, the date of the Company's initial public offering
(symbol: CDTS). The Company has paid no dividends on its Common Stock since
inception and anticipates that for the foreseeable future, it will continue
to retain its funds for use in its business. The Company is restricted under
its bank financing agreement from paying any cash dividends but may pay stock
dividends. On February 28, 1997, the Company had 92 holders of record of its
Common Stock.
The following table sets forth for the indicated periods the high and low
closing sales prices of the Common Stock as furnished by the Nasdaq National
Market.
PRICE RANGE OF COMMON STOCK
---------------------------------------
FISCAL 1995 FISCAL 1996
--------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $ 7 $ 4 1/2 $ 15 1/2 $ 6
Second Quarter 8 6 17 3/4 9 1/2
Third Quarter 7 5 3/4 13 7 1/2
Fourth Quarter 7 1/2 5 3/16 9 1/2 6
-23-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in connection with
the Company's audited financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. The
statement of operations data for the years ended December 31, 1993 and 1992
and the balance sheet at December 31, 1994, 1993 and 1992 are derived from
audited financial statements not included herein.
STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993(2) 1992
---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Contract $ 9,691 $ 8,148 $ 7,048 $ 5,070 $ 2,233
Product sales 2,852 2,434 1,588 1,409 438
-------- -------- -------- -------- --------
Total revenues $ 12,543 $ 10,582 $ 8,636 $ 6,479 $ 2,671
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Loss from operations $ (5,109) $ (4,423) $ (4,876) $ (4,070) $ (3,132)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss $ (5,004) $ (4,422) $ (4,544) $ (4,122) $ (3,215)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss per common share (1) $ (0.80) $ (0.80) $ (0.85) $ (1.40) $ (1.91)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in computing
per share amounts (1) 6,263 5,543 5,323 2,940 1,680
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993(2) 1992
---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 9,135 $ 4,287 $ 7,076 $ 12,438 $ (1,332)
Total assets 16,081 10,128 12,541 16,233 3,250
Long-term debt, excluding
current portion 1,022 1,146 533 180 252
Stockholders' equity 11,183 5,814 9,529 14,057 46
</TABLE>
(1) Computed on the basis described for net loss per share in Note 2 of Notes
to Financial Statements of Conductus, Inc.
(2) The results of operations of the Company for the year do not include the
results of operations of Tristan prior to its acquisition by Conductus on
May 28, 1993.
-24-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS FORM 10-K 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".
Conductus develops, manufactures, and markets electronic components and
systems based on superconductors for applications in 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 Instruments and Systems division. As of December 31, 1996,
Conductus had accumulated losses of approximately $29,227,000 and expects to
incur additional losses at least during 1997 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
Total revenues increased to $12,543,000 in 1996 from $10,582,000 in 1995
and $8,636,000 in 1994. Total revenues consist primarily of contract revenue
and, to a lesser extent, product sales. Revenue under U.S. government
research and development contracts increased to $9,691,000 in 1996 from
$8,148,000 in 1995 and $7,049,000 in 1994 and represented 77%, 77%, and 82%,
of total revenue in 1996, 1995, and 1994, respectively. The increase in
contract revenues during 1996 is largely attributable to a solid base of
contracts from 1995 and the addition of several new multi-year contracts.
Revenues under these new contracts are expected to offset planned declines in
revenues from contracts approaching the end of their terms. The Company had
$4,620,000 and $3,930,000 in contracts and grants and $8,976,000 and
$9,228,000 in awards from U.S. government agencies as of December 31, 1996
and 1995, 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 "Business - Research and
Development" and 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 $2,852,000 in
1996 from $2,433,000 in 1995 and $1,588,000 in 1994, primarily due to an
increase in sales of superconductive sensor systems and instruments. The
large scale superconductivity systems have large unit prices and are sold in
low volumes, and thus significant period to period fluctuations in sales of
these systems may occur.
Cost of product sales were $1,824,000, $1,430,000, and $975,000 for 1996,
1995, and 1994, respectively. The cost of products in 1996, 1995 and 1994
were primarily due to costs of superconducting magnetic systems manufactured
by the Instrument and Systems Division. Cost of product sales increased in
1996 and 1995 due to increased levels of revenues from new products
introduced in 1995. Gross margins were 36%, 41%, and 39% for 1996, 1995 and
1994, respectively. Gross margins decreased in 1996 because of increased
sales of large systems which have lower gross margins and increased costs of
start-up in the sensor portion of the magnetic sensor business. Gross margin
in 1995 increased over 1994 primarily due to lower margins on initial system
products which included startup costs in 1994. Costs of contract revenues
are included in research and development expenses and are discussed below.
The Company's research and development expenses increased to $11,774,000
in 1996 from $9,819,000 in 1995 and $9,201,000 in 1994, or 67%, 65%, and 68%
respectively, of total operating expenses for that year. These cost
increases in 1996 and 1995 reflect the increase in the Company's overall
research and development activities, and an emphasis on efforts in wireless
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 $13,178,000 of total operating costs and expenses
in 1996, from $9,176,000 in 1995 and $8,717,000 in 1994, reflecting increased
government contract and research activity throughout the period. Increases in
contract revenues in the future, if any, are expected to result in
corresponding
-25-
<PAGE>
increases in research and development and general and administrative
expenses. Current levels of expenditure are expected to continue for
development of commercial products particularly in the wireless and
healthcare areas. In addition, the Company expects to continue to incur
significant research and development expenses on internally funded programs
as it seeks to develop additional commercial products.
Selling, general and administrative expenses increased to approximately
$4,054,000 in 1996 from $3,756,000 in 1995 and $3,336,000 in 1994 or 23%,
25%, and 25%, respectively, of total costs and expenses in 1996, 1995 and
1994, respectively. These costs increased in 1996 and 1995 compared to 1994
due to the increasing size of the Company through the acquisition of Tristan
in 1993, significant headcount additions and increasing sales and marketing
activities. Total headcount has increased to 133 at December 31, 1996 from 99
at December 31, 1995 and 96 at December 31, 1994, respectively. Increases in
1996 and 1995 over 1994 also include the selling costs associated with
expanding the Company's representative network of independent distributors of
magnetic sensing and instrument 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 to continue to incur increasing sales and marketing expenses
to the extent it increases sales of commercial products.
The Company's total costs and expenses increased to $17,652,000 in 1996
from $15,005,000 in 1995 and $13,513,000 on 1994. Increased emphasis in the
wireless and healthcare development added to the total costs and expenses in
1996 and are expected to increase total costs and expenses in 1997.
Loss from operations was $5,109,000, $4,423,000, and $4,876,000, for
1996, 1995, and 1994, respectively. The increased loss in 1996 compared to
1995 is primarily related to the increased focus on the wireless market and
related development in both PCS and cellular areas. The modest decline in
loss in 1995 compared to 1994 was primarily related to increases in revenues
offset by headcount and contract costs as the Company moved towards
developing and commercializing products.
Interest income from cash equivalents and investments was $263,000 in
1996, $249,000 in 1995, and $344,000 in 1994. The primary reasons for the
changes between years was due to the levels of cash equivalents and
investments, and reflect $9,892,000 in net proceeds received in the Company's
follow-on offering in July 1996.
Interest charges were $183,000, $156,000, and $56,000 in 1996, 1995 and
1994, respectively. Interest charges related to the Company's several
equipment term loan facilities which were reflected for the entire year in
both 1996 and 1995 compared to only part of 1994. As of year end, three
lease line obligations existed which mature over the next 12 to 30 months.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's aggregate cash, cash equivalents
and short-term investments totaled $7,636,000, compared to $3,153,000 as of
December 31, 1995. 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, $9,892,000 in net proceeds from its
follow-on public offering of Common Stock in June 1996, $14,645,000 raised
in private financings, $33,006,000 from U.S. government contracts, $5,646,000
in aggregate borrowings under three equipment lease lines of credit and
equipment term loan(s) and $3,419,000 in interest income.
Net cash used in operations was $4,897,000, $4,625,000, and $3,578,000,
for 1996, 1995, and 1994, respectively. The increase in net cash used in
operating activities in 1996 over the prior years was primarily due to an
increase in net loss resulting from expanding the Company's operations,
including headcount and other related costs, which was partially offset by
increased revenues. A significant portion of the increase relates to
increased receivables on government contracts and inventories. The Company
anticipates that its accounts receivable from revenues under U.S. government
contracts and product sales, as well as inventories, will remain consistent
with 1996 levels during 1997.
Net cash used in investing activities was $4,868,000 in 1996 primarily
from the increase in short-term investments from the follow-on offering in
June 1996 and the purchases of property and equipment. During 1995
-26-
<PAGE>
and 1994, net cash of $2,670,000 and $1,743,000 was provided by investing
activities from the net reduction in investments, offset by purchases of
property and equipment. Purchases of property and equipment in 1995 increased
$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 financing activities was $10,612,000, $1,722,000, and
$269,000 in 1996, 1995 and 1994, respectively. Net cash provided by financing
activities in 1996 was primarily due to the Company's follow-on offering in
June 1996 and borrowings under the Company's equipment loans, offset by
principal payments under capital lease obligations and equipment term loans.
Net cash provided by financing activities in 1995 and 1994 was primarily due
to borrowings under the Company's equipment term loan and proceeds from
issuance of shares under the 1994 Employee Stock Purchase Plan offset by
principal payments under capital lease obligations.
The Company to date has received limited revenues from product sales. The
development of the Company's potential products will require a commitment of
substantial funds to conduct further research and development and testing of
its potential products, to establish commercial-scale manufacturing and to
market any resulting products. The Company expects to use significant
amounts of cash for capital equipment and support operations until product
revenues can contribute. 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.
Conductus anticipates that its existing available cash and $1,830,000 of
available borrowing under the Company's various lines of credit term loan
facilities (See Note 10 to the financial statements) will be adequate to fund
the Company's operations through at least the end of 1997 without including
funding that may be available under existing and future government contracts.
There can be no assurance that additional funding will be available on
acceptable terms or at all, if required.
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128 (SFAS 128) "Earnings Per Share", and Statement No. 129 (SFAS
129) "Disclosures of Information About Capital Structure". These statements are
expected to be effective for the Company's first quarter in 1998 and will
require a revised presentation of earnings per share. Early adoption of the new
standards is not permitted and apart from the impact on earnings per share, the
impact will not be material to the Company's financial position or results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Registrant and auditor's report
are included in Item 8:
Report of Independent Accountants
Balance Sheets - as of December 31, 1996 and 1995
Statements of Operations - years ended December 31, 1996, 1995
and 1994
Statements of Stockholders' Equity - years ended December 31, 1996,
1995 and 1994
Statements of Cash Flows - years ended December 31, 1996, 1995
and 1994
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
-27-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information required by this item
relating to the Company's directors and nominees and disclosure relating to
compliance with Section 16(a) of the Securities Exchange Act of 1934 that is
included under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement
for the 1997 Annual Meeting of Stockholders to be held on May 22, 1997 (the
"Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information required by this item
that is included under the caption "Executive Compensation and Related
Information" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information required by this item
that is included under the caption "Ownership of Securities" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information required by this item
that is included under the caption "Certain Transactions" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
PAGE
NUMBER
------
1. Financial Statements
Report of Independent Accountants . . . . . . . . . . . . . 32
Balance Sheets - as of December 31, 1996 and 1995 . . . . . 33
Statements of Operations - years ended December 31, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . 34
Statements of Stockholders' Equity - years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . 35
Statements of Cash Flows - years ended December 31, 1996,
1995, and 1994 . . . . . . . . . . . . . . . . . . . . . 36
Notes to Financial Statements . . . . . . . . . . . . . . . 37
2. Financial Statement Schedule
Report of Independent Accountants . . . . . . . . . . . . . 48
Schedule II- Valuation and Qualifying Accounts. . . . . . . 49
Schedules 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.
3. See Exhibits
-28-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 (1) Stock Exchange Agreement dated as of May 28, 1993 between the
Registrant and Tristan Technologies, Inc. ("Tristan").
3.3(2) Restated Certificate of Incorporation.
3.5(1) Restated Bylaws of Registrant.
4.2(1) Warrant dated December 1, 1988 by the Registrant in favor of
Comdisco, Inc.("Comdisco").
4.7(1) Warrant dated January 5, 1993 by the Registrant in favor of
Comdisco.
10.1(1) Second Amended and Restated Registration Rights Agreement dated
June 3, 1993.
10.2(1) Form of Modification Agreement to be entered into among the
Registrant and certain of its warrantholders.
10.3(1)+ Coordinated Research Program Agreement dated October 14, 1988 and
Amendment dated May 26, 1991 between the Registrant and Hewlett-
Packard Company ("H-P"), as amended by the Agreement Between
Registrant and Hewlett-Packard Company dated June 2, 1993.
10.4(1)+ Consortium for Superconducting Electronics Participation Agreement
dated October 20, 1989 and Supplemental Agreement dated
October 21, 1991 among the Registrant, American Telephone and
Telegraph Company, International Business Machines
Incorporated, MIT-Lincoln Laboratory and Massachusetts
Institute of Technology.
10.5(1) Cooperation Agreement dated March 2, 1992 between the Registrant
and TRW, Inc.
10.7(1) Collaborative Research Agreement among the Registrant, TRW, H-P,
Stanford University and University of California, Berkeley.
10.7.1(4)+ Joint Development and Licensing Agreement dated August 31, 1994
between the Registrant and Varian.
10.7.2(6) Joint Development Agreement dated December 14, 1995 between the
Registrant and Siemens Aktiengesellschaft Medical Engineering
Group.
10.7.3(6)+ Superconducting Filter Technology Joint Development Agreement
dated April 25, 1996 between the Registrant and Lucent
Technologies Inc.
10.7.4(7) 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(7) 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(1) Master Equipment Lease Agreement dated November 18, 1988 between
the Registrant and Comdisco, as amended to date.
10.16(1) 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(1) Lease Agreement dated May 3, 1993 between the Registrant and
Mozart-McKee Limited Partnership for part of the Sunnyvale
facilities.
10.18(1) Standard Industrial Lease between Tristan and GWR Instruments,
Inc. dated September 10, 1991
10.19(1) 1992 Stock Option/Stock Purchase Plan.
10.20(1) Amended 1989 Stock Option Plan.
10.21(1) 1987 Stock Option Plan.
10.22(1) Form of Indemnification Agreement between the Registrant and each
of its directors and officers.
10.23(2) Exclusive Distributor Agreement between Registrant and Niki Glass
Co., Ltd. dated as of February 2, 1994.
10.24(4) Lease Agreement dated December 8, 1994 between Registrant and
Mozart-McKee Limited Partnership for Sunnyvale facilities.
10.25(4) Business Loan Agreement dated August 15, 1994 between Registrant
and Silicon Valley Bank for working capital credit facility
and term loan facility.
10.26(4) Employment Agreement dated May 3, 1994 between Registrant and Mr.
Charles E. Shalvoy.
10.28(3) Conductus, Inc. 1994 Employee Stock Purchase Plan.
10.29(5) Business Loan Agreement dated March 8, 1996 between Registrant
and Silicon Valley Bank for working capital credit facility
and term loan facility.
10.30 Business Loan Agreement dated December 27, 1996 between
Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
11.1 Statements of computation of loss per share
-29-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
21.1(1) Subsidiary of the Registrant.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (See Page 32).
(1) 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.
(2) Incorporated herein by reference from the same numbered exhibit filed
with the Company's 1993 Annual Report on Form 10-K.
(3) 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.
(4) Incorporated herein by reference from the same numbered exhibit filed
with the Company's 1994 Annual Report on Form 10-K.
(5) Incorporated herein by reference from the same numbered exhibit filed
with the Company's 1995 Annual Report on Form 10K.
(6) Incorporated herein by reference from the same numbered exhibit filed
with the Company's Registration Statement on Form S-1 (Number 333-3815),
as amended, on May 10, 1996
(7) Incorporated herein by reference from the same numbered exhibit filed with
Amendment No. 2 to the company's Registration Statement on Form S-1
(Number 333-3815) on June 17, 1996.
(+) Confidential treatment granted or requested as to certain portions of
these exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Form 10-K Annual Report.
(c) Exhibits
See responses to Item 14(a)(3) above.
(d) Financial Statement Schedules
None required, except as indicated in response to Item 14(a)(2) above.
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
May 8, 1997.
CONDUCTUS, INC.
By: /s/ William J. Tamblyn
---------------------------
William J. Tamblyn
Vice President and Chief Financial Officer
-31-
<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, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 7, 1997
-32-
<PAGE>
CONDUCTUS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,119,991 $ 272,410
Short-term investments 6,516,401 2,880,464
Accounts receivable (net of
allowance for doubtful accounts
of $50,000 for 1996 and 1995) 3,756,586 3,251,147
Inventories 1,220,873 765,424
Prepaid expenses and other current
assets 397,556 285,404
------------ -------------
Total current assets 13,011,407 7,454,849
Property and equipment, net 2,941,685 2,550,042
Other assets 127,763 123,340
------------ -------------
Total assets $ 16,080,855 $ 10,128,231
------------ -------------
------------ -------------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 1,119,330 $ 687,736
Accounts payable 1,710,762 1,621,424
Other accrued liabilities 1,045,916 821,230
Obligations under capital leases,
current portion 37,894
------------ --------------
Total current liabilities 3,876,008 3,168,284
Long-term debt, net of current portion 1,021,781 1,146,227
------------ --------------
Total liabilities 4,897,789 4,314,511
------------ --------------
Commitments (Note 11)
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value:
Authorized: 1,000,000 shares
None issued or outstanding in
1996 or 1995
Common stock, $0.000l par value:
Authorized: 11,000,000 shares;
Issued: 6,988,517 and 5,861,632 shares
in 1996 and 1995 683 570
Outstanding: 6,816,143 and 5,689,258
shares in 1996 and 1995
Additional paid-in capital 40,405,381 30,035,358
Unrealized gain on investments, net 3,808 626
Accumulated deficit (29,226,806) (24,222,834)
------------ --------------
Total stockholders' equity 11,183,066 5,813,720
------------ --------------
Total liabilities and
stockholders' equity $ 16,080,855 $ 10,128,231
------------ --------------
------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-33-
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---- ---- ----
Revenues:
Contract $ 9,690,989 $8,148,189 $7,048,529
Product sales 2,851,682 2,433,496 1,587,603
----------- ---------- ----------
Total revenues 12,542,671 10,581,685 8,636,132
----------- ---------- ----------
Costs and expenses:
Cost of product sales 1,823,622 1,429,516 974,699
Research and development 11,773,587 9,819,416 9,201,460
Selling, general and
administrative 4,054,303 3,755,653 3,336,346
----------- ---------- ----------
Total costs and expenses 17,651,512 15,004,585 13,512,505
----------- ---------- ----------
Loss from operations (5,108,841) (4,422,900) (4,876,373)
Interest income 262,965 249,371 344,496
Other income (expense) 25,042 (92,608) 43,737
Interest expense (183,138) (155,515) (55,816)
----------- ---------- ----------
Net loss $(5,003,972) $(4,421,652) $(4,543,956)
----------- ---------- ----------
----------- ---------- ----------
Net loss per common share $(0.80) $(0.80) $(0.85)
----------- ---------- ----------
----------- ---------- ----------
Shares used in computing per
share amounts 6,263,446 5,543,073 5,322,767
----------- ---------- ----------
----------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
-34-
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For each of the three years in the period ended December 31, 1996
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE UNREALIZED GAIN
COMMON PAID-IN FROM (LOSS) ON ACCUMULATED
STOCK CAPITAL STOCKHOLDERS INVESTMENTS DEFICIT TOTAL
----- ---------- ------------ --------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $ 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 stock-
holders (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 69,037 shares
of common stock 7 110,318 110,325
Issuance of 1,000,000 shares
of common stock through
secondary offering, net of
issuance costs 100 9,892,107 9,892,207
Issuance of 57,848 shares
of common stock to employees
under the employee stock
purchase plan 6 340,597 340,603
Compensation associated with
stock options granted 27,001 27,001
Unrealized gain on
investments 3,182 3,182
Net loss (5,003,972) (5,003,972)
--------- ----------- -------- --------- ------------ -----------
Balances, December 31, 1996 $ 683 $40,405,381 $ - $ 3,808 $(29,226,806) $11,183,066
--------- ----------- -------- --------- ------------ -----------
--------- ----------- -------- --------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-35-
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,003,972) $(4,421,652) $(4,543,956)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 925,718 901,340 948,132
Compensation associated with stock options granted 27,001 34,528 59,192
Provision for excess and obsolete inventory 20,000 61,000
(Gain)loss on disposal of equipment (22,922) 15,473
Other noncash expenses, net 57,535
(Increase) decrease in:
Accounts receivable (505,439) (910,573) (428,871)
Inventory (455,449) (290,845) (342,499)
Prepaid expenses and other current assets (112,152) (122,994) (11,480)
Other assets (63,580) (1,099) (4,193)
Increase in:
Accounts payable and accrued liabilities 314,024 166,025 611,413
----------- ----------- ----------
Net cash used in operating activities (4,896,771) (4,625,270) (3,578,254)
----------- ----------- ----------
Cash flows from investing activities:
Proceeds from sales of short-term investments 44,266,602 40,473,743 42,875,034
Purchases of short-term investments (47,899,357) (36,235,256) (39,906,358)
Acquisition of property and equipment (1,264,478) (1,568,033) (1,225,846)
Proceeds from sales of assets 29,196
----------- ----------- ----------
Net cash (used in) provided by
investing activities (4,868,037) 2,670,454 1,742,830
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from borrowings 1,229,019 1,432,944 554,705
Proceeds from repayment of note
receivable from stockholder 18,765
Net proceeds from issuance of common stock 10,343,135 586,635 24,300
Repurchase of common stock (90)
Principal payments under capital lease obligations (37,894) (143,340) (329,148)
Principals payments on long-term debt (921,871) (153,686)
----------- ----------- ----------
Net cash provided by financing activities 10,612,389 1,722,463 268,622
----------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents 847,581 (232,353) (1,566,802)
Cash and cash equivalents at beginning of period 272,410 504,763 2,071,565
----------- ----------- ----------
Cash and cash equivalents at end of period $ 1,119,991 $ 272,410 $ 504,763
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
Refer to Note 4.
The accompanying notes are an integral part of these financial statements.
-36-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS
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 and preferred 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 U.S. major banks.
Other financial instruments, principally accounts receivable, leases
payable and other borrowings are considered to approximate fair value
based upon comparable market information available at respective balance
sheet dates.
Investments are deemed by management to be available-for-sale and are
reported at fair market value with net unrealized gains or 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.
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.
-37-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciated on 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. When assets are disposed of, the cost and
related accumulated depreciation are removed from the accounts and the
resulting gains and losses are included in results of operations.
REVENUE RECOGNITION:
Product revenues are generally recognized at the time of shipment.
Income from other revenue and royalty agreements is recognized at such
time as the earnings process is complete and once collectability is
considered probable. Appropriate allowance is made for product returns
and potential warranty claims 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 of
contract revenues for the years ended December 31, 1996, 1995 and 1994
was $13,178,000, $9,176,000 and $8,717,000, respectively. 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.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
As prescribed by Statement of Financial Accounting Standards
No. 123 (SFAS 123) the Company accounts for grants of equity
instruments to employees using the intrinsic value method
described in Accounting Practice Bulletin No. 25 (APB 25).
All other grants are accounted for using the fair value method
described in FAS 123, with appropriate compensation expense
recognition in the statement of operations, where significant.
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.
RECENT PRONOUNCEMENTS:
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128 (SFAS 128) "Earnings Per Share", and Statement No. 129
(SFAS 129) "Disclosures of Information About Capital Structure". These
statements are expected to be effective for the Company's first quarter
in 1998 and will require a revised presentation of earnings per share.
Early adoption of the new standards is not permitted and apart from the
impact on earnings per share, the impact will not be material to the
Company's financial position or results of operations.
-38-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
3. SUPPLEMENTAL CASH FLOW DISCLOSURE:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------- ----------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 191,050 $ 147,605 $ 58,816
------------- ----------- ----------
------------- ----------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FUNDING ACTIVITIES:
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 $ 3,182 $ 85,388 $ (84,762)
------------- ----------- ----------
------------- ----------- ----------
Repurchase of common stock in exchange for
note receivable $ 5,648
----------
----------
OTHER NONCASH EXPENSES:
Compensation associated with stock
options granted $ 27,001 $ 34,528 $ 59,192
Additions to principal for accrued interest
earned on notes receivable from stockholders (1,657)
------------- ----------- ----------
$ 27,001 $ 34,528 $ 57,535
------------- ----------- ----------
------------- ----------- ----------
</TABLE>
4. INVESTMENTS:
Investments are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- --------------------------
MARKET MARKET
COST VALUE COST VALUE
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Debt securities:
Corporate bonds $2,356,259 $2,359,453
Preferred bonds 2,000,000 2,000,000 $500,000 $500,000
U.S. government and related
agency securities 795,897 796,902
Commercial paper 2,078,596 2,079,210 1,499,909 1,499,530
Other 18,545 18,545 40,904 40,904
Accrued interest 59,193 59,193 43,128 43,128
------------- ------------- ------------ ------------
Subtotal 6,512,593 6,516,401 2,879,838 2,880,464
Unrealized gain 3,808 626
------------- ------------- ------------ ------------
Total $6,516,401 $6,516,401 $2,880,464 $2,880,464
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
At December 31, 1996, all scheduled maturities of investments are within
one year and unrealized gains for investments were $3,808.
Additionally, investments consisted of U.S. corporate notes, preferred
bonds, and commercial paper bearing interest between 5.25% to 6.16% per
annum are due to mature between January 1997 and August 1997.
For the years ended December 31, 1996, 1995 and 1994 gross realized
gains and losses on sales of available-for-sale securities were not
material. The cost of securities sold is based on the specific
identification method.
-39-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
5. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:
DECEMBER 31,
----------------------------
1996 1995
------------- --------------
U.S. government contracts:
Unbilled $ 466,509 $ 411,206
Billed 2,842,285 2,036,294
Commercial 447,792 803,647
------------- --------------
$3,756,586 $3,251,147
------------- --------------
------------- --------------
6. INVENTORIES:
Inventories, net of reserves at December 31, 1996 and 1995 of $81,000
consist of the following:
DECEMBER 31,
----------------------------
1996 1995
------------- --------------
Raw materials $393,464 $299,619
Work in process 728,603 431,882
Finished goods 98,806 33,923
------------- --------------
$1,220,873 $765,424
------------- --------------
------------- --------------
7. PROPERTY AND EQUIPMENT:
Property and equipment, including equipment acquired under capital leases
(see Note 9), consist of the following:
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
Equipment $6,403,590 $5,494,288
Leasehold improvements 1,586,350 1,489,856
Furniture and fixtures 449,574 368,164
Construction in process 318,003 191,664
------------- -------------
8,757,517 7,543,972
Less accumulated
depreciation and
amortization 5,815,832 4,993,930
------------- -------------
$2,941,685 $2,550,042
------------- -------------
------------- -------------
8. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following:
DECEMBER 31,
----------------------
1996 1995
---------- ---------
Accrued consulting and
professional $171,300 $159,734
Accrued compensation 727,299 525,193
Other accrued liabilities 147,317 136,303
---------- ---------
$1,045,916 $821,230
---------- ---------
---------- ---------
-40-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
9. EQUIPMENT LEASE LINES OF CREDIT:
As of December 31, 1996, the Company had no borrowings due under equipment
lease lines of credit. All leased assets were purchased or returned at
lease end in 1996. The borrowings owed at December 31, 1995 were
collateralized by the related equipment.
Following is an analysis of equipment acquired under the lease lines of
credit as of December 31, 1995:
Equipment $ 292,953
Less accumulated amortization (267,588)
-------------
Net property acquired under capital leases $ 25,365
-------------
-------------
10. LONG-TERM DEBT AND OTHER BORROWINGS:
At December 31, 1996, the Company has three term loan obligations with
annual maturities as follows:
1997 $1,119,330
1998 923,092
1999 98,689
-------------
$2,141,111
-------------
-------------
All borrowings under these credit facilities are at the bank's prime rate
plus 1.00% (9.25% at December 31, 1996) with interest paid monthly, and
are collateralized by the related equipment. At December 31, 1996,
$829,913 was available under the credit facilities.
In December 1996, the Company modified its line of credit facility with a
bank to expire February 28, 1998. The agreement provides for borrowings
up to the lesser of $1,000,000 or 75% of eligible receivables. Borrowings
under the agreement bear interest at the bank's prime rate plus 0.50%
(8.75% at December 31, 1996) and are collateralized by accounts
receivable, equipment and other assets of the Company. At December 31,
1996, the Company has no borrowings under the agreement and had $1,000,000
available under the line of credit. In connection with a prior line of
credit 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 three 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.
11. COMMITMENTS:
The Company leases its administrative, sales, marketing, manufacturing,
research and development facilities under noncancelable operating leases
expiring in February 1998, August 2000 and August 2001. Under the terms of
the leases, the Company is responsible for certain expenses and taxes.
-41-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
11. COMMITMENTS, continued
Future minimum payments under these noncancelable leases are as follows:
FISCAL YEAR:
1997 $ 396,951
1998 338,810
1999 327,114
2000 279,114
2001 122,076
--------------
$1,464,065
--------------
--------------
Rent expense was $438,531, $470,379, and $456,459, for December 31, 1996,
1995, and 1994, respectively.
12. RESEARCH AND DEVELOPMENT ARRANGEMENTS:
The Company is party to a number of research and development contracts,
generally short-term in nature, which are substantially all with various
agencies of the United States government. Credit risk related to accounts
receivable arising from such contracts is considered minimal. The
following describes some of the major programs underway:
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. In connection with the modifying 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.
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.
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. Under the terms of the
five year agreement, the U.S. government agreed to share costs of the
joint venture's research effort up to an aggregate of $7,450,000,
including subcontractor costs. Revenue of $1,613,444, $1,920,020, and
$1,520,390 was recognized under this contract for 1996, 1995, and 1994,
respectively.
FOCUSED RESEARCH INITIATIVE:
In September 1995, the Company entered into a contract with the Naval
Research Laboratory for the development of HTS receiver coils for a pulse
magnetic resonance imaging (MRI) prototype for screening of breast cancer.
The revenues of $1,473,000 and $185,000 was recognized under the contract
for 1996 and 1995.
-42-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
13. STOCKHOLDERS' EQUITY
CAPITAL STOCK:
Under the terms of the Company's Articles of Incorporation,
the Board of Directors may determine the rights, preferences
and terms of the Company's authorized but unissued preferred
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 and 9,664 shares of common
stock, at a price per share of $6.08 and $8.96, respectively.
As of December 31, 1996, warrants for 16,447 and 2,087 shares
of Common Stock remain exercisable, respectively. The
warrants, which are 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 1,880,000 shares of common stock are authorized for
issuance under the Plan as of December 31, 1996. 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 1,182,276 shares under amendments to the Plan.
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. Thereafter each year all
non-employee Board members will receive a grant of 3,000
shares which vest over 3 years.
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
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 issued options at below fair market
value, resulting in a compensation charge of $295,000, which
is being amortized to the statement of operations over the
vesting period of the related options. As of December 31,
1996, $54,160 remains to be amortized.
-43-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
13. STOCKHOLDERS' EQUITY, continued
1992 STOCK OPTION/STOCK ISSUANCE PLAN, CONTINUED:
A summary of the status of all the Company's stock options as of December
31, 1996, 1995 and 1994 and changes during the years ending on these dates
is presented below:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------
Available For Grant Price Weighted Avg.
Under Option Plan Shares Per Share Exercise Price
----------------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Balances, January 1, 1994 142,549 732,685 $ .16-10.63 $0.87
Additional shares authorized 500,000
Granted (565,000) 565,000 $4.00-5.75 $5.13
Exercised (91,001) $ .16-.88 $0.31
Canceled 56,093 (56,093) $ .45-10.63 $6.14
---------------- --------------
Balance, December 31, 1994 133,642 1,150,591 $ .16-5.75 $2.76
Additional shares authorized 300,000
Granted (309,163) 309,163 $4.94-7.25 $5.61
Exercised (224,762) $ .16-6.31 $0.58
Canceled 154,559 (212,684) $ .45-6.88 $3.08
---------------- --------------
Balance, December 31, 1995 279,038 1,022,308 $ .16-7.25 $4.04
Additional shares authorized 300,000
Granted (528,000) 528,000 $6.50-15.25 $9.57
Exercised (57,311) $ .16-7.25 $2.08
Canceled 107,815 (107,815) $ .45-11.50 $6.09
---------------- --------------
Balance December 31, 1996 158,853 1,385,182 $ .16-15.25 $6.07
---------------- --------------
---------------- --------------
</TABLE>
Options canceled in the year ended December 31, 1995, include 58,125
options which were originally granted outside of the Stock Option
Plan.
At December 31, 1996, and 1995, vested options to purchase 477,522
and 326,040 shares, respectively, were unexercised. Vested options
are those options in respect of which the Company's right of
re-purchase has expired. The weighted average price for the
respective vested options were $3.21 and $2.26.
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 1996 and 1995 employees
purchased 57,848 and 101,790 shares for a total of approximately $340,603
and $453,226, respectively. At December 31, 1996, 40,362 shares were
available for future grants under the Plan.
COMMON STOCK RESERVED:
At December 31, 1996, the Company had reserved the following shares of
common stock:
Employee Stock Purchase Plan 40,362
Warrants 33,534
Option Plan 1,543,910
------------
1,617,806
------------
------------
-44-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
13. STOCKHOLDERS' EQUITY, continued
STOCK BASED COMPENSATION PLANS - VALUATION:
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Weighted
Number Weighted Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Contractual Life (Years) Price at 12/31/96 Price
-------------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$0.16 - $ 0.88 234,563 4.84 $0.55 234,563 $ 0.55
4.38 - 6.00 624,885 7.70 5.21 624,885 5.21
6.13 - 9.25 278,984 9.56 7.71 278,984 7.71
9.38 - 15.25 246,750 9.34 11.64 246,750 11.64
------------------- --------- ---- ----- --------- ------
0.16 - $15.25 1,385,182 7.88 $6.07 1,385,182 $ 6.07
------------------- --------- ---- ----- --------- ------
------------------- --------- ---- ----- --------- ------
</TABLE>
The following information concerning the Company's stock option and
employee stock purchase plan (see Employee Stock Purchase Plan) is
provided in accordance with SFAS No. 123. The company however,
continues to apply APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plans.
The fair value of each option grant and purchase right has been
estimated on the date of grant using the Black-Scholes option pricing
and valuation model with the following weighted average assumptions used
for grants and purchase rights in 1996 and 1995.
1996 1995
----------------- -----------------
GROUP A GROUP B GROUP A GROUP B
--------- -------- --------- ---------
Risk-free Interest Rates 6.13% 5.50% 6.38% 5.60%
Expected Life 4.9 years 6 months 4.9 years 6 months
Volatility 0.76 0.76 0.76 0.76
Dividend Yield --- --- --- ---
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents all employees, Officers and
Directors. Group B are for the employees with purchase rights under the
Employee Stock Purchase Plan.
The weighted average fair value of those options granted in 1996 and
1995 was $6.19 and $3.64, respectively. The respective weighted average
fair value of those purchase rights granted in 1996 and 1995 was $3.47
and $2.21.
Had compensation cost for these plans been determined based on fair
value of the options at the grant date in 1996 and 1995 consistent with
the provisions of SFAS No. 123 the Company's net loss and net loss per
share would have been as follows:
1996 1995
------------ ------------
Net Loss - As reported $(5,004,000) $(4,422,000)
- Pro forma $(6,057,000) $(4,917,000)
Loss per share - As reported $ (0.80) $(0.80)
- Pro forma $ (0.97) $(0.89)
The above pro forma effects may not be representative of the effects on
reported net income for future years as the pro forma numbers presented
do not take into account the effect of equity grants made prior to 1995
or additional future grants.
On March 8, 1996 the Company issued warrants to acquire 15,000 shares of
common stock at a price of
-45-
<PAGE>
$11.25 per share. The fair value of these warrants at the grant
date was $11.25 per share.
-46-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
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 1994 through 1996.
15. INCOME TAXES:
The components of deferred tax assets are as follows:
DECEMBER 31,
------------------------------
1996 1995
-------------- -------------
Property and equipment, principally
due to differences in depreciation $ 327,000 $ 332,000
Other accrued liabilities 519,000 101,000
Capitalized research and
development expense 882,000 805,000
Net operating loss carry forward 9,190,000 6,157,000
Valuation allowance (10,918,000) (7,395,000)
-------------- -------------
Net deferred tax asset $ -- $ --
-------------- -------------
-------------- -------------
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, 1996, the Company had approximately $26,000,000 and
$5,700,000 in net operating loss carry forwards for federal and state
income purposes, respectively. These expire in the years 1997 through
2011. The utilization of the Company's net operating loss carry forwards
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 12%
($1,560,000), 11% ($1,172,000), and 8% ($732,000) in 1996, 1995 and 1994,
respectively. Amounts receivable from this customer were $381,000 and
$408,000 at December 31, 1996 and 1995, respectively.
The Company's export revenues are all denominated in U.S. dollars and are
summarized as follows:
1996 1995 1994
------------- ------------- -------------
Japan $1,560,000 $ 1,172,000 $732,000
Rest of the world 433,385 256,000 265,000
------------- ------------- -------------
$1,993,385 $ 1,428,000 $997,000
------------- ------------- -------------
------------- ------------- -------------
-47-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Conductus, Inc.:
Our report on the financial statements of Conductus Inc., is included on
page 33 of this Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule
listed in the index on page 28 of this Form 10-K.
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 7, 1997
-48-
<PAGE>
SCHEDULE II
CONDUCTUS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
Description of Period Expenses Accounts Deductions Of Period
<S> <C> <C> <C> <C> <C>
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
Year ended December 31, 1996:
Allowance for doubtful accounts $50,000 $ -- $ -- $ -- $50,000
Allowance for excess and
obsolete inventory $81,000 $ -- $ -- $ -- $81,000
</TABLE>
-49-
<PAGE>
PROMISSORY NOTE
Borrower: CONDUCTUS, INC.
969 West Maude Avenue
Sunnyvale, CA 94086
Lender: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Principal Amount: $1,000,000.00 Initial Rate: 9.250% Date of Note:
December 26, 1996
PROMISE TO PAY. CONDUCTUS, INC. ("Borrower") promises to pay to Silicon
Valley Bank ("Lender"), or order, in lawful money of the United States of
America, the principal amount of One Million & 00/100 Dollars ($1,000,000.00)
or so much as may be outstanding, together with interest on the unpaid
outstanding principal balance of each advance. Interest shall be calculated
from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in accordance with the following payment
schedule:
The Draw Period shall begin as of this date and shall end on June 30, 1997
(the "Draw Period"). Borrower shall pay regular monthly payments of all
accrued unpaid interest due as of each payment date, beginning January 31,
1997 and all subsequent interest payments will be due on the last day of each
month thereafter through the Draw Period. The outstanding principal balance
on June 30,1997 will be payable in thirty (30) even payments of principal
plus interest due as of each payment date, beginning July 31, 1997 and all
subsequent payments of principal plus interest will be due on the last day of
each month thereafter. The final payment, due on December 31, 1999, will be
for all outstanding principal plus all accrued interest not yet paid.
Interest on this Note is computed on a 365/360 simple interest basis; that
is, by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount of any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate
(the "Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate may
or may not be the lowest rate available from Lender at any given time. Lender
will tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each time the prime rate
is adjusted by Silicon Valley Bank. The Index currently is 8.250% per annum.
The interest rate to be applied to the unpaid principal balance of this Note
will be at a rate of 1,000 percentage point over the Index, resulting in an
initial rate of 9.250% per annum. NOTICE: Under no circumstances will the
interest rate on this Note be more than the maximum rate allowed by applicable
law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject
to refund upon early payment (whether voluntary or as a result of default),
except as otherwise required by law. Except for the foregoing, Borrower may
pay without penalty all or a portion of the amount owed earlier than it is
due. Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance due.
DEFAULT. Shall have the same meaning as set forth in the Business Loan
Agreement.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to
apply all amounts declared due pursuant to this section, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 5.000 percentage points over the otherwise
effective interest rate, and (b) add any unpaid accrued interest to principal
and such sum will bear interest therefrom until paid at the rate provided in
this Note (including any increased rate). Lender may hire or pay someone else
to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable
law, Lender's reasonable attorneys' fees and Lender's legal expenses whether
or not there is a lawsuit, including reasonable attorneys' fees and Lender's
reasonable legal expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by
<PAGE>
law. This Note has been delivered to Lender and accepted by Lender in the
State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Santa Clara County,
the State of California. This Note shall be governed by and construed in
accordance with the laws of the State of California.
LINE OF CREDIT. This Note evidences a straight line of credit through the end
of the Draw Period. Once the total amount of principal has been advanced,
Borrower is not entitled to further loan advances. Advances under this Note,
as well as directions for payment from Borrower's accounts, may be requested
orally or in writing by Borrower or by an authorized person. Lender may, but
need not, require that all oral requests be confirmed in writing. Borrower
agrees to be liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of Borrower's
accounts with Lender. The unpaid principal balance owing on this Note at any
time may be evidenced by endorsements on this Note or by Lender's internal
records, including daily computer print-outs. Lender will have no obligation
to advance funds under this Note if: (a) Borrower or any guarantor is in
default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with
the signing of this Note; (b) Borrower ceases doing business or is insolvent;
or (d) Borrower has applied funds provided pursuant to this Note for purposes
other than those authorized by Lender.
ADVANCE RATE. At any time from the date hereof through the end of the Draw
Period, Borrower may request advances (each an "Advance" and collectively, the
"Advances") from Lender up to $1,000,000.00. To evidence the Advances,
Borrower shall deliver to Lender, at the time of each advance request, an
invoice for the equipment purchased from July 1, 1996 through June 30, 1997
or an agreement for the equipment purchased under a lease buy-out agreement.
The Advances shall be used to purchase new equipment and equipment under
existing leases. The advance rate for the equipment purchased shall not
exceed One Hundred Percent (100%) of the Invoice amount of such equipment
approved from time to time by Lender, excluding taxes, shipping and
installation expense. The advances for lease buy-outs shall not exceed
fifty-five (55%) of the fair market value for the equipment purchased and
shall exclude, taxes, shipping and installation expense and shall not exceed
the aggregate of $350,000.00. Software may, however, constitute up to twenty
five percent (25%) of each Advance. Each Advance must be a minimum of
$100,000.00, except the final advance.
BUSINESS LOAN AGREEMENT. This Note is subject to and shall be governed by all
the terms and conditions of the Business Loan Agreement dated August 15,
1994, as may be amended, between Borrower and Lender, which Business Loan
Agreement is incorporated herein by reference.
LOAN FEE. This Note is subject to a loan fee in the amount of Five Thousand
and 00/100 Dollars ($5,000.00) plus all out-of-pocket expenses.
REQUEST TO DEBIT. Borrower will regularly deposit all funds received from its
business activities in accounts maintained by Borrower at Silicon Valley
Bank. Borrower hereby requests and authorizes Lender to debit any of
Borrower's accounts with Lender, specifically, without limitation, Account
Number 0351679270 for payments of principal and interest due on the loan and
any other obligations owing by Borrower to Lender. Lender will notify Borrower
of all debits which Lender makes against Borrower's accounts. Any such debits
against Borrower's accounts in no way shall be deemed a set-off.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive any applicable statute of limitations, presentment, demand for payment,
protest and notice of dishonor. Upon any change in the terms of this Note,
and unless otherwise expressly stated in writing, no party who signs this
Note, whether as maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any
party or guarantor or collateral; or impair, fail to realize upon or perfect
Lender's security interest in the collateral; and take any other action deemed
necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER HAS READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS.
BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A
COMPLETED COPY OF THE NOTE.
BORROWER:
CONDUCTUS, INC.
By: /s/ William J. Tamblyn
--------------------------------
Name: William J. Tamblyn
--------------------------------
Title: VP/CFO
--------------------------------
<PAGE>
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of December 26,
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), 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") and being executed concurrently herewith,
a Promissory Note dated December 26, 1996, in the original principal amount
of One Million and 00/100 Dollars ($1,000,000.00) (the "Term Note 3). The
Line has been modified pursuant to Loan Modification Agreements dated August
15, 1995, 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) and further modified by that certain Loan Modification
Agreement dated June 10, 1996. 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 Line, the Term
Note 1, the Term Note 2 and the Term Note 3 shall be collectively 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. MODIFICATION(S) TO LINE.
1. Notwithstanding a maturity date of February 28, 1997. Lender
agrees on that date to extend the term of Borrower's Line for
an additional year, subject to ongoing compliance with the
terms and conditions set-forth in the Existing Loan
Documents. Borrower shall pay to Lender, one payment of all
outstanding principal plus all accrued unpaid interest on
February 27, 1998. In addition, Borrower will pay regular
monthly payments of all accrued unpaid interest beginning
December 31, 1996, and all subsequent interest payments will
be due on the last day of each month thereafter.
2. The principal amount of the Line is hereby decreased to One
Million and 00/100 Dollars ($1,000,000.00).
<PAGE>
B. 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, beginning with
the month ending December 31, 1996, a minimum quick ratio of
1.75 to 1.00; a minimum liquidity coverage ratio of 2.00 to
1.00; a minimum Tangible Net Worth of $8,500,000.00; and a
maximum total Debt minus Subordinated Debt to Tangible Net
Worth plus Subordinated Debt ratio of 1.00 to 1.00.
Furthermore, Borrower may incur losses, provided, such losses
shall not exceed $1,500,000.00 for the quarter ending
December 31, 1996; $1,250,000.00 for the quarter ending March
31, 1997; $1,000,000.00 for the quarter ending June 30, 1997;
and $750,000.00 for the quarter ending September 30, 1997.
Borrower shall achieve profitability beginning as of the
quarter ending December 31, 1997, with the allowance of one
quarterly loss per annum, provided such loss does not exceed
$500,000.00.
For calculation purposes, the liquidity coverage ratio shall
mean cash or cash equivalents plus availability under the
Line divided by the sum of outstanding balances under the
Term Note as defined herein.
2. The first sentence of the paragraph entitled "Borrowing Base
Formula" is hereby amended, in its entirety, to read as
follows:
Funds shall be advanced under the Line according to a
borrowing base formula, as determined by Lender, defined as
follows: The less of (i) $1,000,000.00 minus the face amount
of outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) or (ii) seventy-five percent
(75%) of eligible accounts receivable minus the face amount
of outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit).
3. The defined term "Term Note" shall mean collectively, that
certain Promissory Note dated August 15, 1994, in the
original principal amount of $1,500,000.00, as may be
amended; that certain Promissory Note dated March 1, 1996, in
the original principal amount of $1,000,000.00, as may be
amended; and that certain Promissory Note dated December 26,
1996, in the original principal amount of $1,000,000.00, as
may be amended.
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) in connection with the Term Note
3 and a fee in the amount of Two Thousand Five Hundred and 00/100 Dollars
($2,500.00) in connection with the Line (collectively 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,
2
<PAGE>
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: /s/ William J. Tamblyn By: /s/ Simon James
---------------------- -------------------
Name: William J. Tamblyn Name: Simon James
---------------------- -------------------
Title: VP/CFO Title: Vice President
---------------------- -------------------
3
<PAGE>
EXHIBIT 11.1
CONDUCTUS, INC.
STATEMENTS OF COMPUTATION OF LOSS PER SHARE
(amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Net loss $(5,004) $(4,422) $(4,544)
--------- -------- ---------
--------- -------- ---------
Weighted average number of shares outstanding as adjusted 6,263 5,543 5,323
--------- -------- ---------
--------- -------- ---------
Loss per share $(0.80) $(0.80) $(0.85)
--------- -------- ---------
--------- -------- ---------
</TABLE>
-50-
<PAGE>
EXHIBIT 23.1
CONDUCTUS, INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Conductus, Inc. on Form S-8 (File Nos. 33-74478, 33-79946 and 33-82454) of
our reports dated February 7, 1997 on our audits of the financial statements
and financial statement schedule of Conductus, Inc. as of December 31, 1996
and December 31, 1995, and for the years ended December 31, 1996, 1995 and
1994, which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 8, 1997
-51-
