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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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 (-418DEG. 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 (-320DEG. 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 COMMUNICATIONS HEALTHCARE INSTRUMENTATION
TECHNOLOGY
<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 film Demonstrated HTS microwave Demonstrated HTS MRI Introduced Mr. SQUID-Registered
with state-of-the-art delay lines. receiver coil. Trademark- HTS SQUID magnetometer.
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 deposition cellular filter on 3" of NMR probe to Varian. measurement system.
process. substrate.
Demonstrated integrated Announced program with
cellular filter Stanford University to
subsystem at industry develop MRI for
trade shows and to mammography.
OEMs.
1996 Began production of Performed first field Signed joint development Began OEM shipments of
single-and double sided tests of prototype agreement with Siemens magnetic sensors.
wafers by filter subsystem for for low-field MRI coil.
coevaporation. rural cellular market.
Formed alliance with Introduced first HTS
Lucent and CTI to NMR probe product
develop filter to the market.
subsystem 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.
(delivery of 6 pack). 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 HTSITS 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 gratedinternal 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 and instrumentation 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 May 1996.
TARGET MARKETS AND COMMERCIALIZATION STATUS
<TABLE>
<CAPTION>
CONDUCTUS POTENTIAL TARGET CURRENT
MARKET PRODUCT PRODUCT BENEFITS MARKET PARTNER STATUS
<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.
worldwide + buildout. Additional field tests
ongoing.
PCS transceiver Increased range, higher Forecast buildout of Lucent Developed initial
subsystem call capacity, reduced 70,000 PCS base Technologies (April prototype filter
interference, higher stations in the U.S. 1996) subsystems and
quality connections, by the year 2000. completed initial
reduced size. field test. Anticipate
commercial sales in
late 1997 or early
1998.
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HEALTHCARE NMR probe Allows use of Estimated 400 new Varian (November First production
subsystem smaller samples or machines per year; 1994) units of (1)H and
higher throughput. installed base of (19)F probe subsystems
Allows analysis of 3,000+ machines. Nalorac delivered. Commenced
more complex (November 1996) commercial shipments
compounds. Achieves in 1996. Expect
performance of introduction of (13)C
high-end system with probe in 1997.
lower cost equipment. Developing prototypes
of additional probes.
MRI receiver Better images, faster Estimated 100+ new Siemens Developing prototypes
subsystem for scan time, increased machines per year; (December 1995) subsystems in
low-field throughput in lower estimates installed 1996/1997.
scanners cost MRI systems. base of 500 machines.
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INSTRUMENTATION Laboratory Highly sensitive Research Commercial
measurement measurement of laboratories. production of HTS
magnetic properties and LTS products
of materials. First
HTS magnetic sending
products available to
researchers.
SQUID Sensors and subsystems New markets in Kanazawa Institute Providing
magnetometers, for incorporation into medicine, of Technology components for
gradiometers magnetic sensing geophysics, testing. ("KIT") KIT and research
and front-end systems for medical, customers.
electronics geophysical and non-
destructive evaluation
instruments.
</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 therein. Power losses resulting
from the use of components made from conventional conductors have limited the
ability of the industry to address these problems. Conductus believes that
superconductive filters used in conjunction with cryogenically-cooled amplifiers
have the potential to offer solutions to several operating problems in cellular
base stations as well as to provide solutions to anticipated problems in
forthcoming PCS base stations.,
CELLULAR MARKET. According to Federal Communications Commission and
industry reports, there are more than 22,000 installed cellular base stations in
the United States. Of the U.S, installed base, Conductus estimates approximately
2,000-3,000 are located in a rural environment. The present cellular
communications network, operating at frequencies near 850 MHz, was established
at a time when the typical cellular telephone was a mobile unit capable of
transmitting up to 3 watts of radio frequency power and the total number of
subscribers was relatively low., Today, portable handsets that transmit only 0.6
watts are increasingly replacing higher-power mobile telephones, thereby
decreasing the effective receiving range of existing base stations., As a
result, in rural areas where base stations are widely separated, current
cellular customers can experience dropped calls due to "dead zones" in coverage.
At the same time, the increasing demand for cellular service in urban areas has
led to the utilization by service providers of a greater number of channels
within their allotted frequency bands, thereby increasing the incidence of
interference.,
In rural areas, where the primary problem is base station range, solutions
that increase the strength of the received signal or decrease the system noise
level can provide enhanced reception, and thus reduce the occurrence of dead
zones. One solution, which entails significant costs, is to increase the number
of base stations and thereby reduce the required range for each station. Another
solution, which is potentially more economical, is to enhance the signal
reception and noise filtering capabilities of existing base stations.
Conventional aApproaches 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 will be designed to
handle both voice and data transmissions, including features such as Internet
access. Although it utilizes the same basic building blocks as a cellular
system, the higher operating frequency of PCS compared with the cellular network
limits the range of its signal transmission. Because of this limited range of
signal transmission, based on information from third party sources Conductus
estimates that the forthcoming PCS buildout will result in more than 70,000 new
installed base stations throughout the U.S. by the end of the year 2005.
The projected large number and primarily urban location of PCS base
stations drives the needs for equipment cost and size reduction. However, signal
losses in base station components such as filters, antennas and cables are
exacerbated by higher frequency operation. Conventional receiver components
limit sensitivity and therefore base station range. Conventional filters tend to
be physically large and proposed PCS base station architectures call for the use
of multiple filters in each station. Collectively, these issues present a
difficult set of requirements for the designers of forthcoming PCS base station
equipment.
CONDUCTUS' SOLUTIONS. Conductus believes that the performance of cellular
base stations and PCS base stations could be improved significantly by using HTS
and cryocooled components in both their receivers. and their transmitters
Communication filters made using thin-film superconductor technology have the
potential to provide extraordinary frequency selectivity while maintaining
excellent efficiency because of their inherent low insertion losses. On the
receiver side, tThe 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%%. Conductus
expects that the subsystem will undergo increasingly rigorous testing during
1996, leading to potential deliveries of the first commercial units for retrofit
use in rural base stations in late 1996. 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 washas been a
part of the activities of the Consortium for Superconductor Electronics wireless
program, which primarily involveds 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 dispropor- tionate 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 by the end of 1996. See "Risk Factors -- Limited Outlets for Certain
Products", "Competing Technologies", "- Extensive Reliance on Collaborative
Relationships" and "- Highly Regulated Product Applications."
MRI. Magnetic resonance imaging is an important diagnostic medical
technique that provides de- tailed 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 are 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,v ("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,
p. 77, 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 "XXMAG-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 XXMAG
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.
Currently, Conductus is developing HTS geophysical systems under government
contracts from two different agencies and is working with Geometrics, Inc., a
manufacturer of geophysical surveying equipment, to develop and market
commercial instruments for these applications. Conductus is also working with
researchers at Kanazawa Institute of Technology in Japan to develop SQUID-based
instruments for seismic studies 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 and industry standards. The
Company has focused its development efforts to date principally on yttrium
barium copper oxide ("YBCO"). There can be no assurance that YBCO will
ultimately prove commercially competitive against other currently known
materials or materials that may be discovered in the future. The Company will
have to continue to develop and integrate advances in technology for the
fabrication of electronic circuits and devices and manufacture of commercial
quantities of its products. The Company will also need to continue to develop
and integrate advances in complementary technologies. There can be no assurance
that the Company's development efforts will not be rendered obsolete by research
efforts and technological advances made by others or that materials other than
those currently used by Conductus will not prove more advantageous for the
commercialization of superconductive electronic products. In addition, many of
Conductus' potential products, if successfully developed, are likely to be used
as components or subsystems in systems manufactured and sold by third party
systems manufacturers. There can be no assurance that these third parties will
elect to incorporate superconductive electronic products in these systems or, if
they do, that related system requirements, such as data processing software and
hardware capabilities, can or will be successfully developed. Failure of third
parties to successfully commercialize complementary technologies or to
incorporate the Company's products into their systems would have a material
adverse effect on Conductus' business, operating results and financial
condition.
STRATEGIC ALLIANCES AND DEVELOPMENT AGREEMENTS
Conductus is party to a number of collaborative arrangements with
corporations and research institutions with respect to the research, development
and marketing of certain of its potential products. Conductus evaluates, on an
ongoing basis, potential collaborative relationships and intends to continue to
pursue such relationships. The Company's future success will depend
significantly on its collaborative arrangements ( with third parties. There can
be no assurance that these arrangements will result in commercially successful:
products. See "Risk Factors -- Extensive Reliance on Collaborative
Relationships," and "- Limited 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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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. intends that its
initial product will be for seismology Conductus has received several an initial
orders for LTS SQUIDs under this agreement, which contains no minimum purchase
requirement, and there can be no assurance that KIT will successfullyy 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 three months ended March 31, 1996, and fiscal years
19965, 1995, and , and, 19943, respectively. The Company's revenue from
government-related contracts represented approximately 77%, 77%, and 82% and 78%
of total revenues for the three months ended March 31, 1996 and fiscal years
19965, 19954 and 19943, respectively. Conductus believes that it will continue
to be heavily dependent on U.S. government contracts to fund a significant
portion of its research and development programs. The Company's strategy is to
fund a significant portion of its research and development, particularly for
wireless communications and digital electronics applications, through contracts
with agencies of the U.S. government. As of March December 31, 1996, the Company
had received aggregate awards since its inception of approximately $46,422,000
g6,652,000 from U.S. government agencies, including approximately $33,006,000,
$25,529,000 recognized as revenue by the Company through December March 31,
1996, and approximately $8,796,000, $7,760,000 in awards for which it has not
yet entered into research contracts. As of DecemberMarch 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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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
Department of Commerce National Institutes of Health Office of Naval Research
Department of Energy
</TABLE>
<TABLE>
<CAPTION>
SELECTED AREAS OF RESEARCH AND DEVELOPMENT
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 sub- contractor; the failure of the
government to exercise options provided for in the contracts; the government's
nonexclusive, royalty-free license to use technology developed pursuant to the
contracts by or on behalf of the government in certain circumstances; and
exercise of "march-in" rights by the government. March-in rights refer to the
right of the U.S. government or government agency to require the Company to
license patented technology developed under contracts funded by the government
if the contractor fails to continue to develop the technology. In addition,
there can be no assurance that the U.S. government will continue its commitment
to programs to which the Company's development projects are applicable,
particularly in light of recent legislative initiatives to reduce the funding of
various U.S. government agencies and programs, or that the Company can compete
successfully to obtain funding pursuant to such programs, See "Risk Factors --
High Degree of Dependence Upon Government Contracts."
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 2117 U.S. patents and one related foreign patent
which have unexpired term ranging from 13 to 18 years and has 158 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 Overview - 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.
(C"DuPont") has notified Conductus that it is the exclusive licensee of patents
issued in Israel, Sweden,. Taiwan and the United Kingdom covering the
composition of YBCO and a method for using YBCO in superconducting applications.
Dupont has stated that it is interested in sublicensing such patents to
Conductus, and would consider sublicensing to Conductus, as they issue, any
other foreign and U.S. patent applications licensed to DuPont by the University
of Houston. The Company anticipates that it will be required to obtain a license
to use YBCO from one or more of these parties in order to continue to develop
and sell products based on YBCO.
There can be no assurance that the Company would able to obtain licenses to
patents covering YBCO compositions, when issued, or to any other patents
applicable to the Company's business on commercially reasonable terms. In such
an event, the Company could be required to expend significant resources to
develop non-infringing technology alternatives or to obtain licenses to the
technology that the Company infringes or would infringe. There can be no
assurance that the Company would be able to successfully design around these
third party patents or to obtain licenses to technology that it may require.
Furthermore, there can be no assurance that the Company will not be obligated to
defend itself at substantial cost against allegations of infringement of third
party patents. An adverse outcome in such a suit could subject the Company to
significant liabilities to third parties, or require the Company to cease using
such technology. In addition, aside from the merits of a claim, the cost of
defending any such suit would constitute a major financial burden for the
Company that would have a material adverse effect on its business, operating
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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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 head- quarters 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 nine
full-time equivalents. These employees are actively engaged in direct
marketing to OEM and potential OEM customers, as well as in sales and
marketing support. The Company actively markets its products through
advertisements in trade journals as well as through demonstration of its
technology and products at industry trade shows, including trade shows
related to telecommunications, NMR spectroscopy, MRI imaging and magnetic
sensing. The Company's employees have published the results of their research
at Conductus widely in trade and technical journals. Additionally, Conductus'
employees have frequently presented Conductus' technology a invited speakers
at conferences worldwide.
For the three months ended March 31, 1996 and fiscal years 1996, 1995,
and 1994 and 1993, commercial sales to one customer of $1,560,000, 241,000,
$1,172,000, and $732,000 and $816,000 were 12% 9%, 11%, and 8% and 13% of
total revenues, respectively. This customer acts primarily as a distributor
of the Company's products, selling to end-users.
ENVIRONMENTAL MATTERS
The Company uses certain hazardous materials in its research and
manufacturing operations. As a result, Conductus is subject to federal, state
and local governmental regulations. Conductus believes that itt has complied
with all regulations and has all permits necessary to conduct its business.
See "Risk Factors - Environmental Regulations."
EMPLOYEES
As of December March 31, 1996, the Company had a total of 133 full-time
equivalent employees of which46 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' 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:
Name Age Position
- - -------------------------------------------------------------------------------
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
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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
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<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 19965, 19954 and
19943 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 onin 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 were $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 approximately $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 and 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 were 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.
PART III
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<PAGE>
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
1. Financial Statements Number
------
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 . . . . . . . . . . . . . . . . . 47
Schedule II- Valuation and Qualifying Accounts . . . . . . . . . . 48
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
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<PAGE>
EXHIBIT DESCRIPTION
NUMBER -----------
- - ------
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 Ddevelopment 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 between
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.
11.1 Statements of computation of loss per share
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<PAGE>
EXHIBIT DESCRIPTION
NUMBER -----------
- - ------
10.30 Business Loan Agreement dated December 27, 1996 between Registrant
and Silicon Valley Bank for working capital credit facility and term
loan facility.
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.
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<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
March 25, 1997.
CONDUCTUS, INC.
By: /s/Charles E. Shalvoy
---------------------------------------
Charles E. Shalvoy
President and Chief Executive Officer
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<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles E. Shalvoy and William J.
Tamblyn, and each of them, as his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign any and all amendments (including post-effective amendments) to this
Report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Charles E. Shalvoy President, Chief Executive March 25, 1997
- - -------------------------- Officer and Director
Charles E. Shalvoy Officer and Director
(Principal Executive Officer)
/s/ William J. Tamblyn Vice President, March 25, 1997
- - -------------------------- Chief Financial Officer
William J. Tamblyn (Principal Accounting Officer)
/s/ John F. Shoch Chairman of the Board of March 25, 1997
- - -------------------------- Directors
John F. Shoch, Ph.D.
/s/ Richard W. Anderson Director March 25, 1997
- - --------------------------
Richard W. Anderson
/s/ Martin Cooper Director March 25, 1997
- - --------------------------
Martin Cooper
/s/ Robert Janowiak Director March 25, 1997
- - --------------------------
Robert Janowiak
Director
- - --------------------------
Marty Kaplan
/s/ Anthony Sun Director March 25, 1997
- - --------------------------
Anthony Sun
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<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
<PAGE>
CONDUCTUS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1996 1995
----------- ------------
<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.
-34-
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
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
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-35-
<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.
-36-
<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 Ccommon 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>
The accompanying notes are an integral part of these financial statements.
-37-
<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.
-38-
<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 (FAS
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.
-39-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
3. SUPPLEMENTAL CASH FLOW DISCLOSURE: 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:
<TABLE>
<CAPTION>
Investments are summarized below: 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, net 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.,
Tthe cost of securities sold is based on the specific identification
method.
-40-
<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
---------- ---------
---------- ---------
-41-
<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 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. Principal installments under the
facilities mature as follows; $1,119,331, $923,091, and $98,689 in 1997,
1998 and 1999, respectively. At December 31, 1996, $829,913 was available
under the third $1,000,000 credit facilities.
In December 1996, the Company modified its line of credit facility with a
bank to expire February 28, 19987. 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.
-42-
<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:
GOVERNMENT CONTRACTS:
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.
-43-
<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 sStock. Thereafter Additionally each year all the non-
employee Board members will receive a grant of 3,000 shares grant that
which vest over 32 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.
-44-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, 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 cancelled 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 to which the Company's right of
repurchase has expired. The weighted average price for the 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
----------
----------
-45-
<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
- - ---------------------------------------------------------------------------------- -------------------------------------
Number Weighted Average Weighted Average Number Weighted 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% 5.66%
Expected Life 4.9 years 6 months 4.9 year 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. The weighted average fair value of those
purchase rights granted in 1996 and 1995 was $3.47 and $2.21.
The following proforma information has been prepared following the
provision of SFAS No. 123.
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 proforma 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's issued warrants to acquire 15,000
shares of common stock at a price of $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 (10,910,000) (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>
CONDUCTUS, INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Description Balance at Charged to Charged to Balance
Beginning Cost and Other at End
of Period Expenses Accounts Deductions Of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
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>
CONDUCTUS, INC. EXHIBIT 11.1
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, 19954 and 19943,
which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P
San Jose, California
March 27, 1997
-51-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> NOV-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 1119991 1119991
<SECURITIES> 6516401 6516401
<RECEIVABLES> 3756586 3756586
<ALLOWANCES> 0 0
<INVENTORY> 1220873 1220873
<CURRENT-ASSETS> 13011407 13011407
<PP&E> 2941685 2941685
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 16080855 16080855
<CURRENT-LIABILITIES> 3876008 3876008
<BONDS> 0 0
0 0
0 0
<COMMON> 683 683
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 16080855 16080855
<SALES> 1046000 2851682
<TOTAL-REVENUES> 3648000 12542671
<CGS> 608000 1823622
<TOTAL-COSTS> 4738000 17651512
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (56000) (104869)
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1034000) (5003972)
<EPS-PRIMARY> (0.15) (0.80)
<EPS-DILUTED> 0 0
</TABLE>
