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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 31, 1997
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
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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
Preferred Share Purchase Right, $0.0001 par value
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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. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of February 27, 1998, was approximately $23,490,000 based on the
closing sale price of the Company's Common Stock, as reported by the Nasdaq
National Market on February 27, 1998. 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 27, 1998, approximately 7,004,095 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 1998 Annual Meeting
of Stockholders scheduled to be held on May 29, 1998, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
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Number
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . .18
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . .18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. . . . . .18
EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . .18
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . .19
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . .19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . .20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . .24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . .24
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . .24
Item 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . .24
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . .24
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . .24
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . .25
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PART I
ITEM 1. BUSINESS
OVERVIEW
THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K (THE "FORM 10-K")
AND IN REPORTS INCORPORATED BY REFERENCE THAT ARE NOT PURELY HISTORICAL ARE
FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE RULES PROMULGATED
PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"))
THAT REFLECT CONDUCTUS, INC.'S (THE "COMPANY" OR "CONDUCTUS") CURRENT
EXPECTATIONS REGARDING THE FUTURE RESULTS OF OPERATIONS AND PERFORMANCE AND
ACHIEVEMENTS OF THE COMPANY. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
THE SAFE HARBOR CREATED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THE COMPANY HAS TRIED, WHEREVER POSSIBLE, TO IDENTIFY THESE
FORWARD-LOOKING STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE," "BELIEVE,"
"ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS. THESE STATEMENTS REFLECT THE
COMPANY'S CURRENT BELIEFS AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO
IT. ACCORDINGLY, THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS, SUCH AS THOSE SET FORTH UNDER "RISK FACTORS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, WHICH COULD CAUSE THE COMPANY'S FUTURE RESULTS, PERFORMANCE
OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY,
ANY OF THESE STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE
PUBLICLY THE RESULTS OF ANY REVISIONS TO ANY SUCH FORWARD-LOOKING STATEMENTS
THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS
FORM 10-K OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
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 the majority of its efforts on applications
for superconductors in the communications market. Conductus is developing,
manufacturing, and marketing front-end receiver subsystems for cellular and
personal communication services ("PCS") base stations. These superconducting
filter subsystems are intended to provide significant benefits in base
station performance as well as reduce the size of the filter components
required. Conductus has begun shipping initial products for this market and
continues to develop additional products for near-term introduction.
In the third quarter of 1997, the Company completed two organizational
changes aimed at focusing the Company's resources on applications of its
superconductive technology in wireless communications. First, it closed its
Instrument and Systems division, located in San Diego, California, and sold
its product rights to its temperature controller business to Neocera, Inc.
and certain of its magnetic sensing instrumentation rights to Niki Glass Co.
Second, it sold its NMR spectroscopy probe business to Bruker Instruments,
Inc. In order to fund current operations and further product development of
wireless communications applications, the Company intends to raise capital
through the sale of its equity securities. See "Risk Factors-Substantial
Future Capital Needs" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Continuing research and development efforts are aimed primarily at additional
applications in the communications market, including superconducting circuits
for high-speed telecommunications switching. Additionally, Conductus
continues to manufacture and sell 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.
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
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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 compact form-factor. Other intrinsic
properties of superconductors enable the fabrication of unique electronic
devices, including high-speed electronic switches and ultra-sensitive
magnetic sensors.
From 1911, when superconductivity was first discovered, until 1986, the critical
temperatures for all known superconductors did not exceed 23 K (-418 DEG. F).
As a result, superconductivity was not widely used in commercial applications
because of the high cost and complexities associated with reaching and
maintaining such low temperatures. In 1986, a new class of superconducting
materials, referred to as high-temperature superconductors ("HTS"), was
discovered having critical temperatures above 77 K (-320 DEG. F), the boiling
point of liquid nitrogen. These high critical temperatures allow HTS materials
to be cooled to a superconducting state using liquid nitrogen, which is
inexpensive and relatively easy to use, or using relatively simple mechanical
refrigerators. Conductus believes that this ability to obtain the benefits of
superconducting technology at more easily achieved temperatures enables much
broader commercial applications.
The cooling required for HTS materials can also be useful for other materials.
Many electronic technologies, including CMOS, GaAs, optoelectronics and even
copper, exhibit enhanced performance at reduced temperatures, but the most
compelling performance improvements are enabled by superconductive electronics.
When the unique advantages of superconductive electronics are complemented by
the advantages of other cryoelectronic technologies, the result is a hybrid
system whose overall performance can justify the additional expense associated
with cryogenic cooling. Conductus is currently employing this hybrid approach in
its front-end receiver systems, which combine superconductive filters with
cryogenically-cooled low noise amplifiers.
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 procedures similar to those 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 followed by circuit processing steps similar to those used
to manufacture semiconductor devices. The fabrication of HTS components and
circuits entails certain 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 superconductive components,
additional electronic circuits and devices, and the self-contained
refrigeration equipment and packaging required to maintain the
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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
subsystems, 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. Furthermore, 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.
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 currently owns, alone or with others, 21 U.S.
patents and three related foreign patents. Additionally, as part of the sale
of its NMR business to Bruker, Inc., it transfered ownership of an additional
6 patents for which it has retained nonexclusive, royalty-free licenses
outside the NMR field of use. Conductus currently has 8 patent applications
pending in the U.S. and related patents pending in other countries relating
to various aspects of its technologies.
COMMERCIALIZE PRODUCTS WITH SIGNIFICANT MARKET POTENTIAL. Conductus believes
that the largest potential near-term market for superconductor-based products
is the wireless communications market. The Company is actively marketing
front-end systems as well as developing additional HTS component-based
subsystems for this markets. In the cellular market, Conductus completed
field trials of its low-noise receiver filter subsystems for base stations in
mid-1997 and began commercial shipments of ClearSite-TM- front-end receiver
systems in October 1997. In addition, the Company continues to develop
additional subsystems of greater complexity for the cellular market. All
these products contain HTS filters and cryogenically-cooled low-noise
amplifiers in an integrated package that includes a refrigeration system.
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 a direct sales organization for the initial
commercialization of its subsystem products for the communications market and
later to develop additional sales channels through OEM customers for this
equipment.
WIRELESS COMMUNICATIONS APPLICATIONS
The initial applications for superconductive technology in the communications
market are in the area of infrastructure equipment for wireless base
stations. Commercial wireless 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
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the operator's 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, hand-held telephones and strained
capacity due to the growing demand for cellular service. The advent of PCS
(Personal Communications Services) technology will place additional demands on
the performance of wireless base stations and upon the size of the hardware
therein. 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 the growing network of PCS base stations.
BENEFITS OF SUPERCONDUCTIVE TECHNOLOGY FOR WIRELESS COMMUNICATIONS
Superconductive technology can offer signficant benefits in base station
receivers. The unique characteristics of superconducting materials can be
exploited to create filters that simultaneously deliver superior performance
with respect to adjacent-band interference rejection and with respect to
insertion loss (reduction of the desired signal because of the filter.) Because
the superconductor is nearly lossless at microwave frequencies, extremely sharp
filters -- ones with a large number of poles -- can be fabricated without
incurring substantial insertion losses. Because of their low-loss property,
superconductors provide the closest physically-attainable approximation to a
perfect filter, which would allow 100% of the desired signals to pass through
and screen out 100% of the unwanted signals. Given their ability to provide
outstanding performance with respect to multiple parameters, superconducting
filters are well suited for use as preselect filters in cellular or PCS base
stations. High-performance transmit filters made from superconducting materials
may also offer significant benefits in future base station applications as the
power-handling capability of these implementations continue to improve.
An immediate benefit of superconductor technology in base station
applications is the ability to provide superior interference rejection by
virtue of making filters with a large number of poles practical to implement.
Superconducting filters can be made with 12, 16 or even 19 poles to
effectively reject adjacent-band interference which can otherwise saturate
amplifiers in the receiver front end and introduce distortion into voice
channels. Losses of 1 dB or less are typical for superconducting filters
even with these high-order designs (ones with a large number of poles). The
number of adjacent-band interference sources is increasing as additional
wireless services such as specialized mobile radio and 2-way paging are
introduced. In the PCS spectrum, the potential for up to six service
providers to operate in a given area and the inevitability of co-location of
transmitters may drive the need for filters with improved rejection
capabilities.
A second benefit of superior superconducting filters is the potential ability
to fully utilize the available spectrum without introducing guard bands or
blocked channels at the band edge. By using extremely sharp adjacent-band
rejection filters -- often referred to as "brick-wall" filters -- it is
possible to maintain a greater number of voice channels in the band. This
opportunity is particularly attractive in the PCS spectrum in which very
narrow, 5 MHz frequency blocks have been licensed to carriers in addition to
earlier wide-band, 15 MHz blocks. In the narrow-band case, the conventional
configuration for CDMA systems is to utilize three 1.25 MHz carriers within
each block, with the remaining 1.25 MHz not utilized for guard-band purposes.
This provides plenty of separation from adjacent, competing services but is
very wasteful of spectrum. By using a sufficiently sharp superconducting
filter, it may be possible to instead have a fourth channel within a single
narrow-band block. Generally speaking, even in less dramatic broad-band use,
extremely sharp filters can increase the effective capacity of wireless
systems.
A third benefit of superconductor and, more generally, cryoelectronic
technology in base stations is the potential for providing extended coverage
by virtue of reducing the noise floor in the receiver front end of the base
station. This benefit is derived from a combination of highly efficient
superconducting filters that contribute minimal losses along with advanced
ultra-low-noise amplifiers whose own noise levels are reduced by the
cryogenic temperatures already present for the associated superconducting
filters. Superconducting filters contribute very small amounts of noise
because their quality or "Q" factors -- a measure of the ratio between stored
and dissipated energy -- are much higher than can be achieved using other
base station filter technologies. Properly-designed semiconductor low-noise
amplifiers (LNAs) -- for example, certain gallium arsenide HEMTs -- exhibit
enhanced noise performance when operated significantly below room
temperatures. Co-locating these LNAs with superconducting filters to take
advantage of the cryogenics required in the latter case provides an
ultra-low-noise receiver front end. Reducing the noise figure of a base
station's receiver enhances its sensitivity to incoming signals, which
potentially both increases its range and improves coverage within a cell.
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The fourth benefit offered by superconductor technology is the potential for
form-factor reductions in filter subsystems that utilize thin-film
superconductor components. The same basic steps of film deposition,
photolithography and etching that are familiar in the semiconductor industry
are used in fabricating thin-film superconducting devices. The resultant
thin-film superconducting filters are planar devices that utilize microstrip
technology to realize high-performance microwave filters in a very compact
form. Even a 19-pole cellular filter can easily fit on a 3-inch wafer.
Superconducting filters do require the use of a cryogenic refrigerator, which
can occupy perhaps a cubic foot or so of space. However, six or even twelve
filters can be cooled by one such refrigerator, leading to an integrated
filter subsystem package that is smaller and lighter than competing
technology can provide.
APPLICATIONS FOR SUPERCONDUCTING FILTERS
There are applications for superconducting filter technology in existing
wireless systems as well as in forthcoming infrastructures such as PCS.
Superconducting preselect filters offer performance advantages to analog
systems like AMPS cellular as well as to digital protocols such as CDMA, TDMA
and GSM. Depending upon the application, one or more of the benefits of the
technology noted above will come into play. There can be no assurance that
even if the Company's products provide such technological benefits 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. See "Risk Factors - Early Stage of the Superconductive
Electronics Market; Lack of Market Acceptance."
In current cellular systems, the needs of urban and rural operators are quite
different. Urban base stations are typically high-capacity cells in harsh or
otherwise conjested RF environments. Key issues are interference rejection
and maximizing capacity. In contrast, rural base stations see relatively low
call volumes but struggle with problems with the reverse channel path
(mobile/portable handset to base communications) because of the lower power
levels transmitted by hand-held phones compared to earlier mobile systems
whose maximum transmit power was five times that of the small portables in
use today. In this environment, range extension and coverage improvement are
the key issues.
The growing PCS infrastructure presents a variety of opportunities for
superconducting filter technology. With multiple bands, large numbers of
base stations, new interference sources and tight space constraints, all the
virtues of superconducting filter technology are likely to be needed to solve
problems, some of which cannot be anticipated at this early stage of the
deployment. The match-up between benefits and applications for
superconductors in wireless systems is summarized in the chart below.
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SUPERCONDUCTOR BENEFIT REASON RURAL CELLULAR URBAN CELLULAR PCS
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Reduced Interference Sharp filters X X
Increased Capacity Sharp filters X X
Improved Coverage/ Reduced system noise X X
Extended Range
Compact form-factor Thin-film technology X X
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WIRELESS COMMUNICATIONS MARKET
CELLULAR MARKET. According to Federal Communications Commission and industry
reports, there are more than 25,000 installed cellular base stations in the
United States. 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
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incidence of interference. In addition, the arrival of PCS and other
competing services has placed new emphasis upon quality of service for
established cellular operators.
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. Extended
field trials of Conductus' ClearSite-TM- brand front-end receiver system in the
rural environment have demonstrated the system's ability to fill in holes in
coverage between specific cell sites. In recent trials conducted by the
Company, ClearSite-TM- systems demonstrated a 20% reduction in dropped calls and
provided notable improvements in voice quality.
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. An alternative approach is to address
interference by using highly selective filters in the base station receiver.
With superconducting materials, which exhibit extremely low energy loss, filters
can be fabricated with a higher number of poles, thereby increasing filter
selectivity. With increased selectivity, increased capacity and better
performance are simulaneously attainable.
PCS MARKET. PCS is a newer, urban-based communication system designed to
provide wireless telephone service utilizing radio frequency signals in a
frequency band near 2 GHz. This all-digital system is being designed to handle
both voice and data transmissions, including features such as Internet access.
Although it utilizes the same basic building blocks as a cellular system, the
higher operating frequency of PCS compared with the cellular network limits the
range of its signal transmission. Because of this limited range of signal
transmission, industry estimates are that more than 70,000 PCS base stations
will be installed throughout the U.S. by the end of the year 2005.
The projected large number and primarily urban location of PCS base stations
drives the need for equipment cost and size reduction. However, signal losses in
base station components such as filters, antennas and cables are exacerbated by
higher frequency operation. Conventional receiver components limit sensitivity
and therefore base station range. Conventional filters tend to be physically
large and proposed PCS base station architectures call for the use of multiple
filters in each station. Collectively, these issues present a difficult set of
requirements for the designers of both current and forthcoming PCS base station
equipment. Conductus believes that as the PCS build-out proceeds, the incidence
of problems such as adjacent-band interference and gaps in coverage will
steadily increase and the opportunities for applications for superconductive
filter subystems will grow accordingly. Due to slower than expected progress in
the PCS deployment, the Company does not expect to begin volume shipments of
product for that market before 2000.
FUTURE APPLICATIONS.
Conductus is exploring the application of superconductive and cryoelectronic
technologies to a variety of applications in the broader communications market.
Among these are subsystems for communications satellites, antenna components and
various elements of high-speed and/or high-bandwidth communications equipment.
Generally speaking, many electronic technologies, including CMOS, GaAs,
optoelectronics and even copper, exhibit enhanced performance at reduced
temperatures, but the most compelling performance improvements are enabled by
superconductive electronics. When the unique advantages of superconductive
electronics are complemented by the advantages of other cryoelectronic
technologies, the result is a hybrid system whose overall performance may
justify the costs and complexities associated with cryogenic cooling.
In the future, cryoelectronics in communications systems may expand to more
complex digital applications. The reason is that the ever-increasing
bandwidth of digital and wireless communication networks has created a need
for ultra-high-bandwidth cryoelectronics to process and route digital
information. Although fiber-optical transport networks are expected to
transmit 100 Gb/s data, conventional electronic switching technology is not
capable of processing at such high data rates. This situation creates an
electronic bottleneck in telecommunication networks for high-throughput
applications such as Internet backbone switching, satellite communications,
local-area and wide-area graphics networks, and video on demand.
Superconductive digital technology, interfaced to optical fiber via cooled
semiconductor electronics, can increase the capacity and functionality of
future ultra-high-speed networks and enable many real-time communication and
multimedia applications. The high-speed, low-power properties of Josephson
junctions, which are active switching devices made from superconductors,
could be applied to
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communications systems to significantly improve data transmission rates and
reduce system power requirements and costs. These devices can be 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. Nevertheless, the combination of high speed, low power
dissipation and fast synchronization makes superconductive digital technology
increasingly attractive for future communications applications. See "Risk
Factors - Early Stage of the Superconductive Electronics Market; Lack of
Market Acceptance," "-- Dependence On Incorporation of Potential Products in
Third Party Systems," and "-- Intense Competition."
COMMERCIALIZATION STATUS
Conductus began field testing prototypes of the ClearSite front-end receiver
systems for wireless base station applications in 1996, working with a number
of cellular operators in several regions of the United States. The product
progressed to the beta stage late in that year with the initiation of an
extended field trial with Cellcom, Incorporated, a service provider in
Wisconsin. The trial was concluded in the Spring of 1997, resulting in data
on the performance of the system in reducing dropped calls and enhancing
voice quality and leading to the first commercial orders for the product.
Based upon these field trial results and on additional inputs from customers
throughout the industry, additional features were engineered into the
ClearSite front-end receiver system and it was released to the market late in
1997. As finally configured, the ClearSite front-end receiver system
incorporates superconducting filters and cryogenic low-noise amplifiers as
well as built-in rf diagnostics, alarm systems, remote monitoring
capabilities and bypass circuitry in case of system failure. Initial
shipments have been for omnisite systems -- incorporating two filters and two
amplifiers -- designed to be installed inside base stations. These systems
are configured for either of the frequency bands currently allotted to
cellular operators (both "A" and "B" bands.) Scheduled for release during
1998 are three-sector systems (incorporating six filter/amplifier pairs) and
tower-mount versions of the product for both carriers. Therefore, by the end
of 1998, ClearSite front-end receiver systems for cellular are planned to be
a family of products designed to address all types of installations in the
domestic market. There can be no assurance that the Company will be
successful in developing, introducing and marketing new products or
enhancements to existing products or will not experience difficulties that
could delay or prevent the successful development, introduction or marketing
of these products, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve any
significant degree of commercial acceptance. Furthermore, there can be no
assurance that even if the Company's products meet commercial performance
standards 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. See "Risk Factors - Early Stage of
the Superconductive Electronics Market; Lack of Market Acceptance."
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 arrangement 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 that 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.
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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, 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.
RESEARCH AND DEVELOPMENT
GOVERNMENT CONTRACTS. The Company's research and development expenses in the
fiscal years 1997, 1996 and 1995 were approximately $10,626,000, $11,774,000,
and $9,819,000, respectively. Externally funded research and development
programs, primarily under contracts with agencies of the U.S. government,
accounted for approximately $9,814,000, $13,178,000, and $9,176,000 of total
operating expenses in the fiscal years 1997, 1996, and 1995, respectively.
The Company's revenue from government-related contracts represented
approximately 77% of total revenues for each of the fiscal years 1997, 1996,
and 1995. Conductus believes that it will continue to be heavily dependent on
U.S. government contracts to fund a significant portion of its research and
development programs. The Company's strategy is to fund a significant portion
of its research and development, particularly for wireless communications and
digital electronics applications, through contracts with agencies of the U.S.
government. As of December 31, 1997, the Company had received aggregate
awards since its inception of approximately $46,821,000 from U.S. government
agencies, including approximately $40,272,000, recognized as revenue by the
Company through December 31, 1997, and approximately $6,373,000, in awards
for which it has not yet entered into research contracts. As of December 31,
1997, Conductus had backlog of approximately $176,000, under existing U.S.
government contracts which provide that most of the research and development
is to be performed in the next 12 months. Revenue under U.S. government
research and development contracts decreased to $7,266,000 in 1997 from
$9,691,000 in 1996 and $8,148,000 in 1995 and represented approximately 77%
of total revenue in each of the fiscal years 1997, 1996, and 1995. The
decrease in contract revenues during 1997 is largely attributable to the
completion of several major contracts during 1997. The Company had backlog of
approximately $176,000 and $4,620,000 in contracts and grants at December 31,
1997 and 1996, respectively. In addition, at December 31, 1997 and 1996
respectively, the company had approximately $6,373,000 and $8,976,000 in
awards from U.S. government agencies which have not been funded by the
government. Conductus anticipates that government contract revenues will
continue to decline somewhat in the future compared to historical rates due
to reductions in federal R & D funding and the narrower scope of the
Company's business interests. 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 11 of Notes to Financial
Statements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations."
The Company's contracts involving the U.S. government are or may be subject
to numerous risks. These risks include: unilateral termination for the
convenience of the government; reduction or modification in the event of
changes in the government's requirements or budgetary constraints; increased
or unexpected costs causing losses or reduced profits under fixed-price
contracts or unallowable costs under cost reimbursement contracts; risks of
potential disclosure of Conductus' confidential information to third parties;
the failure or inability of the prime contractor to perform its prime
contract in circumstances where Conductus is a subcontractor; the failure of
the government to exercise options provided for in the contracts; the
government's nonexclusive, royalty-free license to use technology developed
pursuant to the contracts by or on behalf of the government in certain
circumstances; and exercise of "march-in" rights by the government. March-in
rights refer to the right of the U.S. government or government agency to
require the Company to license patented technology developed under contracts
funded by the government if the contractor fails to continue to develop the
technology. In addition, there can be no assurance that the U.S. government
will continue its commitment to programs to which the Company's development
projects are applicable, particularly in light of recent legislative
initiatives to reduce the funding of various U.S. government agencies and
programs, or that the Company can compete successfully to obtain funding
pursuant to such programs, See "Risk Factors -High Degree of Dependence Upon
Government Contracts."
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PATENTS, PROPRIETARY TECHNOLOGY AND TRADEMARKS
Conductus has received 27 U.S. patents and three related foreign patents. Six
issued patents were assigned to Bruker Instruments, Inc. under an asset
purchase agreement entered into in July 1997. Conductus retains a
nonexclusive, royalty-reee license to those patents outside the NMR field of
use. The remaining 21 patents have unexpired terms ranging from 12 to 17
years. Additionally, the Company has 8 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 600 patents
have been granted in the U.S. relating to high temperature superconductivity.
In some cases, these patents may be overlapping, and could require a number
of licenses from different entities. 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 and that the Company will be
unable to obtain licenses, or will be unable to obtain licenses on
commercially reasonable bases.
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 "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.
("DuPont") has notified Conductus that it is the exclusive licensee of
patents issued in Israel, Sweden, Taiwan and the United Kingdom covering the
composition of YBCO and a method for using YBCO in superconducting
applications. The Company anticipates that it will be required to obtain a
license to use YBCO from one or more of these parties in order to continue to
develop and sell products based on YBCO.
There can be no assurance that the Company would 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 its
business, operating results, 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
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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.
Additionally, successful marketing of a material portion of Conductus'
products depends in part on nonexclusive licenses obtained from various
licensers. 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-Registered
Trademark-,' the Conductus logo, "Mr. SQUID-Registered Trademark-" and claims
the rights to the trademarks "ClearSite-TM-", and "pcSQUID-TM-". See "Risk
Factors - Uncertainty of Patents and Proprietary Rights; Risk of Litigation."
MANUFACTURING
Conductus has performed pioneering work in materials, processes and
structures based on thin-film superconducting technology, and has developed
processes it believes are capable of routinely producing a variety of
high-quality films for several applications, including multilayer thin-film
materials suitable for more complex devices and components. Conductus has
established a pilot production facility at its headquarters in Sunnyvale,
California to fabricate, test and assemble HTS and LTS thin films and
components. The Company fabricates two-, three- and four-inch wafers in two
cleanroom areas that consist, in the aggregate, of approximately 2,600 square
feet and that have ratings of subclass 1,000 and 10,000 (meaning there are
fewer than 1,000 or 10,000 particles larger than 0.5 microns per cubic foot
of air). Additionally, Conductus assembles systems in a 3250 square foot
manufacturing facility which includes class 10,000 cleanrooms of
approximately 1250 square feet. 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 precursors and processing equipment. The Company procures
its substrates from several suppliers. The Company primarily utilizes
elemental metals (yttrium, barium and copper) to produce YBCO. These
substances are available from numerous vendors. In limited cases, the Company
uses YBCO targets, which it purchases from two sources. 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 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 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 products
incorporating those components at its Sunnyvale, California, facility. Apart
from the production of superconducting components, the Company expects that
its manufacturing activities generally will be limited to cleaning, final
assembly, vacuum bakeout and testing. Conductus is producing these products
in limited commercial quantities and is continuing to expand its
capabilities. See "Risk Factors - Limited Commercial Manufacturing
Capability. In July 1997, Conductus ceased operation of its Instrument and
Systems Division in San Diego, California and consolidated its manufacturing
in Sunnyvale, California.
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
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products. These include, among others: DuPont, IBM, TRW, and Northrop-Grumman
Corporation in the U.S.; and Fujitsu Ltd., Hitachi Ltd., NEC Corp. and
Sumitomo Electric Industries, Ltd. in Japan. The Company also believes that a
number of smaller companies are engaged in various aspects of the development
and commercialization of superconductive electronics products. These include,
among others, 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."
Several of 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. During
1997, the Company hired a Vice President Sales and Marketing and added a
Director of Sales. Conductus sells its products through a combination of
direct sales and OEM relationships. The Company's sales and marketing
strategy is to rely primarily on direct sales for its communications
products. Its magnetic sensors are sold primarily to an OEM. See "Risk
Factors - Need to Develop Infrastructure to Support Commercialization.
The Company currently employs a sales and marketing staff of 6 full-time
equivalents. These employees are actively engaged in direct marketing to
customers, as well as in sales and marketing support. The Company actively
markets its products through direct mail advertisements and advertisements in
trade journals, as well as through demonstration of its technology and
products at industry trade shows. The Company's employees have published the
results of their research at Conductus widely in trade and technical
journals. Additionally, Conductus' employees have frequently presented
Conductus' technology as invited speakers at conferences worldwide.
For the fiscal years 1997, 1996, and 1995, commercial sales to one customer
of $896,000, $1,560,000, and $1,172,000 were 9%, 12%, and 11% of total
revenues, respectively. This customer, Niki Glass Ltd., acts primarily as a
distributor of the Company's magnetic sensing products, selling to end-users.
ENVIRONMENTAL MATTERS
The Company uses certain hazardous materials in its research and
manufacturing operations. As a result, Conductus is subject to federal, state
and local governmental regulations. Conductus believes that it has complied
with all regulations and has all permits necessary to conduct its business.
See "Risk Factors - Environmental Regulations."
EMPLOYEES
As of December 31, 1997, the Company had a total of 90 full-time equivalent
employees of which 39 hold advanced degrees. Of the total full-time
employees, 52 were engaged in research and product development, 14 in
manufacturing, 4 in sales and marketing, and 20 in administration. None of
the Company's employees
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is represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
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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."
SUBSTANTIAL FUTURE CAPITAL NEEDS. The Company to date has received limited
revenues from product sales and as of March 23, 1998, had cash reserves of
approximately $540,000.
On March 30, 1998, the Company entered into an agreement to expand its
existing bank working capital line of credit from $1,000,000 to $2,000,000,
subject to receivables eligibility requirements and certain other
restrictions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
Note 17 of Conductus, Inc., Notes to Financial Statements, "Subsequent
Events."
On April 14, 1998, the Company entered into a "bridge" loan credit facility
commitment with its bank. The facility provides for borrowings of up to
$2,000,000, with interest at the bank's prime rate plus 2.00%. The facility
matures in 120 days, but may be paid off sooner at the Company's option. The
agreement grants to the bank a warrant to purchase 15,000 shares at 3.625 per
share, the closing price for the Company's shares on April 13, 1998.
The agreement provides for additional warrants to be granted based on the
length of time the loan is outstanding, as follows:
if the loan is outstanding after May 31, 1998, a warrant for an
additional 10,000 shares at the May 31, 1998 closing price will be
granted.
if the loan is outstanding after June 30, 1998, a warrant for an
additional 25,000 shares at the June 30, 1998 closing price will
be granted.
Borrowings under this facility are collateralized by a first priority
security interest in all of the Company's property, including intellectual
property rights. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
Note 17 of Conductus, Inc. Notes to Financial Statements, "Subsequent Events."
All the credit facilities contain financial and reporting covenants. In the
event of default on any of these covenants, the entire amount outstanding
could become due and payable immediately upon default, unless such default is
waived by the lender. There can be no assurance that the Company will satisfy
such covenants or, if the Company fails to satisfy such covenants, that
waivers will be obtained from lenders in the event of future defaults.
Conductus anticipates that its existing sources of liquidity and
anticipated revenue, primarily from government contracts, will satisfy the
Company's projected working capital and other cash requirements through
September 1998. There can be no assurance, however, that changes in the
Company's plans or other events affecting the Company will not result in the
expenditure of such resources before such time. The report of the Company's
independent accountants included in this Annual Report on Form 10K places
emphasis on the uncertainty that the Company will continue as a going
concern.
The Company has adopted a plan consisting of the following steps to deal with
its cash reserve situation. The Company has implemented a cost reduction
program which will result in immediate headcount reduction of 11 employees
and reduced levels of operation expenses, working capital requirements, and
capital expenditures over the next several quarters. The Company is pursuing
a sale-leaseback transaction with several leasing companies and the Company
also continues to explore and evaluate equity and debt financing
alternatives. There can be no assurance that any or all of the measures
taken by the Company will provide sufficient liquidity.
The development of the Company's planned products will require a commitment
of substantial additional funds. There can be no assurance that additional
financing will be available on acceptable terms or at all. Unless the
Company is able to raise significant additional funds, through debt or equity
issuances, asset sales or otherwise, the Company will be required to delay,
scale-back or eliminate one or more of its research and development programs
or obtain funds through arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies or potential products that the Company would not otherwise
relinquish. 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
EARLY STAGE OF THE SUPERCONDUCTIVE ELECTRONICS MARKET; LACK OF MARKET
ACCEPTANCE. 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 the
Company will be successful in developing, introducing and marketing new
products or enhancements to existing products or will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve any significant degree of commercial acceptance. Furthermore,
there can be no assurance that even if the Company's products meet commercial
performance standards 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
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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, 1997, the Company had accumulated net losses of
approximately $36.8 million. Conductus expects to incur substantial
additional losses at least during 1998 as it expands operations. Continued
development of the Company's products may require the commitment of
substantial resources to research and development, establishment of
additional pilot and commercial-scale fabrication processes and facilities,
and 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 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.
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.
-14-
<PAGE>
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, some of which may be less expensive and/or offer better
performance. 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. 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. Since 1987 over 600 patents have issued in
the United States relating to HTS and HTS 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
-15-
<PAGE>
exclusive licensee of patents issued in Israel, Sweden, Taiwan and the United
Kingdom covering the composition of YBCO and a method for using YBCO in
superconducting applications. DuPont has stated that it is interested in
sublicensing such patents to Conductus, and would consider sublicensing to
Conductus, as they issue any other foreign and U.S. patent applications
licensed to DuPont by the University of Houston. The Company anticipates
that it will be required to obtain a license to use YBCO from one or more of
these parties in order to continue to develop and sell products based on
YBCO.
There can be no assurance that the Company would be able to obtain licenses
to patents covering YBCO compositions, when issued, or to any other patents
applicable to the Company's business on commercially reasonable terms. In
such an event, the Company could be required to expend significant resources
to develop non-infringing technology alternatives or to obtain licenses to
the technology that the Company infringes or would infringe. There can be no
assurance that the Company would be able to successfully design around these
third party patents or to obtain licenses to technology that it may require.
Furthermore, there can be no assurance that the Company will not be obligated
to defend itself at substantial cost against allegations of infringement of
third party patents. An adverse outcome in such a suit could subject the
Company to significant liabilities to third parties, or require the Company
to cease using such technology. In addition, aside from the merits of a
claim, the cost of defending any such suit would constitute a major financial
burden for the Company that would have a material adverse effect on the
Company's business, operating results and financial condition. See "Business
- -- Patents, Proprietary Technology and Trademarks."
DEPENDENCE ON LICENSED TECHNOLOGY. Successful marketing of a material
portion of Conductus' products depends in part on nonexclusive licenses
obtained from various licensors. There can be no assurance that such
licenses will not be terminated by licensors or that Conductus will be able
to develop alternate products that do not require these or other licenses.
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, or that the
Company will not suffer recurring yield problems caused by mask defects,
impurities in materials and other factors. While the Company has established
limited production facilities for its electronics products, there is no
assurance 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
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.
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% of total revenue for each of the fiscal years
1997, 1996, and 1995. 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
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<PAGE>
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 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. 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 rate of deployment of
PCS, the ability of base station equipment manufacturers and of cellular base
station operators to obtain and retain the necessary FCC approvals and
licenses, and changes in regulations that may impact the requirements for the
Company's products. 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. The loss of
the services of one or more members of the senior management and technical
team 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, that require substantial industry knowledge and expertise.
The Company currently has limited expertise in these areas and it is
essential to attract and retain 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. 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 recently adopted a Shareholders' Rights Plan
which, if triggered, could make it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. 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 and the Bylaws require advance notice
of any matters to be brought before the shareholders at the annual meeting.
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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<PAGE>
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 located in two buildings in Sunnyvale, California, with
leases which will expire in August 2000 and 2001. During 1997, the Company
subleased its facility in San Diego, California, to Niki Glass, in connection
with an asset sale of certain of the assets of the Instrument and Systems
Division. That lease expired in February 1998.
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 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Charles E. Shalvoy 50 President, Chief Executive Officer and Director
James Jay Daley 54 Vice President, Sales and Marketing
William J. Fowler 67 Vice President, Manufacturing
Ainslie Mayberry 46 Chief Financial Officer
Graham Y. Mostyn 44 Vice President, Engineering
Randy W. Simon, Ph.D. 44 Vice President, Technology Programs
</TABLE>
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. DALEY joined the Company in September 1997 as Vice President of Sales and
Marketing. From 1996 until 1997, he was Senior Vice President Sales and
Marketing and Engineering Services of Metawave Communications Corporation, a
leading manufacturer of "smart" antenna systems for wireless
telecommunication networks. Prior to Metawave, Mr. Daley had many years of
experience in telecommunications including senior management positions with
AirNet Communications, Northern Telecom and Motorola. Mr. Daley holds a B.S.
in Business Administration and Education from the University of
Massachusetts, Salem and an M.A. in clinical psychology from Assumption
College.
MS. MAYBERRY was appointed interim Chief Financial Officer in January 1998.
She is President of Virtual CFO, Inc. From 1981 until 1997 she was Chief
Financial Officer and later Chief Operating Officer, acting Chief Executive
Officer and President of AssureNet Pathways, Inc. Ms. Mayberry holds a BS in
accounting and an MBA from California State University, San Jose.
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
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<PAGE>
operations positions 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. 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.
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.
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 16, 1998, the Company paid a stock dividend of one
preferred share purchase right for each outstanding share of common stock,
par value $0.0001 per share.
On February 28, 1998, the Company had 88 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.
<TABLE>
<CAPTION>
Price Range of Common Stock
------------------------------------------
Fiscal 1996 Fiscal 1997
------------------- --------------------
High Low High Low
------- ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter $15 1/2 $6 $9 1/4 $6
Second Quarter 17 3/4 9 1/2 7 3/8 5 5/8
Third Quarter 13 7 1/2 6 5/16 4 7/8
Fourth Quarter 9 1/2 6 5 7/8 3 1/4
</TABLE>
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, 1994 and 1993 and
the balance sheet at December 31, 1995, 1994, and 1993 are derived from audited
financial statements not included herein.
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<PAGE>
STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993(2)
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract $ 7,266 $ 9,691 $ 8,148 $ 7,048 $ 5,070
Product sales 2,188 2,852 2,434 1,588 1,409
--------- --------- --------- -------- ---------
Total revenues $ 9,454 $ 12,543 $ 10,582 $ 8,636 $ 6,479
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
Loss from operations $ (7,499) $ (5,109) $ (4,423) $ (4,876) $(4,070)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
Net loss $ (7,543) $ (5,004) $ (4,422) $ (4,544) $(4,122)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
Net loss per common share (basic and
diluted) (1) $ (1.09) $ (0.80) $ (0.80) $ (0.85) $ (1.40)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
Shares used in computing
per share amounts (basic and diluted) (1) 6,897 6,263 5,543 5,323 2,940
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December, 31
--------------------------------------------------------
1997 1996 1995 1994 1993(2)
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Working capital $ 1,822 $ 9,135 $ 4,287 $ 7,076 $12,438
Total assets 8,762 16,081 10,128 12,541 16,233
Long-term debt, excluding current portion 310 1,022 1,146 533 180
Stockholders' equity 4,301 11,183 5,814 9,529 14,057
</TABLE>
(1) Computed on the basis described for net loss per share in Note 2 of
Notes to Financial Statements of Conductus, Inc. Amounts have been
restated for the adoption of Statement of Financial Accounting Standard
No. 128 "Earnings Per Share".
(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.
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 primarily for applications in the
communications market. 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. In July 1997, Conductus discontinued operations of its
Instruments and Systems division. As of December 31, 1997, Conductus had
accumulated losses of approximately $36,770,000 and expects to incur
additional and increasing losses at least during 1998 due to the Company's
planned expansion of operations and reduced revenue from government contracts
due to reductions in federal R & D funding and the narrower scope of the
Company's business interests. 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 - Early Stage of the
Superconductive Electronics Market; Lack of Market Acceptance."
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<PAGE>
RESULTS OF OPERATIONS
Total revenues decreased to $9,454,000 in 1997 from $12,543,000 in 1996 and
$10,582,000 in 1995. Total revenues consist primarily of contract revenue
and, to a lesser extent, product sales. Revenue under U.S. government
research and development contracts decreased to $7,266,000 in 1997 from
$9,691,000 in 1996 and $8,148,000 in 1995 and represented approximately 77%,
of total revenue in each of the fiscal years 1997, 1996, and 1995. The
decrease in contract revenues during 1997 is largely attributable to the
completion of several major contracts during 1997. The increase in contract
revenues in 1996 compared to 1995 is largely attributable to a solid base of
contracts from 1995 and the addition of several new multi-year contracts. The
Company had backlog of approximately $176,000 and $4,620,000 in contracts and
grants as of December 31, 1997 and 1996, respectively. In addition, the
Company had $6,373,000 and $8,976,000 in awards from U.S. government agencies
which had not been funded as of December 31, 1997 and 1996, respectively.
Conductus anticipates that government contract revenues will continue to
decline somewhat in the future compared to historical rates due to reductions
in federal R & D funding and the narrower scope of the Company's business
interests. 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 11 of Notes to Financial Statements.
Revenue from sales of large-scale superconductive magnetic sensing systems,
SQUIDs, HTS thin films and other products decreased to $2,188,000 in 1997
from $2,852,000 in 1996 and $2,433,000 in 1995. The decrease in 1997 compared
to 1996 was primarily due to the disposition during 1997 of both the
Instrument and Systems division and the NMR product line. The increase in
1996 compared to 1995 was primarily due to increased sales of superconductive
sensor instruments and systems. During the fourth quarter of 1997, the
Company recognized $96,000 as revenue on the first shipment of its ClearSite
front-end system to a commercial customer. Future sales of this product are
subject to numerous technical and market risks. See "Risk Factors - Competing
Technologies," "-- Early Stage of the Superconductive Electronics Market;
Lack of Market Acceptance," "-- Dependence on Incorporation of Potential
Products into Third Party Systems" and "-- Intense Competition."
Cost of product sales were $1,845,000, $1,824,000, and $1,430,000 for 1997,
1996, and 1995, respectively. The cost of products in 1997, 1996, and 1995
were primarily composed of costs of superconducting magnetic systems
manufactured by the Instrument and Systems division, which the Company
disposed of in 1997. Cost of product sales increased slightly from 1996 to
1997 despite lower volume of sales due to inventory writedowns of
approximately $475,000 related to the Instrument and Systems division
products and to certain SQUID product lines no longer considered part of the
Company's future strategic focus. Cost of product sales increased in 1996
and 1995 due to increased levels of revenues from new products introduced in
1995. Gross margins were 16%, 36%, and 41% for 1997, 1996, and 1995,
respectively. The gross margin decrease in 1997 was primarily related to the
inventory writedowns mentioned previously. Gross margins decreased in 1996
compared to 1995 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. Costs of contract revenues are included in
research and development expenses and are discussed below.
The Company's research and development expenses decreased to $10,626,000 in
1997 from $11,774,000 in 1996 but increased from $9,819,000 in 1995, and
represented 63%, 67%, and 65%, respectively, of total operating expenses in
1997, 1996 and 1995. The decrease in 1997 compared to 1996 reflects lower
levels of contract revenues, the dispositions of the Instrument and Systems
and NMR product lines, offset somewhat by increased spending particularly on
new wireless communications products. The increase in 1996 over 1995
reflects the increase in the Company's overall research and development
activities, and an emphasis of efforts in communications and healthcare.
Research and development includes both externally and internally funded
projects. Externally funded research and development programs, primarily
under contracts with agencies of the U.S. government, accounted for
approximately $9,814,000, of total operating costs and expenses in 1997, down
from $13,178,000 in 1996, reflecting reductions in federal R & D funding and
the narrower scope of the Company's business interests during 1997. The
increase in 1996 to $13,178,000 from $9,170,000 in 1995 was due to the
increase in the Company's overall research and development activities
mentioned above. The Company expects to continue to incur significant
research and development expenses on internally funded programs as it seeks
to develop additional commercial products, particularly in the
communications area.
Selling, general and administrative expenses increased to $4,330,000 in 1997
from $4,054,000 in 1996 and $3,756,000 in 1995 and represented 26%, 23%, and
25%, respectively, of total operating expenses in 1997, 1996, and 1995,
respectively. These costs increased in 1997 compared to 1996 primarily due
to increased sales and marketing spending related to commercial wireless
communication products, offset somewhat by lower spending due to the
disposition of the Instrument and Systems division. These costs increased in
1996 compared to 1995 due to the increasing size of the Company since the
acquisition of Tristan in 1993, significant headcount additions and
increasing sales and marketing activities. Total headcount has decreased to
90 at December 31, 1997 from 133 at December 31, 1996 and 99 at December 31,
1995, respectively due to the discontinuation of operations of the Instrument
and Systems division and the sale of the NMR probe business. The Company
expects to continue to incur increasing sales and marketing expenses to the
extent it increases sales of commercial products, particularly in the
communications markets.
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<PAGE>
The Company's total costs and expenses decreased to $16,953,000 in 1997 from
$17,652,000 in 1996 but increased from $15,005,000 in 1995. The decrease in
1997 compared to 1996 was primarily due to the dispositions of the Instrument
and Systems division and NMR product line in the third quarter of 1997,
offset somewhat by increased emphasis in communications product development,
and sales and marketing. The increase in 1996 compared to 1995 was primarily
due to the company's overall increase in research and development activity
for 1996. The Company expects the increased emphasis on communications
product development and sales and marketing to increase total costs and
expenses in 1998.
Loss from operations was $7,499,000, $5,109,000, and $4,423,000, for 1997, 1996,
and 1995, respectively, due to the reasons enumerated above.
Interest income from cash equivalents and investments were $267,000 in 1997,
$263,000 in 1996, and $249,000 in 1995, reflecting the relative average levels
of cash equivalents and investments for each of the years.
Interest charges were $202,000, $183,000, and $156,000 in 1997, 1996, and
1995, respectively. Interest charges are related primarily to the Company's
equipment term loan facilities, and reflect the relative average balances
outstanding under these facilities.
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, 1997, the Company's aggregate cash, cash equivalents and
short-term investments totaled $3,169,000 compared to $7,636,000 as of
December 31, 1996. The balance at December 31, 1997 includes $500,000 of
cash restricted under the terms of the Company's working capital line of
credit. 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, $40,272,000 from U.S. government contracts, $6,056,000 in
aggregate borrowings under three equipment lease lines of credit and
equipment term loans and $3,686,000 in interest income.
Net cash used in operations was $4,702,000, $4,897,000, and $4,625,000, for
1997, 1996, and 1995, respectively. The decrease in net cash used in
operations for 1997 compared to 1996 was due primarily to a decrease in
accounts receivable, higher provision for excess and obsolete inventory, and
the decrease in prepaid expenses, offset somewhat by the larger net loss.
The increase in net cash used in operating activities in 1996 over 1995 was
primarily due to an increase in net loss resulting from expanding the
Company's operations, including headcount and other related costs, and
increases in inventories, offset somewhat by the increase in accounts payable
and accrued liabilities. The Company anticipates that its accounts receivable
from revenues under U.S. government contracts during 1998 will be lower than
1997 levels. Accounts receivable and inventories from product sales are
expected to increase with the anticipated increase in revenues from product
sales in 1998.
Net cash provided by (used in) investing activities was $5,848,000 in 1997,
compared to ($4,868,000) in 1996, and $2,670,000 in 1995. The change in 1997
compared to 1996 is primarily due to the change in proceeds from sales of
short term investments and purchases of short term investments. In 1997 the
Company sold $5,956,000 more of its short term investments than it purchased
to increase cash, while in 1996 the Company purchased $3,633,000 more of
short term investments than it sold to invest cash. In 1995, the Company
sold $4,238,000 more of short term investments than it purchased to increase
cash. In addition, capital expenditures decreased by $575,000 in 1997
compared to 1996, due to lower spending on laboratory and manufacturing
equipment. Capital expenditures decreased by $304,000 in 1996 compared to
1995 due to lower spending on laboratory and manufacturing equipment. The
Company anticipates that its capital expenditures will increase slightly in
1998 as the Company continues its transition to manufacture greater volumes
of commercial products.
Net cash from financing activities was $345,000 in 1997 compared to $10,612,000
in 1996 and $1,722,000 in 1995. The decrease in 1997 compared to 1996 was
primarily due to lower net proceeds from the issuance of common stock . The net
cash provided by financing activities in 1996 was primarily due to the Company's
follow-on offering in June of 1996 and borrowings under the Company's equipment
loans, offset by principal payments under capital lease obligations and
equipment term loans.
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<PAGE>
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 to support operations until product revenues increase.
At December 31, 1997, the Company had three equipment credit facilities and a
bank working capital line of credit. Borrowings under these agreements bear
interest at the Bank's prime rate plus 1.00% (a total of 9.50% at December 31,
1997), and are collateralized by a $500,000 certificate of deposit, accounts
receivable, equipment and other assets of the Company. At December 31, 1997
there were no amounts available under these credit facilities.
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.
The Company received a waiver in March 1998 from the institution with respect
to default that occured in the fourth quarter of fiscal 1997 on certain
financial covenants. There can be no assurance that waivers will be obtained
from lenders in the event of future defaults.
As of March 23, 1998, the Company had cash reserves of approximately
$540,000. On March 30, 1998, the Company entered into an agreement to expand
its existing bank working capital line of credit from $1,000,000 to
$2,000,000, subject to receivables eligibility requirements and certain other
restrictions. See "Risk Factors--Substantial Future Capital Needs" and Note
17 of Conductus, Inc., Notes to Financial Statements, "Subsequent Events."
On April 14, the Company entered into a "bridge" loan credit facility
commitment with its bank. The facility provides for borrowings of up to
$2,000,000, with interest at the bank's prime rate plus 2.00%. The facility
matures in 120 days, but may be paid off sooner at the Company's option. The
agreement grants to the bank a warrant to purchase 15,000 shares at 3.625 per
share, the closing price for the Company's shares on April 13, 1998.
The agreement provides for additional warrants to be granted based on the
length of time the loan is outstanding, as follows:
if the loan is outstanding after May 31, 1998, a warrant for an
additional 10,000 shares at the May 31, 1998 closing price will be
granted.
if the loan is outstanding after June 30, 1998, a warrant for an
additional 25,000 shares at the June 30, 1998 closing price will
be granted.
Borrowings under this facility are collateralized by a first priority
security interest in all of the Company's property, including intellectual
property rights. See "Risk Factors--Substantial Future Capital Needs" and
Note 17 of Conductus, Inc., Notes to Financial Statements, "Subsequent
Events."
There can be no assurance that the Company will satisfy such covenants or, if
the Company fails to satisfy such covenants, that waivers will be obtained
from lenders in the event of future defaults.
Conductus anticipates that its existing sources of liquidity and
anticipated revenue, primarily from government contracts, will satisfy the
Company's projected working capital and other cash requirements through
September 1998. There can be no assurance, however, that changes in the
Company's plans or other events affecting the Company will not result in the
expenditure of such resources before such time. The report of the Company's
independent accountants included in this Annual Report on Form 10K places
emphasis on the uncertainty that the Company will continue as a going
concern. The Company is continuing to pursue a number of financing
alternatives, as described below.
The Company has adopted a plan consisting of the following steps to deal with
its cash reserve situation. The Company has implemented a cost reduction
program which will result in immediate headcount reduction of 11 employees
and reduced levels of operation expenses, working capital requirements, and
capital expenditures over the next several quarters. The Company is pursuing
a sale-leaseback transaction with several leasing companies and the Company
also continues to explore and evaluate equity and debt financing
alternatives. There can be no assurance that any or all of the measures
taken by the Company will provide sufficient liquidity.
The development of the Company's planned products will require a commitment
of substantial additional funds. There can be no assurance that additional
financing will be available on acceptable terms or at all. Unless the
Company is able to raise significant additional funds, through debt or equity
issuances, asset sales or otherwise, the Company will be required to delay,
scale-back or eliminate one or more of its research and development programs
or obtain funds through arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies or potential products that the Company would not otherwise
relinquish. 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.
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment of the Company's sales, manufacturing and finance
systems, the Company determined that it will be required to replace this
software so that these computer systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with the conversion of
its sales, manufacturing, and finance systems to new software, the Year 2000
Issue can be mitigated as far as its impact on those systems. However, if the
conversion is not completed in a timely manner, the Year 2000 Issue could have a
material impact on the operations of the Company. The Company has not yet
completed the assessment of its remaining internal systems which may be effected
by the Year 2000 Issue.
The Company has not yet begun formal communications with its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company has not yet determined if it has exposure to contingencies related to
the Year 2000 Issue for the products it has sold.
The Company will utilize both internal and external resources to replace its
sales, manufacturing, and finance systems. The Company plans to complete this
phase in early 1999, and anticipates that the cost of the software and its
implementation will not have a material financial impact. The Company is unable
to estimate the remaining financial impact, if any, of the Year 2000 Issue
until it completes the assessment of the potential impact of the Year 2000 Issue
on its remaining internal systems, on third parties such as its suppliers and
customers, on products it has sold, and on other factors that may come to the
Company's attention.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
(SFAS 130) "Reporting Comprehensive Income". SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income is
defined as
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<PAGE>
the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. SFAS
130 will become effective for the Company's 1998 fiscal year.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 (SFAS 131) "Disclosures about Segments of an Enterprise and Other
Information." SFAS No. 131 requires publicly-held companies to report
financial and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by the chief
operation decision makers. Specific information to be reported for individual
segments includes profit and loss, certain revenue and expense items and
total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS 131 will become
effective for the Company's 1998 fiscal year.
The Company is currently studying the implications of these statements and
has not yet determined the impact of their adoption.
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, 1997 and 1996
Statements of Operations - years ended December 31, 1997, 1996 and 1995
Statements of Stockholders' Equity - years ended December 31, 1997, 1996
and 1995
Statements of Cash Flows - years ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information required by this item
relating to the Company's directors and nominees and disclosure relating to
compliance with Section 16(a) of the Securities Exchange Act of 1934 that is
included under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement
for the 1998 Annual Meeting of Stockholders to be held on May 29, 1998 (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.
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<PAGE>
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:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
1. Financial Statements
Report of Independent Accountants..........................................30
Balance Sheets - as of December 31, 1997 and 1996..........................31
Statements of Operations - years ended December 31, 1997, 1996 and 1995....32
Statements of Stockholders' Equity - years ended December 31, 1997, 1996
and 1995.................................................................33
Statements of Cash Flows - years ended December 31, 1997, 1996 and 1995....34
Notes to Financial Statements..............................................35
2. Financial Statement Schedule
Report of Independent Accountants..........................................45
Schedule II - Valuation and Qualifying Accounts............................46
3. See Exhibits
</TABLE>
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<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------
2.1(1) Stock Exchange Agreement dated as of May 28, 1993 between the
Registrant and Tristan Technologies, Inc. ("Tristan").
3.3(2) Restated Certificate of Incorporation.
3.5(8) Restated Bylaws of Registrant.
4.8(9) Shareholder Rights Plan.
10.1(1) Second Amended and Restated Registration Rights Agreement dated
June 3, 1993.
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.
10.7.3(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 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.
10.17(1) Lease Agreement dated May 3, 1993 between the Registrant and
Mozart-McKee Limited Partnership for part of the Sunnyvale
facilities.
10.19(10) 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.
10.24(4) Lease Agreement dated December 8, 1994 between Registrant and
Mozart-McKee Limited Partnership for Sunnyvale facilities.
10.25(4) Business Loan Agreement dated August 15, 1994 between Registrant
and Silicon Valley Bank for working capital credit facility and
term loan facility.
10.26(4) Employment Agreement dated May 3, 1994 between Registrant and Mr.
Charles E. Shalvoy.
10.28(3) Conductus, Inc. 1994 Employee Stock Purchase Plan.
10.29(5) Business Loan Agreement dated March 8, 1996 between Registrant
and Silicon Valley Bank for working capital credit facility and
term loan facility.
10.30(11) Business Loan Agreement dated December 27, 1996 between
Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
10.31 Loan Modification Agreement dated June 30, 1997, between
Registration and Silicon Valley Bank modifying the Business Loan
Agreement dated August 15, 1994.
10.32 Loan Modification Agreement dated November 12, 1997, between
Registration and Silicon Valley Bank modifying the Business Loan
Agreement dated August 15, 1994.
10.33 Loan Modification Agreement dated December 23, 1997, between
Registration and Silicon Valley Bank modifying the Business Loan
Agreement dated August 15, 1994.
10.35+ Asset Purchase Agreement dated July 9, 1997 between Registrant
and Bruker Instruments, Inc. for sale of assets of Registrant's
NMR Probe business.
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<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------
10.36 Asset Purchase Agreement dated August 15, 1997 between Registrant
and Neocera, Inc. for sale of Registrant's assets related to its
temperature controller business.
10.37 Asset Purchase Agreement dated September 3, 1997, between
Registrant and Niki Glass Ltd. for sale of Registrant's assets
related to portions of its instruments business.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (See Page 29).
(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 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.
(8) Incorporated herein by reference from Exhibit 3.3 to the Company's
Registration Statement on Form 8-K filed with the SEC on January 22,
1998.
(9) Incorporated herein by reference from Exhibit 1 to the Company's
Registration Statement on Form 8-K filed with the SEC on January 22, 1998.
(10) Incorporated herein by reference from Exhibit 99.1 to the Company's
Registration Statement on Form S-8 filed with the SEC on November 26, 1997.
(11) Incorporated herein by reference from the same numbered exhibit filed with
the Company's 1996 Annual Report on Form 10K.
+ 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
April 17, 1998.
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, Donald F. DePascal
and Judith A. DeFranco, 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 Officer April 17, 1998
- ---------------------- and Director (Principal Executive
Charles E. Shalvoy Officer)
/s/ Ainslie Mayberry Chief Financial Officer April 17, 1998
- ----------------------
Ainslie Mayberry
/s/ Donald F. DePascal Controller
- ---------------------- (Principal Accounting Officer) April 17, 1998
Donald F. DePascal
/s/ John F. Shoch Chairman of the Board of Directors April 17, 1998
- ----------------------
John F. Shoch, Ph.D.
/s/ Martin Cooper Director April 17, 1998
- ----------------------
Martin Cooper
/s/ Robert Janowiak Director April 17, 1998
- ----------------------
Robert Janowiak
/s/ Marty Kaplan Director April 17, 1998
- ----------------------
Marty Kaplan
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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, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's liquidity has been adversely affected by
continued losses from operations. In addition, continuation of operations is
dependent upon the availability of additional capital and the Company's
ability to generate increased revenues and improved gross margin on sales.
These issues raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 9, 1998 (Except for Notes 1 and 17, as to which
the date is April 17, 1998.)
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<PAGE>
CONDUCTUS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,111,560 $ 1,119,991
Restricted cash equivalent 500,000 -
Short-term investments 556,633 6,516,401
Accounts receivable (net of allowance
for doubtful accounts of $248,232 and $50,000
for 1997 and 1996) 2,055,255 3,756,586
Inventories 610,367 1,220,873
Prepaid expenses and other current assets 139,479 397,556
---------- ----------
Total current assets 5,973,294 13,011,407
Property and equipment, net 2,700,594 2,941,685
Other assets 87,762 127,763
---------- ----------
Total assets $8,761,650 $16,080,855
---------- -----------
---------- -----------
LIABILITIES
Current liabilities:
Current portion of long-term debt $1,547,507 $1,119,330
Accounts payable 1,539,590 1,710,762
Other accrued liabilities 1,063,721 1,045,916
---------- -----------
Total current liabilities 4,150,818 3,876,008
Long-term debt, net of current portion 309,681 1,021,781
---------- -----------
Total liabilities 4,460,499 4,897,789
---------- -----------
Commitments (Note 10)
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value:
Authorized: 1,000,000 shares
None issued or outstanding in 1997 or 1996
Common stock, $0.000l par value:
Authorized: 11,000,000 shares;
Issued: 7,013,062 and 6,988,517 in 1997 and 1996
Outstanding: 7,004,095 and 6,816,143 in 1997
and 1996 702 683
Additional paid-in capital 41,070,636 40,405,381
Unrealized gain on investments, net - 3,808
Accumulated deficit (36,770,187) (29,226,806)
---------- -----------
Total stockholders' equity 4,301,151 11,183,066
---------- -----------
Total liabilities and stockholders' equity $8,761,650 $16,080,855
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-31-
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Contract $7,266,157 $ 9,690,989 $ 8,148,189
Product sales 2,187,383 2,851,682 2,433,496
----------- ----------- -----------
Total revenues 9,453,540 12,542,671 10,581,685
----------- ----------- -----------
Costs and expenses:
Cost of product sales 1,845,413 1,823,622 1,429,516
Research and development 10,626,133 11,773,587 9,819,416
Selling, general and
administrative 4,329,739 4,054,303 3,755,653
Write-off of property, plant,
and equipment 100,000 - -
Loss on asset sale 51,741 - -
----------- ----------- -----------
Total costs and expenses 16,953,026 17,651,512 15,004,585
----------- ----------- -----------
Loss from operations (7,499,486) (5,108,841) (4,422,900)
Interest income 267,492 262,965 249,371
Other income (expense) (108,992) 25,042 (92,608)
Interest expense (202,395) (183,138) (155,515)
----------- ----------- -----------
Net loss $(7,543,381) $(5,003,972) $(4,421,652)
----------- ----------- -----------
----------- ----------- -----------
Basic and diluted loss per share $(1.09) $(0.80) $(0.80)
----------- ----------- -----------
----------- ----------- -----------
Shares used in per share calculation 6,896,649 6,263,446 5,543,073
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-32-
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For each of the three years in the period ended December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Common Additional Gain (Loss) on Accumulated
Stock Paid-In Capital Investments Deficit Total
------- --------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 $ 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 to employees 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, net 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
Issuance of 137,000 shares of common stock
to employees 14 381,592 381,606
Issuance of 50,686 shares of common stock to
employees under the employee stock purchase plan 5 247,662 247,667
Compensation associated with stock options granted 36,001 36,001
Unrealized loss on investments, net (3,808) (3,808)
Net loss (7,543,381) (7,543,381)
------- ----------- -------- ------------ ----------
Balances, December 31, 1997 $ 702 $41,070,636 $ - $(36,770,187) $4,301,151
------- ----------- -------- ------------ ----------
------- ----------- -------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-33-
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended December 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(7,543,381) $(5,003,972) $(4,421,652)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 827,071 925,718 901,340
Compensation associated with stock options granted 36,001 27,001 34,528
Provision for excess and obsolete inventories 199,845 20,000
(Gain)loss on disposal of equipment 51,741 (22,922)
Provision for allowance for doubtful accounts 198,232
(Increase) decrease in:
Accounts receivable 1,603,099 (505,439) (910,573)
Inventories (219,017) (455,449) (290,845)
Prepaid expenses and other current assets 258,077 (112,152) (122,994)
Other assets 40,001 (63,580) (1,099)
Increase, (decrease) in:
Accounts payable and accrued liabilities (153,367) 314,024 166,025
----------- ----------- -----------
Net cash used in operating activities (4,701,698) (4,896,771) (4,625,270)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of short-term investments 39,401,345 44,266,602 40,473,743
Purchases of short-term investments (33,445,385) (47,899,357) (36,235,256)
Acquisition of property and equipment (689,286) (1,264,478) (1,568,033)
Net proceeds from sales of assets 581,243 29,196 -
----------- ----------- -----------
Net cash (used in) provided by investing activities 5,847,917 (4,868,037) 2,670,454
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 910,132 1,229,019 1,432,944
Net proceeds from issuance of Common stock 629,273 10,343,135 586,635
Repurchase of common stock (90)
Principal payments under capital lease obligations (37,894) (143,340)
Principals payments on long-term debt (1,194,055) (921,871) (153,686)
----------- ----------- -----------
Net cash provided by financing activities 345,350 10,612,389 1,722,463
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,491,569 847,581 (232,353)
Cash and cash equivalents at beginning of period 1,119,991 272,410 504,763
----------- ----------- -----------
Cash and cash equivalents at end of period $2,611,560 $ 1,119,991 $ 272,410
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-34-
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION:
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. On September 30, 1997, the Company discontinued operation
of the Company's Instrument and Systems Division.
SUBSTANTIAL FUTURE CAPITAL NEEDS:
The Company to date has received limited revenues from product sales and
as of March 23, 1998, had cash reserves of approximately $540,000. On
March 30, 1998, the Company entered into an agreement to expand its
existing bank working capital line of credit from $1,000,000 to
$2,000,000, subject to receivables eligibility requirements and certain
other restrictions.
On April 14, the Company entered into a "bridge" loan credit facility
with its bank. The facility provides for borrowings of up to
$2,000,000, with interest at the bank's prime rate plus 2.00%. The
facility matures in 120 days, but may be paid off sooner at the
Company's option. The agreement grants to the bank a warrant to purchase
15,000 shares at 3.625 per share, the closing price for the Company's
shares on April 13, 1998.
The agreement provides for additional warrants to be granted based on
the length of time the loan is outstanding, as follows:
if the loan is outstanding after May 31, 1998, a warrant for an
additional 10,000 shares at the May 31, 1998 closing price will be
granted.
if the loan is outstanding after June 30, 1998, a warrant for an
additional 25,000 shares at the June 30, 1998 closing price will
be granted.
Borrowings under this facility are collateralized by a first priority
security interest in all of the Company's property, including
intellectual property rights. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources, Risk Factors--Substantial Future Capital Needs", and Note 17
of Conductus, Inc. Notes to Financial Statements, "Subsequent Events."
The Company anticipates that existing sources of liquidity and
anticipated revenue, primarily from government contracts, will satisfy
the Company's projected working capital and other cash requirements
through September 1998. There can be no assurance, however, that
changes in the Company's plans or other events affecting the Company
will not result in the expenditure of such resources before such time.
The Company is continuing to pursue a number of financing alternatives,
but there can be no assurance that additional financing will be
available on acceptable terms or at all.
The Company has adopted a plan of action to deal with its cash reserve
situation. The Company has implemented a cost reduction program which
will result in immediate headcount reductions of 11 employees and
reduced levels of operating expenses, working capital requirements and
capital expenditures over the next several quarters. The Company is
pursuing a sale-leaseback transaction with several leasing companies.
The Company continues to explore and evaluate equity and debt
financing alternatives. There can be no assurance that any or all of
the measures taken by the Company will provide sufficient liquidity.
The development of the Company's planned products will require a
commitment of substantial additional funds. There can be no assurance
that additional financing will be available on acceptable terms or at
all. Unless the Company is able to raise significant additional funds,
through debt or equity issuances, asset sales or otherwise, the Company
will be required to delay, scale-back or eliminate one or more of its
research and development programs or obtain funds through arrangements
with collaborative partners or others that may require the Company to
relinquish rights to certain of its technologies or potential products
that the Company would not otherwise relinquish. 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. See "Risk Factors - Substantial Future
Capital Needs."
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. In addition,
approximately 77% of the Company's total revenues for each of the fiscal
years 1997, 1996, and 1995 were for government-related contracts. 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 foreign debt, 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 major U.S. 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.
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
or the related lease term. When assets are disposed of,
-35-
<PAGE>
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 collectibility 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. Cost of contract
revenues for the years ended December 31, 1997, 1996, and 1995 was
$9,814,000, $13,178,000, and $9,176,000, 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 permitted by Statement of Financial Accounting Standards No. 123
(SFAS 123) "Accounting for Stock-Based Compensation", the Company
accounts for grants of equity instruments to employees using the
intrinsic value method described in Accounting Principles Board Opinion
No. 25 (APBO 25). All other grants are accounted for using the fair value
method described in SFAS 123 with appropriate compensation expense
recognition in the statement of operations, where significant.
BASIC AND DILUTED LOSS PER SHARE:
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings Per Share", a
reconciliation of the numerator and denominator of the basic and diluted
EPS is provided as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
----- ---- -----
<S> <C> <C> <C>
Numerator - basic and diluted EPS:
Net income (loss) $(7,543,381) $(5,003,972) $(4,421,652)
Denominator - basic and diluted EPS:
Common Stock outstanding 6,896,649 6,263,446 5,543,073
Basic earnings per share $(1.09) $(0.80) $(0.80)
Diluted earnings per share $(1.09) $(0.80) $(0.80)
</TABLE>
In the 1997, 1996, and 1995 computations, common equivalent shares are
excluded from the basic and diluted loss per share as their effect is
antidilutive. Common equivalent shares that could potentially dilute
basic earnings per share in the future and that were not included in the
computations of diluted loss per share because of antidilution were
approximately 268,000, 591,000 and 505,000 for the years ended 1997,
1996, and 1995.
RECLASSIFICATIONS:
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
-36-
<PAGE>
RECENT PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 (SFAS 130) "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events
and circumstances from nonowner sources. SFAS 130 will become effective
for the Company's 1998 fiscal year.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and
Other Information." SFAS 131 requires publicly-held companies to
report financial and other information about key revenue-producing
segments of the entity for which such information is available and is
utilized by the chief operation decision makers. Specific information
to be reported for individual segments includes profit and loss, certain
revenue and expense items and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements
would be provided. SFAS 131 will become effective for the Company's
1998 fiscal year.
The Company is currently studying the implications of these statements
and has not yet determined the impact of their adoption.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE:
<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $173,571 $ 191,050 $ 147,605
-------- ---------- ----------
-------- ---------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FUNDING ACTIVITIES:
Unrealized gain (loss) on investments, net $ 3,808 $ 3,182 $ 85,388
-------- ---------- ----------
-------- ---------- ----------
OTHER NONCASH EXPENSES:
Compensation associated with stock options granted $ 36,001 $ 27,001 $ 34,528
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
4. INVESTMENTS:
Investments, all of which are classified as available-for-sale, are
summarized below:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------- ----------------------------
Cost Market Value Cost Market Value
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Debt securities:
Corporate bonds $2,356,259 $2,359,453
Preferred bonds 2,000,000 2,000,000
Foreign debt $289,829 $289,829
Commercial paper 247,702 247,702 2,078,596 2,079,210
Other 4,587 4,587 18,545 18,545
Accrued interest 14,515 14,515 59,193 59,193
-------- --------- ---------- ----------
Subtotal 556,633 556,633 6,512,593 6,516,401
Unrealized gain, net - - 3,808
-------- --------- ---------- ----------
Total $556,633 $556,633 $6,516,401 $6,516,401
-------- --------- ---------- ----------
-------- --------- ---------- ----------
</TABLE>
-37-
<PAGE>
At December 31, 1997, all scheduled maturities of investments are within
one year. Investments consisted primarily of foreign debt and
commercial paper bearing interest between 5.00% to 6.16% per annum are
due to mature between January 1998 and April 1998.
For the years ended December 31, 1997, 1996, and 1995 gross realized
gains and losses on sales of available-for-sale securities were not
material, the cost of securities sold is based on the specific
identification method.
5. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
U.S. government contracts:
Unbilled
Recoverable costs and accrued profit
on progress completed--not billed $ 796,283 $ 466,509
Unrecovered costs and estimated profits
subject to future negotiation--not billed 350,000 -
Billed 793,382 2,842,285
Commercial 363,822 497,792
Reserves (248,232) (50,000)
---------- ----------
$2,055,255 $3,756,586
---------- ----------
---------- ----------
</TABLE>
Recoverable costs and accrued profit and unrecovered costs and estimated
profits not billed are comprised principally of amounts of revenue
recognized on contracts for which billings had not been presented to the
contract owners because the amounts were not billable at the balance
sheet date. It is anticipated such unbilled amounts receivable from the
U. S. Government at December 31, 1997 will be billed over the next 120
days as incremental increases to the contract are funded by the contract
administrator or as final billing rates related to fiscal years 1994
through 1996 are approved by the DCAA.
6. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Raw materials $293,336 $ 604,070
Work in process 366,550 521,997
Finished goods 231,326 175,806
Reserves (280,845) (81,000)
-------- -----------
$610,367 $ 1,220,873
-------- -----------
-------- -----------
</TABLE>
7. PROPERTY AND EQUIPMENT:
Property and equipment, including equipment acquired under capital
leases, consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Equipment $6,859,265 $6,403,590
Leasehold improvements 1,590,605 1,586,350
Furniture and fixtures 424,824 449,574
Construction in process 307,386 318,003
---------- ----------
9,182,080 8,757,517
Accumulated depreciation
and amortization (6,481,486) (5,815,832)
---------- ----------
$2,700,594 $2,941,685
---------- ----------
---------- ----------
</TABLE>
-38-
<PAGE>
8. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Accrued consulting and professional $ 138,155 $ 171,300
Accrued compensation 704,675 727,299
Other accrued liabilities 220,891 147,317
---------- ----------
$1,063,721 $1,045,916
---------- ----------
---------- ----------
</TABLE>
9. LONG-TERM DEBT AND OTHER BORROWINGS:
At December 31, 1997, the Company has three term loan obligations and a
bank line of credit with annual maturities as follows:
<TABLE>
<S> <C>
1998 $1,547,507
1999 288,416
2000 21,265
----------
$1,857,188
----------
----------
</TABLE>
In December 1997, the Company modified its bank line of credit facility
which expires February 28, 1998. See Note 17. The agreement provides for
borrowings up to the lesser of $500,000 or 75% of eligible receivables.
Borrowings under the agreement bear interest at the bank's prime rate
plus 1.00% (a total of 9.50% at December 31, 1997) and are collateralized
by a $500,000 certificate of deposit, accounts receivable, equipment and
other assets of the Company. At December 31, 1997, the Company had
borrowed $500,000 under the agreement. 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.
All borrowings under these credit facilities are at the bank's prime
rate plus 1.00% (a total of 9.50% at December 31, 1997) with interest
paid monthly, and are collateralized by the related equipment. At
December 31, 1997, there were no amounts available under these credit
facilities.
The Company received a waiver in March 1998 from the institution with
respect to default that occurred in the fourth quarter of fiscal 1997 on
certain financial covenants.
10. 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.
Future minimum payments under these noncancelable leases are as follows:
<TABLE>
<CAPTION>
Fiscal year:
- ------------
<S> <C>
1998 $ 338,810
1999 327,114
2000 279,114
2001 122,076
----------
$1,067,114
----------
----------
</TABLE>
Rent expense was $385,432, $438,531 and $470,379, for December 31, 1997,
1996, and 1995, respectively.
11. RESEARCH AND DEVELOPMENT ARRANGEMENTS:
The Company is party to a number of research and development contracts,
generally short-term in nature, which are substantially all with various
agencies of the United States government. Credit risk related to
-39-
<PAGE>
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 $714,000, $1,613,000, and
$1,920,000 was recognized under this contract for 1997, 1996, and 1995,
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 pulse
magnetic resonance imaging (MRI) prototype for screening of breast
cancer. Revenue of $920,000, $1,473,000, and $185,000 was
recognized under the contract for 1997, 1996, and 1995, respectively.
LUCENT JOINT DEVELOPMENT AGREEMENT:
In April 1996, the Company entered into a joint development and
licensing agreement with Lucent Technologies, Inc., to develop a
superconductive transceiver filter subsystem for the PCS market. Both
Conductus and Lucent provide technical support to the program. 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. Revenue of $1,080,000 and $428,000 was recognized under the
agreement for 1997 and 1996, respectively.
DARPA CRYOPACKAGING PROGRAM:
In August 1996, the Company entered into a contract with the Naval
Research Laboratory to solve technical problems associated with the
support and utilization of cryoelectronic components in advanced
electronic systems with particular emphasis on microwave communications.
Revenue of $847,000 and $616,000 was recognized under this contract for
1997 and 1996, respectively.
12. 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, 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,
1997, warrants for 16,447 and 2,087 shares of Common Stock remain
exercisable, respectively, The warrants, which are immediately
exercisable, expire August 5, 1998. Also see Note 17, "Subsequent
Events."
1992 STOCK OPTION/STOCK ISSUANCE PLAN:
Under the Company's stock option/stock issuance plan (the Plan), as
amended, a total of 2,080,000 shares of common stock are authorized for
issuance under the Plan as of December 31, 1997.
-40-
<PAGE>
Additionally each year the non-employee Board members receive a 3,000
share grant that vests over three years.
The Plan is divided into three separate components: the discretionary
option grant program, the automatic option plan program and the stock
issuance program. Under the discretionary 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. Under the automatic option
grant program, non-employee Board members automatically receive
non-statutory options to purchase shares of the Company's common stock.
Each non-employee Board member who first becomes a non-employee Board
member at any time on or after January 23, 1995 is automatically granted
at the time of such initial election or appointment an option to
purchase 15,000 shares of common stock. The options are immediately
exercisable, subject to the Company's repurchase right which lapses with
respect to twenty percent (20%) of the optioned shares upon completion
of twelve (12) months of Board service from the date of grant, and the
remainder of the optioned shares in forty-eight (48) equal monthly
installments. Under the stock issuance program eligible individuals are
allowed to purchase shares 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, 1997, $18,160 remains to be amortized.
A summary of the status of the Company's stock option plans as of December
31, 1997, 1996 and 1995 and changes during the years ending on these dates
is presented below:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------
Available For Weighted
Grant under Avg. Exercise
Option Plan Shares Price per share Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, January 1, 1995 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 .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
Additional shares authorized 200,000
Granted (644,000) 644,000 $3.44 - 8.38 6.31
Exercised (137,000) $ .16 - 6.38 2.79
Canceled 806,495 (806,495) $ .45 - 15.25 7.98
-------- ---------- -----
Balance December 31, 1997 521,348 1,085,687 $ .45 - 13.00 $4.68
-------- ---------- -----
-------- ---------- -----
</TABLE>
At December 31, 1997, and 1996, vested options to purchase 797,925 and
477,522 were unexercised. The weighted average price for the vested
options were $4.68 and $3.21.
REPRICING OF STOCK OPTIONS:
On April 29, 1997, the Plan Administrator of the 1992 Stock Option/Stock
Issuance Plan adopted a plan for repricing of stock options under which
each employee-holder of outstanding options with an exercise
-41-
<PAGE>
price above the closing price of the Company's stock on April 29, 1997,
was permitted to elect to exchange the existing options for new options,
subject to the same terms as the corresponding original stock options
being surrendered, except that the exercise price was equal to the
closing price of the Company's common stock on April 29, 1997, and all
shares were to be unvested until April 29, 1998, after which they would
be subject to the original vesting schedule.
EMPLOYEE STOCK PURCHASE PLAN:
In July 1994, the Employee Stock Purchase Plan (the ESPP) was adopted by
the Company's Board of Directors. A total of 350,000 shares of common
stock are authorized for issuance under the ESPP as of December 31,
1997. 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 1997 and 1996 employees purchased 50,686 and 57,848 shares for a
total of approximately $381,606 and $340,603, respectively. At
December 31, 1997, 139,676 shares were available for future grants under
the Plan.
SHAREHOLDER RIGHTS PLAN:
On January 22, 1998, the Board of Directors of Conductus, Inc. (the
"Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $0.0001
per share (the "Common Shares") outstanding on February 16, 1998 (the
"Record Date") to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series A Junior Participating Preferred
Stock, par value $0.0001 per share (the "Preferred Shares"), of the
Company, at a price of $29.00 per one one-thousandth of a Preferred
Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement.
COMMON STOCK RESERVED:
At December 31, 1997, the Company had reserved the following shares of
Common Stock:
<TABLE>
<S> <C>
Employee Stock Purchase Plan 139,676
Warrants 33,534
Option Plan 1,607,035
---------
1,780,245
---------
---------
</TABLE>
STOCK BASED COMPENSATION PLANS - VALUATION:
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------
Weighted
Number Weighted Average Average Number Weighted
Range of Exercise Outstanding at Remaining Contractual Exercise Exercisable at Average
Prices 12/31/97 Life (Years) Price 12/31/97 Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.45 - $ 0.88 163,091 4.66 $ 0.63 163,091 $ 0.63
$ 3.44 - $ 5.25 104,666 7.79 $ 4.79 104,666 $ 4.79
$ 5.38 - $ 6.50 740,252 7.91 $ 5.96 452,490 $ 5.61
$ 6.56 - $13.00 77,678 8.79 $ 7.66 77,678 $ 7.66
- ------------------ --------- ---- ------- ------- -------
$ 0.45 - $13.00 1,085,687 7.47 $ 5.17 797,925 $ 4.68
- ------------------ --------- ---- ------- ------- -------
- ------------------ --------- ---- ------- ------- -------
</TABLE>
The following information concerning the Company's stock issuance plans
(see Employee Stock Purchase Plan) is provided in accordance with SFAS
123. The Company however continues to apply APBO 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for
its plan.
-42-
<PAGE>
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 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996 1995
Group A Group B Group A Group B Group A Group B
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Risk-free Interest Rates 6.23% 5.50% 6.13% 5.50% 6.38% 5.60%
Expected Life 4.4 years 6 months 4.9 years 6 months 4.9 years 6 months
Volatility 0.83 0.83 0.76 0.76 0.76 0.76
Dividend Yield -- -- -- -- -- --
</TABLE>
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 represents the employees with purchase rights under
the Employee Stock Purchase Plan.
The weighted average fair value of those options granted in 1997, 1996,
and 1995 was $4.10, $6.19, and $3.64. The weighted average fair value of
those purchase rights granted in 1997, 1996, and 1995 was $2.71, $3.47,
and $2.21.
Had compensation cost for these plans been determined based on fair value
of the options at that grant date in 1997, 1996, and 1995 consistent with
the provisions of SFAS 123, the Company's net loss and net loss per share
would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Loss - As reported $(7,543,000) $(5,004,000) $(4,422,000)
- Proforma $(8,746,000) $(6,057,000) $(4,917,000)
Basic and diluted loss per share - As reported $(1.09) $(0.80) $(0.80)
- Proforma $(1.27) $(0.97) $(0.89)
</TABLE>
The above proforma effect 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 issued warrants to acquire 15,000 shares
of common stock at a price of $11.25 per share.
13. 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 1997.
14. ASSET DISPOSALS:
During the third quarter of 1997, the company disposed of the net assets
of its Systems and Instrumentation division, and its NMR product line.
The following table summarizes the financial impact of the transactions:
<TABLE>
<S> <C>
Proceeds from the sale of product lines and related assets. $1,128,093
Net book value of assets sold:
Fixed assets (3,306)
Inventories (629,678)
Costs related to asset disposal. (546,850)
----------
Net loss $ (51,741)
----------
----------
</TABLE>
-43-
<PAGE>
15. INCOME TAXES:
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
---- -----
<S> <C> <C>
Property and equipment, principally due to
differences in depreciation $ 198,000 $ 327,000
Accrued liabilities and other 248,000 519,000
Tax credit carryforwards 1,191,000 -
Capitalized research and development expense 76,000 882,000
Net operating loss carry forward 13,028,000 9,190,000
Valuation allowance (14,741,000) (10,918,000)
------------- -------------
Net deferred tax asset $ - $ -
------------- -------------
------------- -------------
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax
assets in future tax years, the Company has placed a valuation
allowance against its otherwise recognizable net deferred tax assets.
At December 31, 1997, the Company had approximately $36,231,000 and
$12,150,000 in net operating loss carry forwards for federal and state
income purposes, respectively. These expire in the years 1998 through
2012. 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 9%
($896,000), 12% ($1,560,000) and 11% ($1,172,000), in 1997, 1996 and
1995, respectively. Amounts receivable from this customer were $183,000
and $381,000 at December 31, 1997 and 1996, respectively.
The Company's export revenues are all denominated in U.S. dollars and
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Japan $ 896,000 $1,560,000 $1,172,000
Rest of the world 240,000 433,000 256,000
---------- ---------- ----------
$1,136,000 $1,993,000 $1,428,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
17. SUBSEQUENT EVENTS:
RE-NEGOTIATED CREDIT FACILITIES:
On March 30, the Company renegotiated the terms of its bank line of
credit and its three equipment term loan facilities. The bank line of
credit facility provides for borrowings of up to the lesser of
$2,000,000 or 80% of eligible receivables. Borrowings under the
agreement bear interest at the bank's prime rate plus 2.0%, and are
collateralized by the accounts receivable, equipment and the assets of
the Company.
The three equipment term loan facilities will continue to be amortized
using the same interest rates and amortization periods in effect under
the previous agreement. However, amounts owing under these facilities
will be collateralized by certificates of deposit or other restricted
cash accounts. This requirement will be in effect after July 30, 1998.
The Company is required to 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
minimum tangible net worth covenants.
NEW "BRIDGE" LOAN FACILITY
On April 14, the Company entered into a "bridge" loan credit facility
with its bank. The facility provides for borrowings of up to
$2,000,000, with interest at the bank's prime rate plus 2.00%. The
facility matures in 120 days, but may be paid off sooner at the
Company's option. The agreement grants to the bank a warrant to purchase
15,000 shares at 3.625 per share, the closing price for the Company's
shares on April 13, 1998.
The agreement provides for additional warrants to be granted based on
the length of time the loan is outstanding, as follows:
if the loan is outstanding after May 31, 1998, a warrant for an
additional 10,000 shares at the May 31, 1998 closing price will be
granted.
if the loan is outstanding after June 30, 1998, a warrant for an
additional 25,000 shares at the June 30, 1998 closing price will
be granted.
Borrowings under this facility are collateralized by a first priority
security interest in all of the Company's property, including
intellectual property rights.
-44-
<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 30
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 25 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 9, 1997
-45-
<PAGE>
SCHEDULE II
CONDUCTUS, INC
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance at Charged to Balance at
Beginning of Cost and Other End of
Description Period Expenses Accounts Deductions 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 $ 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
Year ended December 31, 1997:
Allowance for doubtful accounts $ 50,000 $273,232 $(75,000) $ 248,232
Allowance for excess and obsolete inventory $ 81,000 $249,845 $(50,000) $ 280,845
</TABLE>
-46-
<PAGE>
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of June 30,
1997, by and between Conductus, Inc. (the "Borrower") whose address is 969
West Maude Avenue, Sunnyvale, CA 94086, and Silicon Valley Bank (the
"Lender") whose address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness
which may be owing by Borrower to Lender, Borrower is indebted to Lender
pursuant to, among other documents, a Promissory Note, dated August 15, 1994,
in the original principal amount of One Million and 00/100 Dollars
($1,000,000.00), as may be amended (the "Line"), a Promissory Note, dated
March 1, 1996, in the original principal amount of One Million and 00/100
Dollars ($1,000,000.00), as may be amended ("Term Note 1"), and a Promissory
Note dated December 26, 1996, in the original principal amount of One Million
and 00/100 Dollars ($1,000,000.00), as may be amended ("Term Note 2"). The
Line has been modified pursuant to among other documents, a Loan Modification
Agreement dated December 26, 1996, pursuant to which, among other things, the
principal amount of the Line was increased to One Million and 00/100 Dollars
($1,000,000.00). Hereinafter, the Line, Term Note 1, and Note 2 shall be
collectively referred to as the "Notes". The Notes, together with other
promissory notes from Borrower to Lender, are governed by the terms of a
Business Loan Agreement, dated August 15, 1994, between Borrower and Lender,
as such agreement may be amended from time to time (the "Loan Agreement").
Defined terms used but not defined herein shall have the same meanings as in
the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES: Repayment of the
Indebtedness is secured by a Commercial Security Agreement, dated August 15,
1994. In addition to the foregoing, Borrower has agreed not to sell,
transfer, assign, mortgage, pledge, lease, grant a security interest in, or
encumber any of Borrower's Intellectual Property.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Indebtedness shall be referred to as the
"Security Documents". Hereinafter, the Security Documents, together with all
other documents evidencing or securing the Indebtedness shall be referred to as
the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO TERM NOTE #2.
1. The Draw Period is hereby extended to September 30,
1997. Accordingly, the first principal plus interest
payment shall be due on October 30, 1997, with all
subsequent payments due the last day of each month
thereafter. The final payment, due December 31, 1999, will
be for all outstanding principal plus all accrued interest
not yet paid.
B. MODIFICATIONS(S) TO LOAN AGREEMENT.
1. The paragraph entitled "Financial Covenants" is hereby
amended, in its entirety, to read as follows:
Borrower shall maintain, on a monthly basis, a minimum quick
ratio of 1.75 to 1.00; a minimum liquidity coverage ratio of
2.00 to 1.00; a minimum Tangible Net Worth of $7,000,000.00;
and a maximum total Debt minus Subordinated Debt to Tangible
Net Worth plus Subordinated Debt ratio of 1.00 to 1.00.
Furthermore, Borrower may incur losses, provided, such
losses shall not exceed $1,250,000.00 for the quarter ended
March 31, 1997;
<PAGE>
$2,000,000.00 for the quarter ending June 30, 1997; and
$750,000.00 for the quarter ending September 30, 1997.
Borrower shall achieve profitability beginning as of the
quarter ending December 31, 1997, with the allowance of
one quarterly loss, provided such loss does not exceed
$500,000.00.
For calculation purposes, the liquidity coverage ratio
shall mean cash or cash equivalents plus availability
under the Line divided by the sum of outstanding balances
under the Term Note as defined herein.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of this date, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor
signing below) understands and agrees that in modifying the existing
Indebtedness, Lender is relying upon Borrower's representations, warranties,
and agreements, as set forth in the Existing Loan Documents. Except as
expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released
by Lender in writing. No maker, endorser, or guarantor will be released by
virtue of the Loan Modification Agreement. The terms of this paragraph apply
not only to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
CONDUCTUS, INC. SILICON VALLEY BANK
By: /s/ William J Tamblin By: /s/ Simon James
---------------------- ----------------------
Name: William J Tamblin Name: Simon James
---------------------- ----------------------
Title: VP/CFO Title: Vice President
---------------------- ----------------------
<PAGE>
Exhibit 10.32
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of November 12, 1997,
by and between Conductus, Inc. (the "Borrower") whose address is 969 West
Maude Avenue, Sunnyvale, CA 94086, and Silicon Valley Bank (the "Lender")
whose address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated August 15, 1994, in the
original principal amount of One Million and 00/100 Dollars ($1,000,000.00),
as may be amended (the "Line"), a Promissory Note, dated August 15, 1994, in
the original principal amount of One Million Five Hundred Thousand and 00/100
Dollars ($1,500,000.00), as amended ("Term Note 1"), a Promissory Note, dated
March 1, 1996, in the original principal amount of One Million and 00/100
Dollars ($1,000,000.00), as may be amended ("Term Note 2"), a Promissory Note
dated December 26, 1996, in the original principal amount of One Million and
00/100 Dollars ($1,000,000.00), as may be amended ("Term Note 3"). The line
has been modified pursuant to, among other documents, a Loan Modification
Agreement dated December 26, 1996, pursuant to which, among other things, the
principal amount of the Line was increased to One Million and 00/100 Dollars
($1,000,000.00). Term Note # 1 was amended pursuant to among other documents,
a Loan Modification Agreement dated June 20, 1995, pursuant to which, among
other things, the principal amount was increased to Two Million and 00/100
Dollars ($2,000,000.00). Hereinafter, the Line, Term Note 1, Term Note 2 and
Note 3 shall be collectively referred to as the "Notes". The Notes, together
with other promissory notes from Borrower to Lender, are governed by the
terms of a Business Loan Agreement, dated August 15, 1994, between Borrower
and Lender, as such agreement may be amended from time to time (the "Loan
Agreement"). Defined terms used but not defined herein shall have the same
meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred
to as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES: Repayment of the Term Notes is
secured by a Commercial Security Agreement, dated August 15, 1994. In
addition to the foregoing, Borrower has agreed not to sell, transfer, assign,
mortgage, pledge, lease, grant a security interest in, or encumber any of
Borrower's Intellectual Property.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Indebtedness shall be referred to as the
"Security Documents". Hereinafter, the Security Documents, together with all
other documents evidencing or securing the Indebtedness shall be referred to as
the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. WAIVER OF COVENANT DEFAULT
1. Lender hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the
Tangible Net Worth covenant as of the month ended September 30,
1997 and the Profitability covenant as of the quarter ended
September 30, 1997. Lender's waiver of Borrower's compliance of
these covenants shall apply only to the foregoing period.
Accordingly, for the month ended October 31, 1997 and the
quarter ending December 31, 1997, Borrower shall be in
compliance with these covenants as amended herein.
Lender's agreement to waive the above-described default (1) in
no way shall be deemed an agreement by the Lender to waive
Borrower's compliance with the above-described covenants as of
all other dates and (2) shall not
<PAGE>
limit or impair the Lender's right to demand strict performance
of these covenants as of all other dates and (3) shall not limit
the Lender's right to demand strict performance of all other
covenants as of any date.
B. MODIFICATIONS(S) TO LOAN AGREEMENT.
1. The paragraph entitled "Financial Covenants" is hereby amended,
in its entirety, to read as follows:
Borrower shall maintain, on a monthly basis, a minimum liquidity
coverage ratio of 2.00 to 1.00; a minimum Tangible Net Worth of
$3,500,000.00, plus 75% of new equity or Subordinated Debt and a
maximum total Debt minus Subordinated Debt to Tangible Net Worth
plus Subordinated Debt ratio of 1.00 to 1.00. Furthermore,
Borrower may incur losses, provided such losses shall not exceed
$1,200,000.00 for the quarter ended December 31, 1997;
$900,000.00 for the quarter ending March 31, 1998; $400,000.00
for the quarter ending June 30, 1998 and $100,000.00 for the
quarter ending September 30, 1999, with quarterly profitability
thereafter
For calculation purposes, the liquidity coverage ratio shall
mean cash or cash equivalents plus availability under the Line
divided by the sum of outstanding balances under the Term Notes.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of this date, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in the Existing Loan Documents. Except as expressly
modified pursuant to this Loan Modification Agreement, the terms of the
Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released
by Lender in writing. No maker, endorser, or guarantor will be released by
virtue of the Loan Modification Agreement. The terms of this paragraph apply
not only to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
CONDUCTUS, INC. SILICON VALLEY BANK
By: By:
----------------------------- -----------------------------
Name: Charles E. Shalvoy Name:
----------------------------- -----------------------------
Title: President & CEO Title:
----------------------------- -----------------------------
<PAGE>
Exhibit 10.33
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of December 23,
1997, by and between Conductus, Inc. (the "Borrower") whose address is
969 West Maude Avenue, Sunnyvale, CA 94086, and Silicon Valley Bank (the
"Lender") whose address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated August 15, 1994, in the
original principal amount of One Million and 00/100 Dollars ($1,000,000.00),
as may be amended (the "Line"), a Promissory Note, dated August 15, 1994, in
the original principal amount of One Million Five Hundred Thousand and 00/100
Dollars ($1,500,000.00), as amended ("Term Note 1"), a Promissory Note, dated
March 1, 1996, in the original principal amount of One Million and 00/100
Dollars ($1,000,000.00), as may be amended ("Term Note 2"), a Promissory Note
dated December 26, 1996, in the original principal amount of One Million and
00/100 Dollars ($1,000,000.00), as may be amended ("Term Note 3"). Term Note
# 1 was amended pursuant to among other documents, a Loan Modification
Agreement dated June 20, 1995, pursuant to which, among other things, the
principal amount was increased to Two Million and 00/100 Dollars
($2,000,000.00). Hereinafter, Term Note 1, Term Note 2 and Note 3 shall be
collectively referred to as the "Term Notes" and the Line and the Term Notes
shall be collectively referred to as the "Notes". The Notes, together with
other promissory notes from Borrower to Lender, are governed by the terms of
a Business Loan Agreement, dated August 15, 1994, between Borrower and
Lender, as such agreement may be amended from time to time (the "Loan
Agreement"). Defined terms used but not defined herein shall have the same
meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES: Repayment of the Term Notes is
secured by a Commercial Security Agreement, dated August 15, 1994 and
repayment of the Line is secured by an Assignment of Deposit Account
Agreement of even date herewith (the "Pledge Agreement"). In addition to the
foregoing, Borrower has agreed not to sell, transfer, assign, mortgage,
pledge, lease, grant a security interest in, or encumber any of Borrower's
Intellectual Property.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Indebtedness shall be referred to as the
"Security Documents". Hereinafter, the Security Documents, together with all
other documents evidencing or securing the Indebtedness shall be referred to
as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO THE LINE.
1. The principal amount of the Line is hereby decreased to
Five Hundred Thousand and 00/100 Dollars ($500,000.00).
B. MODIFICATIONS(S) TO LOAN AGREEMENT.
1. The paragraph entitled "Financial Covenants" is hereby
amended, in its entirety, to read as follows:
Borrower shall maintain, on a monthly basis, a minimum
liquidity coverage ratio of 2.00 to 1.00; a minimum
Tangible Net Worth of $3,500,000.00, plus 75% of new
equity or Subordinated Debt and a maximum total Debt minus
<PAGE>
Subordinated Debt to Tangible Net Worth plus Subordinated
Debt ratio of 1.00 to 1.00. Furthermore, Borrower may
incur losses, provided such losses shall not exceed
$1,200,000.00 for the quarter ended December 31, 1997;
$900,000.00 for the quarter ending March 31, 1998;
$400,000.00 for the quarter ending June 30, 1998 and
$100,000.00 for the quarter ending September 30, 1999,
with quarterly profitability thereafter.
For calculation purposes, the liquidity coverage ratio
shall mean cash or cash equivalents plus availability
under the Line divided by the sum of outstanding balances
under the Term Notes.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of this date, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in the Existing Loan Documents. Except as expressly
modified pursuant to this Loan Modification Agreement, the terms of the
Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released
by Lender in writing. No maker, endorser, or guarantor will be released by
virtue of the Loan Modification Agreement. The terms of this paragraph apply
not only to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
7. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Lender's receipt of the Pledge Agreement.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
CONDUCTUS, INC. SILICON VALLEY BANK
By: /s/ Charles E. Shalvoy By: /s/ Debra Bowman
------------------------ ----------------------
Name: Charles E. Shalvoy Name: Debra Springer Bowman
Title: President & CEO Title: Vice President
<PAGE>
ASSET PURCHASE AGREEMENT
Agreement dated as of July 9, 1997, by and between Bruker Instruments,
Inc., a Massachusetts corporation ("Buyer") and Conductus, Inc., a Delaware
corporation ("Seller").
This Agreement sets forth the terms and conditions upon which Buyer will
purchase from Seller, and Seller will sell to Buyer, all the assets of Seller's
HTS NMR Probe business (other than the Retained Assets, as hereinafter defined)
and the business and goodwill of such business as a going concern, subject to
those liabilities of Seller which are specifically hereinafter described, for
the consideration provided herein.
In consideration of the foregoing, the mutual representations, warranties
and covenants set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties to
this Agreement hereby agree as follows:
1.0 DEFINITIONS
1.1 DEFINITIONS. For the purposes of this Agreement, all capitalized
words or expressions used in this Agreement shall have the meanings specified in
this Article I (such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
"AFFILIATE" means when used with respect to any Person if such Person is a
corporation, any officer or director thereof and any Person which is, directly
or indirectly, the beneficial owner (by itself or as part of any group) of more
than five percent (5%) of any class of any Equity Security thereof, and, if such
beneficial owner is a partnership, any general or limited partner thereof, or if
such beneficial owner is a corporation, any Person controlling, controlled by or
under common control with such beneficial owner, or any officer or director of
such beneficial owner or of any corporation occupying any such control
relationship.
"AGREEMENT" means this Asset Purchase Agreement (together with all Exhibits
and Schedules hereto) as in effect from time to time.
"BUSINESS" means Seller's NMR probe business operated by Buyer through the
use of the Purchased Assets, including, without limitation, all business
activities of Seller used in or for systems, subunits (E.G., NMR probes,
cryogenic systems, preamplifiers, etc.) and accessories (a) for NMR
spectroscopy, and (b) for all NMR microscopy on any sample or specimen other
than in-vivo NMR microscopy on human patients. "Business"
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does not include MRI and/or in-vivo NMR microscopy on human patients in
magnets of any geometry.
"BUSINESS DAY" means any day, excluding Saturday, Sunday and any other day
on which commercial banks in Boston, Massachusetts are authorized or required by
law to close.
"CHARTER" means the Certificate of Incorporation, Articles of Incorporation
or Organization or other organizational document of a corporation, as amended
and restated through the date hereof.
"CLAIM" means an action, suit, proceeding, hearing, investigation,
litigation, charge, complaint, claim or demand.
"CODE" means the Internal Revenue Code of 1986, and the regulations,
rulings, and court decisions in respect thereof, all as the same shall be in
effect at the time.
"ERISA" means the Employee Retirement Income Security Act of 1974, and any
similar or successor federal statute, and the rules, regulations and
interpretations thereunder, all as the same shall be in effect at the time.
"GAAP" means generally accepted accounting principles, consistently
applied.
"HTS NMR PROBE" includes the HTS coil(s), the probe body, the transfer line
to the probe body, probe connections to the cryogenic system, and heat sink if
it is incorporated into the probe body, but does not include the preamplifier
module(s), refrigeration components, heat exchanger, coldhead, or the vacuum
components outside the probe body.
"IRS" means the Internal Revenue Service.
"LIEN" means, with respect to any asset, any mortgage, deed of trust,
pledge, hypothecation, assignment, security interest, lien, charge, restriction,
adverse claim by a third party, title defect or encumbrance of any kind.
"MATERIAL ADVERSE EFFECT" means a material adverse impact or effect on the
business, operations, assets, liabilities, prospects or condition (financial or
otherwise) of the Business.
"MRI" means magnetic resonance imaging.
"NMR" means nuclear magnetic resonance.
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"OFFICER'S CERTIFICATE" means a certificate signed in the name of a
corporation by its President, Chief Executive Officer, Treasurer, Chief
Financial Officer, or, if so specified, the Clerk or Secretary, acting in his or
her official capacity.
"PERSON" means any individual, firm, partnership, association, trust,
corporation, limited liability company, governmental body or other entity.
"PURCHASE DOCUMENTS" means this Agreement and any other certificate,
document, instrument or agreement executed in connection therewith.
"TAX" means any federal, state, local or foreign tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
"TAX RETURN" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"TRANSFERRED TECHNOLOGY" means patents, patent applications, inventions and
designs which are included in the Purchased Assets.
2.0 PURCHASE AND SALE OF ASSETS
2.1 PURCHASE OF ASSETS. Upon the terms and subject to the conditions
contained in this Agreement, at the Closing (as defined in Section 2.7 hereof),
Seller shall sell, assign, transfer and convey to Buyer, and Buyer shall
purchase, acquire and accept from Seller, the Business, including those of
Seller's assets used in connection with Seller's operation of the Business as
set forth in SCHEDULE 2.1 attached hereto (the "Purchased Assets") (other than
those assets included in the Retained Assets as defined in Section 2.2 hereof),
and subject only to the liabilities and obligations of Buyer which are defined
in Section 2.3 hereof (the "Assumed Liabilities").
2.2 RETAINED ASSETS. Seller will retain ownership of all of Seller's
assets other than the Purchased Assets (the "Retained Assets"), including,
without limitation, the patents listed in SCHEDULE 2.2.
2.3 ASSUMED LIABILITIES. Buyer shall assume and pay, perform and
discharge the Assumed Liabilities, and will pay, perform and discharge the
Assumed Liabilities as they become due. The Assumed Liabilities shall consist
solely of the liabilities of Buyer listed on SCHEDULE 2.3 attached hereto.
2.4 RETAINED LIABILITIES. The liabilities and obligations which shall be
retained by Seller (the "Retained Liabilities") shall consist of all liabilities
of Seller other than the Assumed Liabilities, including, without limitation, the
following:
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<PAGE>
(a) all liabilities of Seller relating to indebtedness for borrowed
money;
(b) Subject to Section 10.5(c), all liabilities of Seller resulting
from, constituting or relating to a breach of any of the representations,
warranties, covenants or agreements of Seller under this Agreement except to the
extent that they relate to the Business for periods after the Closing Date;
(c) all liabilities of Seller for Taxes, including any gain and
income from the sale of the Purchased Assets and other transactions contemplated
herein;
(d) all liabilities for all environmental, ecological, health,
safety, products liability or other claims pertaining to the Business or the
Purchased Assets which relate to time periods or events occurring on or prior to
the Closing Date;
(e) all liabilities of Seller arising in connection with its
operations unrelated to the Business and all liabilities (including any
liability pursuant to any claim, litigation or proceeding) in connection with
the operation of the Business arising prior to the Closing except as otherwise
specifically provided herein and any liability of Seller based on its tortious
or illegal conduct;
(f) any liability or obligation incurred by Seller in connection with
the negotiation, execution or performance of this Agreement, including, without
limitation, all legal, accounting, brokers', finders' and other professional
fees and expenses;
(g) all liabilities incurred by Seller after the Closing Date;
(h) all liabilities or obligations associated with the Business
Employees (as hereinafter defined), including, but not limited to, any liability
or obligation under or with respect to any collective bargaining agreement,
employment agreement, unemployment or workers' compensation laws, sales
commissions (other than on orders shipped and billed after the Closing Date), or
any liability or obligation arising from any decision of Buyer not to offer
employment to any Business Employee; and
(i) all liabilities and obligations arising out of, resulting from,
or relating to any employee benefit plan, program, or arrangement maintained or
contributed to by Seller or any entity which is or has been aggregated with
Seller for purposes of section 414 of the Code or section 4001 of ERISA.
2.5 PURCHASE PRICE. Upon the terms and subject to the conditions
contained in this Agreement, and in consideration of the sale, assignment,
transfer and delivery of the Purchased Assets and covenants not to compete
received from Seller, Buyer will pay, by
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<PAGE>
wire transfer of immediately available funds, to Seller,
.
2.6 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among the Purchased Assets and the covenants not to compete received from Seller
as set forth in SCHEDULE 2.6 attached hereto. Seller and Buyer shall be bound
by such allocation for all purposes and to account for and report the purchase
and sale contemplated hereby for all financial, accounting and Tax purposes in
accordance with such allocation.
2.7 TIME AND PLACE OF CLOSING. The closing of the transactions described
in Sections 2.1 through 2.6 hereof (the "Closing") shall take place at the
offices of Seller at 9:00 a.m. on July 16, 1997, or at such other place or
time as the parties hereto may agree. The date and time at which the Closing
actually occurs is hereinafter referred to as the "Closing Date."
2.8 EXECUTION AND DELIVERY OF DOCUMENTS OF TITLE BY SELLER. At the
Closing, Seller shall execute and deliver to Buyer a bill of sale and such
deeds, conveyances, bills of sale, certificates of title, assignments,
assurances and other instruments and documents as Buyer may reasonably request
in order to effect the sale, conveyance, and transfer of the Purchased Assets
from Seller to Buyer. Such instruments and documents shall be sufficient to
convey to Buyer good and merchantable title in all of the Purchased Assets.
Seller will, from time to time after the Closing Date, take such additional
actions and execute and deliver such further documents as Buyer may reasonably
request in order more effectively to sell, transfer and convey the Purchased
Assets to Buyer and to place Buyer in position to operate and control all of the
Purchased Assets.
2.9 EXECUTION AND DELIVERY OF DOCUMENTS BY BUYER. At the Closing, Buyer
shall execute and deliver to Seller an Assumption Agreement and such other
documents as Seller may reasonably request in order to evidence Buyer's
assumption of the Assumed Liabilities. Buyer will, from time to time after the
Closing Date, take such additional action and deliver such further documents as
Seller may reasonably request in order effectively to assume the Assumed
Liabilities.
2.10 After the Closing, Buyer shall pay a share of Net Revenue (as
hereinafter defined) to Seller as follows:
(a) For the first three (3) years after the Closing Date, Buyer
shall pay Seller of the Net Revenue from the sale of HTS
NMR Probes which are based, in whole or in substantial part, on Transferred
Technology.
(b) For the fourth and fifth years after the Closing Date, Buyer
shall pay Seller of the Net Revenue from the sale of HTS NMR
Probes which are based, in whole or in substantial part, on Transferred
Technology.
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(c) For the sixth through the tenth years after the Closing Date,
Buyer shall pay Seller of the Net Revenue from the sale of
HTS NMR Probes which are based in whole or in substantial part, on
Transferred Technology.
(d) For the first 3 years after the Closing Date, Buyer shall pay
Seller 2% of the Net Revenue from the sale of cryogenics for HTS NMR Probes
which are based in whole or in substantial part, on Transferred Technology.
(e) For purposes of this Section 2.10, "Net Revenue" shall mean the
net amounts received by Buyer from its distributors, less separately stated
amounts such as sales, value added and similar taxes and governmental charges,
transportation, installation, duties, insurance and similar charges, provided
that for system sales when the HTS NMR Probe price is not separately stated, Net
Revenue shall be equal to the then current list price for such HTS NMR Probe or
cryogenics less twenty five percent (25%).
(f) Payments shall be made by Buyer no later than forty-five (45)
days after the end of each calendar quarter accompanied by a report setting
forth the calculation of the payment then due. Sufficient records to support
such reports shall be kept for six (6) years following the due date for the
report relating to the reporting period to which such records pertain.
(g) Seller shall have the right to have an independent certified
public accountant audit, at Seller's expense, Buyer's royalty calculations no
more than once every two (2) years. At least ten (10) days notice of any such
audit shall be provided to Buyer, such accountant shall execute a standard Buyer
non-disclosure agreement prior to any such audit and the results of such audit
may be disclosed only to Seller. If such an audit uncovers a deficiency greater
than 5% in reporting or payments, Buyer shall bear the expenses of the audit.
2.11 SCHEDULES. This Agreement has been executed without all Schedules
attached. Mutually agreeable schedules shall be attached no later than July 15,
1997.
3.0 REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
3.1 ORGANIZATION AND QUALIFICATION. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Seller has full power and authority to own, use and lease its
properties and to conduct its business as currently conducted. The copies of
Seller's Charter and By-Laws, as amended to date, certified by its Secretary and
delivered to Buyer's counsel prior to the Closing, are true, complete and
correct.
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3.2 AUTHORITY; NO VIOLATION. Seller has all requisite corporate power
and authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement by Seller has been duly and validly authorized and approved by all
necessary corporate action. This Agreement constitutes the legal and binding
obligation of Seller, enforceable against it in accordance with its terms.
To Seller's knowledge, and without having conducted any special
investigation, the entering into of this Agreement by Seller does not, and
the consummation by Seller of the transactions contemplated hereby, including
specifically the transfer of the Purchased Assets to Buyer by Seller, will
not violate the provisions of (a) any applicable federal, state, local or
foreign laws, (b) Seller's Charter or By-Laws, or (c) any provision of, or
result in a default or acceleration of any obligation under, or result in any
change in the rights or obligations of Seller under, any Lien, contract,
agreement, license, lease, instrument, indenture, order, arbitration award,
judgment, or decree to which Seller is a party or by which it is bound, or to
which any property used in the Business is subject, except where such
default, acceleration, or change would not have a material adverse effect.
3.3 FINANCIAL STATEMENTS. (omitted intentionally)
3.4 ABSENCE OF UNDISCLOSED LIABILITIES. To Seller's knowledge and without
having conducted any special investigation, there are no undisclosed Liabilities
of the Business.
3.5 ABSENCE OF CERTAIN CHANGES. Except as otherwise disclosed in SCHEDULE
3.5 attached hereto, since APRIL 1ST, 1997, there has not been:
(a) any material change in the business, operations, assets,
liabilities, prospects or condition (financial or otherwise) of the Business;
(b) any obligation or liability incurred by Seller with respect to
the Business other than obligations and liabilities incurred in the ordinary
course of business for an amount not more than $5,000.00 in each case or
$25,000.00 in the aggregate;
(c) any Liens placed on any of the Purchased Assets which in the
aggregate exceed $5,000.00 remain in existence on the date hereof; such amount
of any Liens, if any, in existence on the Closing Date shall be deducted from
the Purchase Price;
(d) any purchase, sale, lease, assignment, transfer or other
disposition, or any agreement or other arrangement for the purchase, sale,
lease, assignment, transfer or other disposition, of any part of Seller's
properties or assets used in the Business, other than purchases and sales in the
ordinary course of business, and except for fixed assets purchased or other
capital expenditures made in amounts not exceeding $5,000 for any single item
and $25,000 in the aggregate for all such items;
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(e) any damage, destruction or loss, whether or not covered by
insurance, which has a Material Adverse Effect on Seller's properties, assets or
business used in the Business;
(f) any labor dispute or claim of unfair labor practices involving
Seller; any change in the employment contracts of or compensation payable or to
become payable by Seller to any of its current or former officers, directors,
employees, consultants, or agents with respect to the Business or any bonus
payment, loan or arrangement made to or with respect to any of such officers,
directors, employees, consultants, or agents; or any change in coverage vesting,
or benefits available, under any Plan described in Section 3.14 hereof with
respect to the Business;
(g) any change with respect to the Business' management or
supervisory personnel;
(h) any contracts, licenses, leases or agreements entered into by
Seller with respect to the Business which are outside the ordinary course of
business or which obligate Seller for more than $5,000 in any one case or more
than $25,000 in the aggregate or any cancellation, termination, modification, or
acceleration by any party to any contract, license, lease or agreement involving
more than $25,000 with respect to the Business to which Seller is a party or by
which it is bound;
(i) any postponement or delay in payment of any accounts payable or
other liability of Seller with respect to the Business except in the ordinary
course of business consistent with prior practices;
(j) any cancellation, waiver, compromise or release of any right or
claim with respect to the Business either involving more than $25,000 or outside
the ordinary course of business consistent with prior practices; or
(k) any other occurrence, action, failure to act or transaction
involving the Business other than transactions in the ordinary course of
business consistent with prior practices.
3.6 TITLE, SUFFICIENCY AND CONDITION OF ASSETS. Seller has good and
marketable title to, or a valid leasehold interest in, all of the Purchased
Assets, free and clear of all Liens and the sale and delivery of the Purchased
Assets to Buyer pursuant hereto shall vest in Buyer good and marketable title
thereto, free and clear of any and all Liens which in the aggregate exceed
$5,000.00 or defects, other than as disclosed in SCHEDULE 3.6 hereto or as may
be created by Buyer. Except as disclosed in SCHEDULE 3.6, or as provided in
Section 3.9 with respect to intellectual Property Seller owns or leases all
property and assets necessary for the conduct of the Business as the Business is
presently conducted
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and is proposed to be conducted, and all such property and assets are
included in the Purchased Assets. To the knowledge of Seller, all tangible
properties and assets owned or leased by Seller and contained in the
Purchased Assets are in good operating condition and repair, ordinary wear
and tear excepted, have been well maintained, and conform with all applicable
laws, statutes, ordinances, rules and regulations.
3.7 REAL ESTATE. (omitted intentionally)
3.8 CURRENT ASSETS. (omitted intentionally)
3.9 INTELLECTUAL PROPERTY. All patents, patent applications, proprietary
designs, copyrights, trade names, service marks, trademarks and trademark
applications which are owned by or licensed to Seller with respect to the
Business are listed in SCHEDULE 2.1 attached hereto ("Intellectual Property").
To its knowledge, and without having conducted any special investigation or
patent or trademark search, the Intellectual Property's use does not require the
consent of any other Person and it is freely transferable and owned exclusively
by Seller, free and clear of any Liens. Except as set forth in SCHEDULE 2.1,
(a) no other Person has an interest in or right or license to use, or the right
to license any other Person to use, any of the Intellectual Property, (b) Seller
has received no claims or demands of any other Person pertaining thereto and
has not received notice that any proceedings have been instituted, or are
pending or, to the knowledge of Seller, threatened, which challenge Seller's
rights in respect thereof, (c) Seller is unaware of any infringement of the
Intellectual Property by another Person or that the Intellectual Property is
subject to any outstanding order, decree, ruling, charge, injunction, judgment
or stipulation, and (d) no Claim has been received by Seller, or, to Seller's
knowledge threatened charging the Seller with infringement of any adversely
held intellectual property. Buyer acquires no right to the trademark
"Conductus", but shall be permitted to use technical documentation existing at
the Closing Date and including the name "Conductus" for up to six months after
the Closing Date.
3.10 CONTRACTS. Except for contracts, commitments, leases, licenses, plans
and agreements described in SCHEDULES 3.10 attached hereto, Seller with respect
to the Business is not a party to or subject to:
(a) any plan or contract regarding or providing for bonuses,
pensions, options, stock purchases, deferred compensation, severance benefits
retirement payments, profit sharing, stock appreciation, collective bargaining
or the like, or any contract or agreement with any labor union;
(b) any employment or consulting contract or contract for personal
services not terminable at will by Seller without penalty to Seller;
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(c) any contract or agreement for the purchase of any commodity,
product, material, supplies, equipment or other personal property, or for the
receipt of any service, other than purchase orders entered into in the ordinary
course of business for less than $1,000 each and which in the aggregate do not
exceed $10,000;
(d) any contract or agreement for the purchase or lease of any fixed
asset, whether or not such purchase or lease is in the ordinary course of
business, for a price in excess of $5,000;
(e) any contract or agreement for the sale of any commodity, product,
material, equipment, or other personal property, or the furnishing by Seller of
any service, other than contracts with customers entered into in the ordinary
course of business for a price in excess of $5,000;
(f) any contract or agreement providing for the purchase of all or
substantially all of its requirements of a particular product from a supplier,
or for periodic minimum purchases of a particular product from a supplier;
(g) any contract or agreement with any sales agent, distributor or
OEM of products of the Business;
(h) any contract or agreement concerning a partnership or joint
venture with one or more Persons;
(i) any confidentiality agreement or any non-competition agreement or
other contract or agreement containing covenants limiting the Business' freedom
to compete in any line of business or in any location or with any Person;
(j) any license agreement (as licensor or licensee);
(k) any contract or agreement with any present or former officer,
director, consultant, agent or stockholder of Seller or with any Affiliate of
any of them;
(l) any loan agreement, indenture, note, bond, debenture or any other
document or agreement evidencing a capitalized lease obligation or Indebtedness
to any Person;
(m) any agreement of guaranty, indemnification, or other similar
commitment with respect to the obligations or liabilities of any other Person
(other than lawful indemnification provisions contained in the Charter and
By-Laws of Seller; or
(n) any other agreement or contract (or group or related agreements
or contracts) under which the consequences of a default or termination could
have a Material
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Adverse Effect or the performance of which involves consideration paid or
received by Seller in excess of $ 5,000.
Copies of all such written contracts, commitments, plans, leases, licenses
and agreements have been provided to Buyer prior to the execution of this
Agreement, and all such copies are true, correct and complete and have been
subject to no amendment, extension or other modification as of the date hereof,
except such as are described in SCHEDULE 3.10. Except as listed and described
in SCHEDULE 3.10, Seller, or to the knowledge of Seller, any other Person, is
not in default under any such contract, commitment, plan, lease, license or
agreement.
3.11 CUSTOMERS AND SUPPLIERS. Except as set forth in SCHEDULE 3.11, no
supplier is a material sole source of supply to the Business. The relationships
of the Business with its suppliers and customers are good commercial working
relationships and, neither (i) any of the twenty (20) largest suppliers and
customers of the Business, nor (ii) any supplier who at any time during 1996 or
1997 was or is the sole source of supply of any item, has canceled or otherwise
terminated, or threatened to cancel or otherwise terminate, its relationship
with the Business or has during the last twelve (12) months decreased materially
or threatened to decrease or limit materially, its services, supplies or
materials to the Business or its usage or purchase of the services or products
of the Business.
3.12 COMPLIANCE WITH LAWS. To the best of its knowledge, Seller has, with
respect to the Business, conducted and is conducting its business in compliance
with applicable federal, state, local or foreign laws, statutes, ordinances,
regulations, rules or orders or other requirements of any governmental,
regulatory or administrative agency or authority or court or other tribunal
relating to it. Seller is not now charged with, and to the knowledge of Seller
is not now under investigation with respect to, any possible violation of any
applicable law, statute, ordinance, regulation, rule, order or requirement
relating to any of the foregoing. Seller, with respect to the Business, has all
licenses, permits, franchises, orders, approvals, accreditations, written
waivers and other authorizations as are necessary in order to enable it to own
and conduct its business as currently conducted and as proposed to be conducted
and to occupy and use its real and personal properties without incurring any
material liability ("Necessary Permits"), except where the failure to do so
would not have a Material Adverse Effect. No registration, filing, application,
notice, transfer, consent, approval, order, qualification, waiver or other
action of any kind is required by virtue of the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby to effect
the transfer to Buyer of the Necessary Permits. The Business is in full
compliance with the terms and conditions of all Necessary Permits.
3.13 TAXES. There are no Liens or other problems with unpaid Taxes with
respect to the Purchased Assets.
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3.14 EMPLOYEE BENEFIT PLANS. (intentionally omitted)
Seller has disclosed its employee benefit plans to Buyer.
3.15 ENVIRONMENTAL MATTERS. To the best of Seller's knowledge, its
operation of the Business is in compliance with applicable environmental laws.
3.16 EMPLOYEES. Except as disclosed in SCHEDULE 3.16, Seller with respect
to the Business is not a party to any written or oral employment, consulting,
service, severance or pension agreement. Seller enjoys good relations with its
employees and there is no pending or, to the knowledge of Seller, threatened
labor dispute with or effort to organize any of its employees, and there has
been no such labor dispute or, to the knowledge of Seller, effort to organize
during the past five (5) years.
3.17 LITIGATION. Except as disclosed on SCHEDULE 3.17 attached hereto, (a)
there is no Claim pending or, to the knowledge of Seller threatened (or, to the
knowledge of Seller, any facts which are reasonably likely to lead to such a
Claim) by, against, affecting or regarding the Business or the properties or
assets used in the Business, at law or in equity, before any federal, state,
local or foreign court or any other governmental or administrative agency or
tribunal or any arbitrator or arbitration panel which is likely to have a
Material Adverse Effect, and (b) there are no judgments, orders, rulings,
charges, decrees, injunctions, notices of violation or other mandates against or
affecting the Business or the properties or assets used in the Business which is
likely to have a Material Adverse Effect. Nothing listed on SCHEDULE 3.17,
either individually or when aggregated with other listings on such Schedule,
would reasonably be expected to have a Material Adverse Effect.
3.18 BROKERS. Neither Seller or anyone acting on its behalf, has engaged,
retained, or incurred any liability to any broker, investment banker, finder or
agent or has agreed to pay any brokerage fees, commissions, finder's fees or
other fees with respect to the sale of the Purchased Assets, this Agreement or
the transactions contemplated hereby.
3.19 DISCLOSURE OF MATERIAL INFORMATION. Neither this Agreement (including
the Schedules and Exhibits hereto) nor any document, certificate or instrument
furnished in connection therewith contains, with respect to Seller or the
Business, any untrue statement of a material fact or omits to state a material
fact necessary to made the statements therein not misleading. To its knowledge,
and without having conducted any special inquiry, there is no fact known to
Seller which has or would reasonably be expected in the future to result in a
Material Adverse Effect and which has not been set forth in this Agreement or in
written materials furnished to Buyer for purposes of its due diligence review.
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4.0 REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
4.1 ORGANIZATION AND QUALIFICATION. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts, with full power and authority to own, use or
lease its properties and to conduct its business as such properties are owned,
used or leased and as such business is conducted.
4.2 AUTHORITY. Buyer has the requisite corporate power and authority
to enter into this Agreement and to carry out the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by Buyer
have been duly and validly authorized and approved by all necessary corporate
action on the part of Buyer, and this Agreement constitutes the legal and
binding obligation of Buyer, enforceable against Buyer in accordance with its
terms. Assuming the accuracy of the representations and warranties of Seller
hereunder and to the best knowledge of Buyer, the entering into of this
Agreement by Buyer does not, and the consummation by Buyer of the
transactions contemplated hereby will not, violate the provisions of (a) any
applicable laws of the United States or any other state or jurisdiction in
which Buyer does business, (b) the Charter or By-Laws of Buyer, or (c) any
provision of, or result in a default or acceleration of any obligation under,
or result in any change in the rights or obligations of Buyer under, any
mortgage, Lien, lease, agreement, contract, instrument, order, arbitration
award, judgment, or decree to which Buyer is a party or by which Buyer is
bound, or to which any property of Buyer is subject.
4.3 BROKERS. Neither Buyer nor anyone acting on its behalf has engaged,
retained or incurred any liability to any broker, investment banker, finder or
agent or has agreed to pay any brokerage fees, commissions, finder's fees or
other fees with respect to the purchase of Purchased Assets, this Agreement or
the transactions contemplated hereby.
5.0 COVENANTS
5.1 COVENANTS OF SELLER. Seller shall keep, perform and fully discharge
the following covenants and agreements:
(a) INTERIM CONDUCT OF BUSINESS. From the date hereof until the
Closing, Seller shall operate the Business as a going concern consistent with
prior practice and in the ordinary course of business. Without limiting the
generality of the foregoing, from the date hereof until the Closing, except for
transactions contemplated by this Agreement or expressly approved in writing by
Buyer, Seller shall not with respect to the Business:
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(i) enter into or amend any employment, bonus, severance, or
retirement contract or arrangement, or increase any compensation payable or
to become payable to any person other than in the ordinary course of
business consistent with prior practice;
(ii) purchase, lease or otherwise acquire any real estate or any
interest therein;
(iii) sell, lease or otherwise dispose of or agree to sell, lease
or otherwise dispose of any of its assets, properties, rights or claims,
whether tangible or intangible, except in the ordinary course of business
consistent with prior practice;
(iv) incur any liability, guaranty or obligation (fixed or contingent)
other than in the ordinary course of business consistent with prior
practice or make any investment in excess of $10,000, whether singly or in
the aggregate, in property, plant and equipment and other items of capital
expenditure;
(v) place or permit to be placed any Lien on any of its assets or
properties, other than statutory Liens arising in the ordinary course of
business;
(vi) accelerate receivables or delay or postpone payment of any
accounts payable or other liability, except in the ordinary course of
business consistent with prior practice; or
(vi) abandon any part of the Business.
(b) ACCESS. Seller shall, upon reasonable notice, give Buyer and its
representatives full and free access to all properties, assets, books,
contracts, commitments and records of Seller with respect to the Business during
reasonable business hours and shall promptly furnish Buyer with all financial
and operating data and other information as to the history, ownership,
Affiliates, business, operations and properties of the Business as Buyer may
from time to time reasonably request. Simultaneously with the execution hereof,
the parties shall enter into a non-disclosure agreement in form and substance as
set forth in SCHEDULE 5.1(b) attached hereto.
(c) TRANSFER OF NECESSARY PERMITS. From and after the date hereof to
the Closing Date and following the Closing Seller will use commercially
reasonable efforts to effect the transfer to Buyer of all of the Necessary
Permits and all other permits, licenses, and leases which are associated with
the Business as presently conducted, to the extent the same are by their terms
transferable.
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(d) RETAINED LIABILITIES. From and after the date hereof to the
Closing Date and following the Closing Seller shall pay, perform and fully
discharge all of the Retained Liabilities as they come due.
(e) SATISFACTION OF CONDITIONS. Seller shall use good faith efforts
to accomplish the satisfaction of the conditions precedent to Closing contained
in Section 6.1 hereof on or prior to the Closing Date.
(f) NO SOLICITATION, CONFIDENTIALITY, ETC. Prior to the Closing or
the termination of this Agreement pursuant to Section 7.0 hereof, Seller will
not (i) solicit or negotiate with respect to any inquiries or proposals relating
to (x) the possible direct or indirect acquisition of all or a portion of the
Purchased Assets or Business, or (y) any merger, consolidation, joint venture or
business combination of Seller, or (ii) discuss or disclose either this
Agreement or other confidential information pertaining to the Business with any
Person (except as may be required by law or except as may be required in
connection with the transactions contemplated by this Agreement to Affiliates,
officers, directors, employees and agents of Seller).
(g) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Without the prior
written consent of Buyer, Seller will not take any action from the date hereof
to the Closing Date, that would cause any representation or warranty of Seller
contained in this Agreement to become untrue or cause the breach of any
agreement hereof or covenant contained herein. Seller will promptly bring to
the attention of Buyer any facts which come to its attention that would cause
any of the representations and warranties of Seller to be untrue or materially
misleading in any respect.
(h) TAX MATTERS. Seller shall be responsible for and shall cause to
be prepared and duly filed all Tax Returns relating to Taxes of Seller due for
periods through and until the Closing. Seller shall be responsible for and
shall, jointly and severally, indemnify and hold harmless Buyer with respect to
all Taxes of Seller due for periods through and until the Closing. Buyer shall
be responsible for and shall cause to be prepared and duly filed all Tax Returns
relating to Taxes of Buyer due for periods at or after Closing. Buyer shall be
responsible for and shall indemnify and hold harmless Seller with respect to all
Taxes of Buyer due for periods at or after the Closing.
5.2 COVENANTS OF BOTH PARTIES. The parties hereto shall keep, perform and
fully discharge the following covenants and agreements:
(a) WAIVER OF COMPLIANCE WITH THE BULK SALES ACT. In connection with
the transactions contemplated hereby, the parties shall waive compliance with
the provisions of Article 6 of the Uniform Commercial Code - Bulk Transfers and
the Bulk Sales Act and any other applicable bulk sales act or statute ("Bulk
Sales Acts"). Seller
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shall satisfy all creditors in connection with Seller's operation of the
Business prior to the Closing, except as contemplated by the Assumed
Liabilities, and shall remove any and all Liens against the Purchased Assets
as a result of payments made by Seller to others. Seller shall indemnify and
hold Buyer harmless from and against any and all liabilities under the Bulk
Sales Acts.
(b) EMPLOYEES. Following the execution of this Agreement and prior
to the Closing Date, Buyer shall be allowed to discuss with employees currently
or previously employed or otherwise compensated by Seller in connection with the
Business ("Business Employees") the possibility of employment with Buyer and
shall be allowed to employ such persons effective as of the Closing Date on such
terms and conditions as may be negotiated among Buyer and such persons.
(c) WARN ACT AND COBRA. Seller shall be responsible for any notice
required under or liability associated with the Worker Adjustment and Retraining
Notification Act (29 U.S.C. Sections 2101-2109), COBRA group health plan
continuation coverage (29 U.S.C. Sections 601-608 and 26 U.S.C. Section 4980B)
and any applicable state or local plant closing, mass layoff, relocation, or
severance, or continuation coverage laws associated with the Business Employees
which takes place or arises on or before the Closing Date, and Buyer shall be
responsible for any such notice or liability associated with the persons hired
by Buyer on or after the Closing Date which takes place or arises after the
Closing Date.
6.0 CLOSING CONDITIONS
6.1 CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of Buyer to
consummate this Agreement and the transactions contemplated hereby are subject
to the fulfillment, prior to or at the Closing, of the following conditions
precedent:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the
representations and warranties of Seller contained in this Agreement shall
remain true and correct at the Closing Date as fully as if made on the Closing
Date; Seller shall have performed, on or before the Closing Date, all of its
obligations under this Agreement and the other Purchase Documents which by the
terms thereof are to be performed on or before the Closing Date; and Seller
shall have delivered to Buyer an Officer's Certificate dated the Closing Date of
Seller to such effect.
(b) NO PENDING ACTION. No legislation, order, rule, ruling or
regulation shall have been proposed, enacted or made by or on behalf of any
governmental body, department or agency, and no legislation shall have been
introduced in either House of Congress or in the legislature of any state, and
no investigation by any governmental authority shall have been commenced or
threatened, and no action, suit, investigation or proceeding shall have been
commenced before, and no decision shall have been rendered
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by, any court or other governmental authority or arbitrator, which, in any
such case, in the reasonable judgment of Buyer could adversely affect,
restrain, prevent or rescind the transactions contemplated by this Agreement
(including, without limitation, the purchase and sale of the Purchased
Assets) or result in a Material Adverse Effect.
(c) PURCHASE PERMITTED BY APPLICABLE LAWS; LEGAL INVESTMENT. Buyer's
purchase of and payment for the Purchased Assets (a) shall not be prohibited by
any applicable law or governmental order, rule, ruling, regulation, release or
interpretation, (b) shall not constitute a fraudulent or voidable conveyance
under any applicable law, and (c) shall be permitted by all applicable laws,
statutes, ordinances, regulations and rules of the jurisdictions to which Buyer
is subject.
(d) PROCEEDINGS SATISFACTORY. All proceedings taken in connection
with the purchase and sale of the Purchased Assets, all of the other Purchase
Documents and all documents and papers relating thereto, shall be in form and
substance reasonably satisfactory to Buyer.
(e) CONSENTS - PERMITS. Seller shall have received (and there shall
be in full force and effect) all material consents, approvals, licenses,
permits, orders and other authorizations of, and shall have made (and there
shall be in full force and effect) all such filings, registrations,
qualifications and declarations with, any Person pursuant to any applicable law,
statute, ordinance, regulation or rule or pursuant to any agreement, order or
decree to which Seller with respect to the Business is a party or to which it is
subject, in connection with the transactions contemplated by this Agreement and
the sale of the Purchased Assets.
(f) CORPORATE DOCUMENTS. Seller shall have delivered to Buyer:
(i) an Officer's Certificate of the Secretary of Seller
certifying (x) the incumbency and genuineness of signatures of all officers of
Seller executing this Agreement, any document delivered by Seller at the Closing
and any other document, instrument or agreement executed in connection herewith,
(y) the truth and correctness of resolutions of Seller authorizing the entry by
Seller into this Agreement and the transactions contemplated hereby, and (z) the
truth, correctness and completeness of the By-Laws of Seller;
(ii) the Charter of Seller certified as of a recent date by the
Secretary of State of the State of Delaware; and
(iii) certificates of corporate and tax good standing and
legal existence of Seller as of a recent date from the Secretary of State of the
State of Delaware.
(g) OPINION OF COUNSEL. (intentionally omitted)
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(h) PAYMENT OF INDEBTEDNESS. All indebtedness for borrowed money
with respect to the Business shall have been paid and discharged in full, and
the holders of such indebtedness shall have terminated any security interests
covering the Purchased Assets.
(i) TRANSFER OF NECESSARY PERMITS. All of the Necessary Permits
shall have been transferred to or obtained by Buyer on or before the Closing
Date.
(j) EMPLOYEES.
shall have agreed to become employees of Buyer as of the Closing Date.
6.2 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Seller to
consummate this Agreement and the transactions contemplated hereby are subject
to the fulfillment, prior to or at the Closing, of the following conditions
precedent:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Buyer in this Agreement shall remain true and correct at the
Closing Date, and Buyer shall, on or before the Closing Date, have performed all
of its obligations under this Agreement and the other Purchase Documents which
by the terms thereof are to be performed by it on or before the Closing Date;
and Buyer shall have delivered an Officer's Certificate to Seller dated the
Closing Date to such effect.
(b) NO PENDING ACTION. No legislation, order, rule, ruling or
regulation shall have been proposed, enacted or made by or on behalf of any
governmental body, department or agency, and no legislation shall have been
introduced and no investigation by any governmental authority shall have been
commenced or threatened, and no action, suit, investigation or proceeding shall
have been commenced before, and no decision shall have been rendered by, any
court or other governmental authority or arbitrator, which, in any such case,
was not known by Seller on the date hereof or which could adversely affect,
restrain, prevent or rescind the transactions contemplated by this Agreement
(including, without limitation, the purchase and sale of the Purchased Assets)
or result in a Material Adverse Effect.
(c) PROCEEDINGS SATISFACTORY. All proceedings taken in connection
with the assumption of Assumed Liabilities, all of the other Purchase Documents
and all documents and papers relating thereto, shall be in form and substance
reasonably satisfactory to Seller.
(d) CONSENTS - PERMITS. Buyer shall have received (and there shall
be in full force and effect) all material consents, approvals, licenses,
permits, orders and other authorizations of, and shall have made (and there
shall be in full force and effect) all such filings, registrations,
qualifications and declarations with, any Person pursuant to
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any applicable law, statute, ordinance, regulation or rule or pursuant to any
agreement, order or decree to which Buyer with respect to the Business is a
party or to which it is subject, in connection with the transactions
contemplated by this Agreement, the purchase of the Purchased Assets and the
assumption of Assumed Liabilities.
(e) OPINION OF COUNSEL. (Intentionally omitted).
6.3 THIRD PARTY AGREEMENTS. Unless specifically agreed in writing, no
third-party agreements, collaborations, supplier purchase orders or the like
concerning the Business are assigned by Seller to Buyer, and Buyer does not
accept any assignment of such third party agreements. Prior to the Closing
Date, Seller shall inform Buyer of the existence and relevant terms of such
third party agreements concerning the Business. To the extent such
agreements are assignable, Buyer shall have the option to have Seller assign
them to Buyer. Seller will use its best efforts to cancel any non-assignable
agreements prior to Closing.
7.0 TERMINATION
7.1 TERMINATION OF AGREEMENT. This Agreement and the transactions
contemplated hereby may (at the option of the party having the right to do so)
be terminated at any time on or prior to the Closing Date as follows:
(a) MUTUAL CONSENT. By mutual written consent of Buyer and Seller;
(b) COURT ORDER. By Buyer or Seller if any court of competent
jurisdiction shall have issued an order pursuant to the request of a third party
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement;
(c) FAILURE TO MUTUALLY AGREE TO SCHEDULES. By Buyer or Seller if
the Schedules or Exhibits hereto have not been mutually agreed to on or before
July 15, 1997.
(d) FAILURE TO CLOSE. By Buyer or Seller if the transactions
contemplated hereby shall not have been consummated on or before July 31, 1997;
provided, however, that such right to terminate this Agreement shall not be
available to any party whose failure to fulfill any obligation of this Agreement
has been the cause of, or resulted in, the failure of the transactions
contemplated hereby to be consummated on or before such date;
(e) TERMINATION BY SELLER. By Seller upon notice to Buyer, if as of
the Closing (i) a condition to the performance of Seller set forth in Section
6.2 hereof shall not be fulfilled at the time specified for the fulfillment
thereof, (ii) a default under or a breach of this Agreement shall be made by
Buyer, or (iii) any representation or warranty set
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forth in this Agreement or in any instrument delivered by Buyer pursuant
hereto shall be false or misleading; or
(f) TERMINATION BY BUYER. By Buyer by notice to Seller at any time
prior to the Closing if (i) a condition to the performance of Buyer set forth in
Section 6.1 hereof shall not be fulfilled at the time specified for the
fulfillment thereof, (ii) a default under or a breach of this Agreement shall be
made by Seller, (iii) any representation set forth in this Agreement or in any
instrument delivered by Seller pursuant hereto shall be false or misleading, or
(iv) the results of Buyer's due diligence of the Business shall not be
satisfactory to Buyer.
7.2 EFFECT OF TERMINATION AND RIGHT TO PROCEED. If this Agreement is
terminated pursuant to this Section 7.0, all further obligations of Buyer and
Seller under this Agreement shall terminate without further liability of Buyer
or any Affiliate thereof to Seller or of Seller to Buyer or any Affiliate
thereof. If any of the conditions to obligations of Buyer specified herein have
not been satisfied, Buyer, in addition to any other rights which it may have,
shall have the right to waive its rights to have such conditions satisfied and
elect to proceed with the transactions contemplated hereby and, if any of the
conditions to the obligations of Seller specified herein have not been
satisfied, Seller in addition to any other rights which may be available to it,
shall have the right to waive its rights to have such conditions satisfied and
elect to proceed with the transactions contemplated hereby.
8.0 INDEMNIFICATION
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each and every such
representation and warranty set forth in this Agreement shall survive until the
first anniversary of the Closing Date.
8.2 INDEMNIFICATION BY SELLER. Seller shall indemnify, defend and hold
Buyer, its officers, directors, employees, owners, agents and Affiliates,
harmless from and in respect of any and all losses, damages, costs and expenses
of any kind and nature whatsoever (including, without limitation, interest and
penalties, reasonable expenses of investigation and court costs, reasonable
attorneys' fees and disbursements and the reasonable fees and disbursements of
other professionals) which may be sustained or suffered by any of them
(collectively "Losses"), arising out of, resulting from or pertaining to any
Retained Liability, any breach or inaccuracy of any representation or warranty
or the breach of or failure to perform any warranty, covenant, undertaking or
other agreement of Seller contained in this Agreement or any other Purchase
Document.
8.3 INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold
Seller and its officers, directors, employees, consultants, owners, agents and
Affiliates, harmless from and in respect of any and all Losses which may be
sustained or suffered by any
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of them arising out of or resulting from or pertaining to any breach or
inaccuracy of any representation or warranty or the breach of or failure to
perform any warranty, covenant, undertaking or other agreement of Buyer
contained in this Agreement or any other Purchase Document or all liabilities
(other than Retained Liabilities) for all environmental, ecological, health,
safety, products liability or other claims pertaining to the Business or the
Purchased Assets which relate to time periods or events occurring after the
Closing Date.
8.4 NOTICE AND OPPORTUNITY TO DEFEND. If there occurs an event which a
party asserts is an indemnifiable event pursuant to Section 8.2 or 8.3, the
party seeking indemnification (the "Claiming Party") shall promptly notify the
other party obligated to provide indemnification (the "Indemnifying Party"). If
such event involves (a) any Claim, or (b) the commencement of any action, suit
or proceeding by a third person, the Claiming Party will give the Indemnifying
Party prompt written notice of such Claim or the commencement of such action,
suit or proceeding, PROVIDED, HOWEVER, that the failure to provide prompt notice
as provided herein will relieve the Indemnifying Party of its obligations
hereunder only to the extent that such failure prejudices the Indemnifying Party
hereunder. In case any such action, suit or proceeding shall be brought against
a Claiming Party and it shall notify the Indemnifying Party of the commencement
thereof, the Indemnifying Party shall be entitled to participate therein and, to
the extent that it desires to do so, to assume the defense thereof, with counsel
reasonably satisfactory to the Claiming Party and, after notice from the
Indemnifying Party to the Claiming Party of such election so to assume the
defense thereof, the Indemnifying Party shall not be liable to the Claiming
Party hereunder for any attorneys' fees or any other expenses, in each case
subsequently incurred by the Claiming Party, in connection with the defense of
such action, suit or proceeding. The Claiming Party shall cooperate fully with
the Indemnifying Party and its counsel in the defense against any such action,
suit or proceeding. In any event, the Claiming Party shall have the right to
participate at its own expense in the defense of such action, suit or
proceeding. In no event shall an Indemnifying Party be liable for any
settlement or compromise effected without its prior consent.
8.5 PAYMENT. Payment of amounts owing by the Indemnifying Party pursuant
to Sections 8.2 through 8.4 with respect to a third party claim shall be made
within thirty days after the later of (i) settlement of the third party claim,
or (ii) the expiration of the period for appeal of a final adjudication of such
third party claim.
8.6 TAX BENEFITS; INSURANCE PROCEEDS. In determining the amount of any
damages for which any party is entitled to indemnification under this Agreement,
the gross amount thereof will be reduced by any correlative tax benefit or
insurance proceeds realized or to be realized by such party; provided, however,
that any increase in insurance premiums or taxes or the like caused by the
damages or payment thereof shall be taken into consideration and utilized to
offset the reduction in damages.
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8.7 DISPUTE RESOLUTION. In the event that a dispute arises between the
parties as to any claim for Indemnification under Sections 8.1 through 8.4
hereof, the Presidents of each party hereto shall, for a period of ten (10)
days, discuss the matter in question to see if it is capable of a resolution
without invoking the provisions of 8.1 through 8.5 hereof. In the event that
the matter has not been so resolved upon the conclusion of such ten (10) day
period, during the next thirty (30) days the parties shall engage in good faith
non-binding mediation with a mutually agreeable third party mediator in an
effort to resolve such matter. If the Claiming Party is the Seller, the
mediation shall occur in Boston, Massachusetts. If the Claiming Party is the
Buyer, the mediation shall occur in San Jose, California.
9.0 POST CLOSING MATTERS
9.1 LICENSE TO BUYER. At the Closing, Seller shall execute and deliver to
Buyer a non-exclusive, royalty free, perpetual, worldwide license to make, use
and sell products for the fields of NMR spectroscopy and NMR microscopy under
all of Seller's existing patents, patent applications and inventions relating to
the Business which are not included in the Purchased Assets in the form set
forth in EXHIBIT 9.1.
9.2 LICENSE TO SELLER. At the Closing, Buyer shall execute and deliver to
Seller a non-exclusive, royalty free, perpetual, worldwide license to make, use
and sell products for all fields except NMR spectroscopy and NMR microscopy
under all patents, patent applications and inventions, which are included in the
Purchased Assets in the form set forth in EXHIBIT 9.2.
9.3 CIRCUITS. The fabrication line to manufacture HTS rf circuits on
wafers is not included in the Purchased Assets. Seller shall supply Buyer with
processed, etched high quality HTS rf circuits ("Circuits") in accordance with
the following:
[
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]
9.4 NON-COMPETITION. Seller shall not, directly or indirectly and in any
capacity of any nature whatsoever, manufacture, sell, re-enter or otherwise
participate in the business of cryogenic or HTS probes, preamplifiers or
cryogenic systems for NMR spectroscopy or NMR microscopy for a period of ten
(10) years after the Closing Date. Without limiting the generality of the
foregoing, Seller shall not, directly or indirectly and in any capacity of any
nature whatsoever, act as a foundry for HTS or other electronics for any Person
other than Buyer for NMR spectroscopy or microscopy for a period of ten (10)
years after the Closing Date.
9.5 NON-SOLICITATION. For a period of five (5) years after the Closing
Date, Seller shall not, directly or indirectly and in any capacity of any nature
whatsoever, retain or hire as an employee or consultant or in any other
capacity, including, without limitation, through a supplier to Seller, any
Business Employee hired by Buyer within thirty (30) days before or after the
Closing, provided that (a) such restriction shall not apply to any such Business
Employee who has ceased employment with Buyer for any reason at least twelve
(12) months prior to an offer of employment by Seller, and (b) Buyer may waive
such restriction, in its sole discretion, on a case-by-case basis.
9.6 PROJECTS. The parties intend to work together on NMR spectroscopy and
NMR microscopy projects in government funding opportunities limited to small
businesses, such as the Small Business Innovative Research programs of agencies
such as the National Science Foundation, the National Institutes of Health and
the Department of Defense. Seller, with Buyer's consent, will apply as the
prime contractor and Buyer will participate as a subcontractor to the maximum
amount permitted by applicable regulations (e.g., 33% in Phase 1 and 49% in
Phase 2). As part of such projects, Seller will be generally responsible for
HTS technology and cryogenic technology, while Buyer will be responsible for NMR
circuits, electronics, probes, systems integration and NMR applications testing.
9.7 USE OF CERTAIN TOOLS. For a period of up to three (3) years after the
Closing Date, Seller will provide Buyer with reasonable access to those of
Seller's tools, as listed in SCHEDULE 9.7, which are used by Seller in its core
businesses, but which are also required for Buyer's designs and manufacture of
NMR Probes, provided such tools continue to be available to Seller and Buyer
gives reasonable notice for scheduling such access.
9.8 CONFIDENTIALITY. To the extent permitted by applicable law, the
parties agree to keep the purchase price, royalties, and other material terms
and conditions of this
23
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Agreement confidential for ten (10) years. Seller will request confidential
treatment of purchase price and royalty percentages in any filing required
with a regulatory agency.
10.0 MISCELLANEOUS
10.1 FEES AND EXPENSES. Each of the parties hereto will pay and discharge
its own expenses and fees in connection of with the negotiation of and entry
into this Agreement and the consummation of the transactions contemplated
hereby.
10.2 NOTICES. All notices, requests, demands, consents and communications
necessary or required under this Agreement or any other Purchase Document shall
be made in the manner specified, or, if not specified, shall be delivered by
hand or sent by registered or certified mail, return receipt requested, or by
telecopy (receipt confirmed) to:
if to Buyer:
Bruker Instruments, Inc.
15 Fortune Drive
Billerica, MA 01821
Attention: Frank H. Laukien Ph.D.
President
Facsimile Transmission Number: 508-667-0985
with a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Richard M. Stein, Esq.
Facsimile Transmission Number: (617) 951-1295
if to Seller:
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, CA 94086
Attention: Charles E. Shalvoy
President
Facsimile Transmission Number: 408-523-9979
with a copy to:
24
<PAGE>
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, CA 94086
Attention: Judith A. DeFranco, Esq.
Manager, Legal Affairs
Facsimile Transmission Number: 408-523-9979
All such notices, requests, demands, consents and other communications
shall be deemed to have been duly given or sent two (2) days following the date
on which mailed, or on the date on which delivered by hand or by facsimile
transmission (receipt confirmed), as the case may be, and addressed as
aforesaid.
10.3 SUCCESSORS AND ASSIGNS. All covenants and agreements set forth in
this Agreement and made by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the successors and assigns of such party, whether or
not so expressed, except that Seller may not assign or transfer any of its
rights or obligations under this Agreement without the consent in writing of
Buyer.
10.4 COUNTERPARTS, ETC. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement. If any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason in any
jurisdiction, the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions hereof shall not be in any
way impaired or affected, it being intended that each of parties' rights and
privileges shall be enforceable to the fullest extent permitted by law, and any
such invalidity, illegality and unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
10.5 TAX MATTERS.
(a) Seller will timely file all federal, state, local and foreign tax
reports and returns for any period which ends on or prior to the Closing Date
and which are required to be filed to reflect the operations of the Business.
All such reports and returns will be prepared and filed using tax accounting
methods and principles which are substantially consistent with those used in the
returns and reports of taxes for the Business for preceding tax periods unless
Buyer agrees otherwise. Any item of income, deduction or credit to be included
in any such tax return or report shall be based on the
25
<PAGE>
permanent records (including work papers) of Seller. Buyer shall prepare and
file on behalf of the Business all federal, state, local and foreign tax
reports and returns for any period which ends after the Closing Date and
which are required to be filed to reflect the operations of the Business
attributable to a period prior to the Closing Date. Any tax returns or
reports filed by Buyer and Seller shall be consistent with the provisions of
this Agreement.
(b) All refunds of taxes attributable to any or all years or periods
(or portions thereof) ending prior to the Closing Date or attributable to any
taxable year or period which ends at or after the Closing Date, to the extent
that the refund is attributable to the operations of the Business up to the
Closing Date (as determined on the basis of the permanent records of Seller),
shall belong to and be retained by Seller.
(c) The parties hereto shall provide such necessary information as
any other party hereto may reasonably request in connection with the preparation
of such parties' Tax Returns, or to respond to or contest any audit, prosecute
any claim for refund or credit or otherwise satisfy any requirements relating to
Taxes of Seller.
(d) Buyer shall pay all transfer Taxes, sales Taxes, documentary
stamp Taxes, recording charges and other similar Taxes resulting from, arising
under or in connection with the transfer of the Purchased Assets or any other
related transaction under the Agreement.
(e) The obligations of Buyer and Seller set forth in the Agreement
relating to Taxes shall, except as otherwise agreed in writing, be unconditional
and absolute and shall remain in effect without limitation as to time or amount
of recovery by Seller or Buyer until thirty (30) days after the expiration of
the applicable statute of limitations governing the Taxes to which such
obligations relate (after giving effect to any agreement extending or tolling
such statute of limitations).
10.6 GOVERNING LAW. This Agreement, including the validity hereof and the
rights and obligations of the parties hereunder, shall be construed in
accordance with and governed by the laws of the Commonwealth of Massachusetts
applicable to contracts made and to be performed entirely in such state (without
giving effect to the conflicts of laws provisions thereof).
10.7 ENTIRE AGREEMENT. This Agreement, including the Schedules referred to
herein, is complete, and all promises, representations, understandings,
warranties and agreements with reference to the subject matter hereof, and all
inducements to the making of this Agreement relied upon by all the parties
hereto, have been expressed herein or in said Schedules or Exhibits. This
Agreement may not be amended except by an instrument in writing signed on behalf
of Seller and Buyer.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first set forth above.
ATTEST: BRUKER INSTRUMENTS, INC.
/s/ David E. Plunkett By: /s/ Frank H. Laukien
- --------------------------- ------------------------
Title: President
---------------------
ATTEST: CONDUCTUS, INC.
/s/ Guochun Liang By: /s/ Judith A. DeFranco
- --------------------------- ------------------------
7/9/97 Title: Manager, Legal Affairs
--------------------------
27
<PAGE>
SCHEDULE 2.1
Purchased Assets
Seller shall deliver to Buyer the following:
1. All inventory of the Business, including Seller's inventory of the Business
located either in the hands of distributors or at customer sites, as listed in
Exhibit 2.1.1.
2. The tools and test equipment of the Business as listed in Exhibit 2.1.2,
including computers used by hired employees, software for computer-aided design
or engineering, Business documents, spreadsheets, databases and the like, but
excluding Government-owned tools and test equipment used in the Business and
test equipment that is shared by other operations of Seller.
3. All documents, drawings and similar materials of the Business in hard copy
and electronic form (where available)
4. Seller's interest in all intellectual property of the Business, including,
without limitation, the following:
a. U.S. Patent No. 5,508,613, for "Apparatus for Cooling NMR Coils"
(co-owned with Robert Black, licensed to Varian);
b. U.S. Patent No. 5,585,723, for "Inductively Coupled Superconducting
Coil Assembly" (co-owned with Varian);
c. U.S. Patent No. 5,572,127, for "Inhomogeneities In Static Magnetic
Fields Near Superconducting Coils" (licensed to Varian);
d. U.S. Patent No. 5,565,778, for "Nuclear Magnetic Resonance Probe Coil"
(licensed to Varian);
e. U.S. Patent No. 5,594,342, for "Nuclear Magnetic Resonance Probe Coil
with Enhanced Current-Carrying Capability;"
f. U.S. Patent No. 5,619,140, "Method of Making Nuclear Magnetic
Resonance Probe Coil;"
[
28
<PAGE>
]
n. Any foreign patents or U.S. or foreign patent applications,
continuations-in-part or other similar rights corresponding to
the foregoing;
o. All trademarks used in the Business;
p. All copyrights used in the Business;
q. All know-how used in the Business; and
r. All designs developed by the Business.
5. Other assets used in the Business.
29
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Exhibit 2.2.1 Inventory
[]
30
<PAGE>
Exhibit 2.1.2 Fixed Assets
[]
31
<PAGE>
SCHEDULE 2.2
Retained Assets
Seller shall retain ownership of the following assets:
1. Accumulated losses of the Business;
2. All issued and pending U.S. and foreign Patents of Seller not listed
in Schedule 2.1;
3. Equipment not listed in SCHEDULE 2.1 which is used in operations of
Seller other than the Business.
32
<PAGE>
SCHEDULE 2.3
Assumed Liabilities
1. Buyer shall be responsible for the following:
a. Ongoing factory service for out-of-warranty customers of HTS NMR
Probes sold by the Business, as listed in Exhibit 2.3.1 hereto.
b. Warranty service, including existing upgrade options, for
accepted NMR Probes sold by the Business which are still covered by their
original warranty, as listed in Exhibit 2.3.1 hereto.
c. Installation and acceptance for HTS NMR Probes which have been
delivered by the Business but not yet installed or accepted as of the Closing,
provided that Seller will exercise its good faith efforts to minimize the number
of HTS NMR Probes which are delivered to customers, but have not yet been
accepted and entered warranty at Closing, as listed in Exhibit 2.3.1. It is
noted, however, that there are no HTS NMR Probes which have been delivered, but
are not installed or accepted on or before the Closing Date.
Notwithstanding the foregoing, for HTS NMR probes manufactured by the
Business which were sold by Varian or Nalorac, Buyer shall have no
responsibility for in-warranty or post-warranty field service or installation
except that Buyer will offer factory-repair services to such distributors at
commercially reasonable rates and conditions.
2. Buyer shall be responsible for the manufacturing, testing and delivery
of HTS NMR Probes to distributors of the Business which, as of the Closing Date,
have been ordered by such distributors but which have not yet been delivered by
the Business. An amount equal to any downpayments made with respect to such
probes prior to the Closing will be subtracted from the Purchase Price, and
Buyer shall have the right to receive any other amounts due for any such probes,
whether or not a downpayment has been made. All probes for which probes have
been ordered but not yet delivered as of the Closing Date are listed in Exhibit
2.3.2. It is noted, however, that at the time of execution of this Agreement
there are no HTS NMR Probes on order, but not yet delivered.
3. If, despite the good faith efforts of Buyer, the specifications on NMR
probes of the Business cannot be met under Paragraphs 1 or 2 of this Schedule
2.3, or if a customer rejects and returns an HTS NMR Probe, sold by Seller prior
to Closing, Seller will be responsible for accepting the return of such probe
for a refund or for negotiating some other form of a settlement with such
customer.
33
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Exhibit 2.3.1 Warranty Status
[
]
34
<PAGE>
Schedule 2.6 Allocation of Purchase Price
[
]
35
<PAGE>
Schedule 3.5 Changes
[
]
36
<PAGE>
SCHEDULE 3.6
TITLE, SUFFICIENCY AND CONDITION OF ASSETS
No exceptions.
37
<PAGE>
SCHEDULE 3.10
CONTRACTS
Seller is subject to the following contracts with respect to the Business:
(a)
1. Employees of the Business are currently eligible for health, dental, life
and long and short term disabliity insurance, 401K plan, Section 125 plan,
incentive stock options and an employee stock purchase plan.
(b)
1. NIH Grant 5 R44 RR09244-03 for "Superconducting Probe for Clinical
Microscopy"
a) Subgrant under this award to Duke University;
b) Conductus has agreed to deliver a probe to Duke University as part of
this program. Title of the probe will transfer to Bruker upon completion
of the grant performance;
c) Conductus has contracted to loan a probe to NCI under this program for
a period of six months. Title to the probe will transfer to Bruker upon
completion of the grant performance.
2. NIH Grant 5 R44 RR09757-03 for "Superconducting Probe for NMR
Spectroscopy."
(c) None.
(d) None.
(e) None.
(f) None.
(g)
1. Sales and Licensing Agreement with Varial dated January 1, 1996; and
2. OEM Distribution Agreement with Nalorac dated November 4, 1996.
(h)
1. Joint Development Agreement with CTI Cryogenics dated September 19, 1995
(expired); and
2. Varian dated August 1, 1994 (superceded by Sales Agreement.
(i) None.
(j)
1. License Agreement with Duke University under Subgrant listed above;
2. License to government of several patents and applications under various
contracts; and
38
<PAGE>
3. License to Varian (as indicated in Schedule 2.13).
(k) None as relates directly to the Business. Seller has numerous contracts
with consultants and former officeers, including nondisclosure agreements and
proprietary rights agreements.
(l) None
(m) None
(n) None
39
<PAGE>
SCHEDULE 3.11
CUSTOMERS AND SUPPLIERS
1. CTI-Cryogenics is the sole source of supply for cryocoolers.
40
<PAGE>
SCHEDULE 3.16
EMPLOYEES
See Schedule 3.5(f).
41
<PAGE>
SCHEDULE 3.17
LITIGATION
None.
42
<PAGE>
EXHIBIT 9.1
LICENSE AGREEMENT
This License Agreement is effective August 4, 1997, by and between Conductus,
Inc., a Delaware corporation ("Licensor") and Bruker Instruments, Inc., a
Massachusetts corporation ("Licensee").
WHEREAS, Licensor and Licensee have entered into an Asset Purchase Agreement
whereby Licensor transferred the assets of its HTS NMR probe business to
Licensee;
WHEREAS, Licensor is the owner by assignment or right to assignment of certain
patents, patent applications and inventions which are or may be useful in the
Business; and
WHEREAS, Licensee desires to acquire and Licensor desires to grant a license,
under the terms and conditions contained herein, to the patents, patent
applications and inventions listed below.
NOW, THEREFORE, in consideration of the agreements and covenants contained
hereunder, the parties agree as follows:
DEFINITIONS.
Unless otherwise provided herein, the definitions contained in the Asset
Purchase Agreement between Bruker Instruments, Inc. and Conductus, Incorporated,
dated July 9, 1997, which is incorporated herein by reference, apply hereto.
"License Agreement means this agreement and any schedules and exhibits thereto;
"Licensee" means Bruker Instruments, Inc. and its Affiliates;
"Licensor" means Conductus, Inc. and its successors and assigns;
"Licensed Field of Use" means systems, subunits (E.G., NMR probes, cryogenic
systems, preamplifiers, etc.) and accessories (a) for NMR spectroscopy, and (b)
for all NMR microscopy on any sample or specimen other than in-vivo NMR
microscopy on human patients, but does not include MRI and/or in-vivo NMR
microscopy on human patients in magnets of any geometry;
"Licensed Product" means a product which embodies or uses any or all of the
elements or steps or their equivalents recited in one or more claims, of any
patent which is in existence or may issue from the Licensed Technology, or which
is manufactured by the use of any or all of the steps or their equivalents
recited in one or more claims of any patent which may issue from the Licensed
Technology;
"Licensed Technology" means those patents, patent applications and inventions
listed in Exhibit 1 hereto.
GRANT OF LICENSE.
Subject to the terms of this License Agreement, Licensor grants Licensee a
worldwide, royalty-free, unrevocable, perpetual, fully paid, nonexclusive
license without right of sublicense to make, have made, import, use, distribute,
sell and otherwise transfer Licensed Products in the Licensed Field of Use.
COVENANT NOT TO SUE.
Licensor hereby grants Licensee immunity from any claims by Licensor, in law or
equity of infringement of any Letters Patent which may be granted to Licensor
arising from inventions first made by Licensor prior to the effective date of
this License Agreement. This immunity shall not apply to (a) any activity
outside of the Licensed Field of Use or (b) any infringement related to any
filter component or Josephson junction device whether in the Licensed Filed of
Use or not.
WARRANTY.
4.1 Licensor represents and warrants that (a) it has the full right and power
to grant the license set forth in Section 2, and that there are no outstanding
agreements, assignments, or encumbrances inconsistent with the provisions of
said license or with any other provisions of this License Agreement, and (b)
that to the best of its knowledge, Exhibit 1 is a full and complete list of all
patents, patent applications and inventions of Licensor applicable to the
Licensed Field of Use. Licensor makes no other representations or warranties,
express or implied, nor does Licensor assume any liability in respect of any
infringement of patents or other rights of third parties due to Licensee's
operation under the license herein granted.
4.2 Licensor does not warrant, nor does it represent that Licensee will not
require a license under other patents to make, use, import, lease, sell or
otherwise transfer products.
43
<PAGE>
PATENT MARKING.
Licensee agrees to affix to each Licensed Product for which a United States
patent has issued the following notice:
"Lic. U.S. Pat. No. ________."
TRADE SECRETS, KNOW-HOW, COPYRIGHTS AND TRADEMARKS.
Except as expressly provided, no license or other right is granted herein to
either party directly or by implication, estoppel or otherwise, with respect to
any trade secret or know-how, and no such license or other right shall arise
from the consummation of this License Agreement or from any acts, statements or
dealings leading to such consummation. Except as specifically provided herein,
neither party is required hereunder to furnish or disclose to the other any
technical or other information.
RIGHT TO ENFORCE PATENT RIGHTS AGAINST THIRD PARTIES.
Licensor shall have the sole right to enforce the rights granted hereunder,
including any patent rights against infringement by third parties.
TRADEMARKS.
Neither the granting of the license herein nor the acceptance of payments
hereunder shall constitute an approval of or acquiescence in Licensor's or
Licensee's practices with respect to trademarks, trade names, corporation names,
advertising, or similar practices with respect to any product.
MISCELLANEOUS.
9.1 This License Agreement represents the entire agreement of the parties
regarding the subject matter hereof and supersedes all prior agreements,
understandings and negotiations regarding the same. This License Agreement may
not be changed, modified, amended or supplemented except by a written instrument
signed by both parties. Furthermore, it is the intention of the parties that
this License Agreement be controlling over any order, confirmation, invoice or
similar document, even if accepted in writing by both parties, and that waivers
and amendments shall be effective only if made by non-preprinted agreements
clearly understood by both parties to be an amendment or waiver.
9.2 Neither party shall be required hereunder to file any patent application,
or to secure any patent or patent rights, or to maintain any patent in force.
9.3 This License Agreement or any part hereof may not be assigned by either
Licensee without the prior consent of Licensor; provided, however, that Licensee
may assign this License Agreement to any entity which acquires substantially all
of its assets or business, provided that the assignor remains obligated
hereunder. This License Agreement, and the Licensed Technology may be freely
assigned by Licensor, provided that the assignor remains obligated hereunder.
9.4 If any provision of this License Agreement shall be held illegal or
unenforceable, that provision shall be limited or eliminated to the minimum
extent necessary so that this License Agreement shall otherwise remain in full
force and effect and enforceable.
9.5 All notices, consents or approvals required by this License Agreement shall
be in writing sent by certified or registered air mail, postage prepaid or by
facsimile or cable (confirmed by such certified or registered mail) to the
parties at the addresses first specified above or such other addresses as may be
designated in writing by the respective parties.
9.6 Both parties are independent contractors under this License Agreement.
Nothing contained in this License Agreement is intended nor is to be construed
so as to constitute the parties as partners, agents or joint ventures with
respect to this License Agreement. Neither party hereto shall have any express
or implied right or authority to assume or create any obligations on behalf of
or in the name of the other party or to bind the other party to any contract,
agreement or undertaking with any third party
9.7 The waiver by either party of a breach of any provisions contained herein
shall be in writing and shall in no way be construed as a waiver of any
succeeding breach of such provision or the waiver of the provision itself.
9.8 NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY
WILL BE OBLIGATED OR LIABLE WITH RESPECT TO ANY SUBJECT
44
<PAGE>
MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR
OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES, OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR
SERVICES.
9.9 Licensee shall comply with all export laws and restrictions and regulations
of the Department of Commerce or other United States or foreign agency or
authority, and not to export, or allow the export or reexport of any Licensed
Technology or any direct product thereof in violation of any such restrictions,
laws or regulations, or to any countries for which the United States Government
or any agency thereof at the time of export requires an export license or other
governmental approval. Licensee will notify its customers of the obligation to
comply with such export laws and regulations.
9.10 This License Agreement shall be effective upon closing of the Asset
Purchase Agreement. In the event that the Asset Purchase Agreement is
terminated, this License Agreement shall be without effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day
and year first above written in multiple counterparts, each of which shall be
considered an original.
Conductus: Bruker:
By: /s/ Charles E. Shalvoy By: /s/ Frank H. Laukien
---------------------------- ----------------------------
Name: Charles E. Shalvoy Name: Frank H. Laukien
Title: President and CEO Title: President
Date: 8/1/97 Date: 8/1/97
---------------------------- ----------------------------
45
<PAGE>
EXHIBIT 1
LICENSED TECHNOLOGY
1. U.S. Patent No. 5,130,294 for "High Temperature Superconductor-Calcium
Titanate Sapphire Structures;"
2. U.S. Patent No. 5,132,282 for "High Temperature Superconductor-Strontium
Titanate Sapphire Structures;"
3. U.S. Patent No. 5,207,884 for "Superconductor Deposition System;"
4. U.S. Patent No. 5,432,151 for "Process for Ion-assisted Laser Deposition of
Biaxially Textured Intermediate Layer for Forming Superconducting Thin
Films on Substrates;"
5. U.S. Patent No. 5,351,007 for "Superconducting Magnetic Resonance Probe
Coil;"
6. U.S. Patent No. 5,276,398 for "Superconducting Magnetic Resonance Probe
Coil;"
7. [
8.
]
9. All other non-listed corresponding or counterpart patents to the patents
and patent applications listed in items 1-8 above;
10. All patents which are reissues, reexaminations, divisions, continuations or
extensions of any of the forgoing patents, patent applications and
inventions.
46
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SCHEDULE 9.7
EXHIBIT TOOLS
[
]
47
<PAGE>
ASSET PURCHASE AGREEMENT
This Agreement dated as of August 15, 1997, is by and between Neocera,
Inc., a Maryland corporation ("Buyer") and Conductus, Inc., a Delaware
corporation ("Seller").
This Agreement sets forth the terms and conditions upon which Buyer will
purchase from Seller, and Seller will sell to Buyer, certain assets of Seller's
temperature controller business, subject to those liabilities of Seller which
are specifically hereinafter described, for the consideration provided herein.
In consideration of the foregoing, the mutual representations, warranties
and covenants set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties to
this Agreement hereby agree as follows:
1. DEFINITIONS
1.1 DEFINITIONS. For the purposes of this Agreement, all capitalized
words or expressions used in this Agreement shall have the meanings specified in
this Article 1 (such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
1.1.1 "AFFILIATE" means when used with respect to any Person if
such Person is a corporation, any officer or director thereof and any Person
which is, directly or indirectly, the beneficial owner (by itself or as part of
any group) of more than five percent (5%) of any class of any equity security
thereof, and, if such beneficial owner is a partnership, any general or limited
partner thereof, or if such beneficial owner is a corporation, any Person
controlling, controlled by or under common control with such beneficial owner,
or any officer or director of such beneficial owner or of any corporation
occupying any such control relationship.
1.1.2 "AGREEMENT" means this Asset Purchase Agreement (together
with all Exhibits and Schedules hereto) as in effect from time to time.
1.1.3 "BUSINESS" means Seller's LTC-TM- Low Temperature
Controller business operated by Seller prior to the closing and operated by
Buyer after the closing through the use of the Purchased Assets.
1.1.4 "CHARTER" means the Certificate of Incorporation, Articles
of Incorporation or Organization or other organizational document of a
corporation, as amended and restated through the date hereof.
1
<PAGE>
1.1.5 "CLAIM" means an action, suit, proceeding, hearing,
investigation, litigation, charge, complaint, claim or demand.
1.1.6 "EXCLUDED PRODUCTS" means (a) any temperature controller
system offered for sale by Seller as a component of a product of Seller other
than a free-standing temperature controller, and (b) the embedded temperature
controllers utilized in Seller's Phoenix contract for APD cryogenics.
1.1.7 "KNOWLEDGE" shall mean the actual knowledge, upon reasonable
investigation, of the Person making a representation or warranty herein.
1.1.8 "LIEN" means, with respect to any asset, any mortgage, deed
of trust, pledge, hypothecation, assignment, security interest, lien, charge,
restriction, adverse claim by a third party, title defect or encumbrance of any
kind.
1.1.9 "LTC TEMPERATURE CONTROLLER" means model LTC 10, LTC 10G,
LTC 11, LTC 20 and LTC 21 temperature controllers and does not include the
Excluded Products.
1.1.10 "MATERIAL ADVERSE EFFECT" means a material adverse impact or
effect on the business, operations, assets, liabilities, prospects or condition
(financial or otherwise) of the Business.
1.1.11 "OFFICER'S CERTIFICATE" means a certificate signed in the
name of a corporation by its President, Chief Executive Officer, Treasurer,
Chief Financial Officer, or, if so specified, the Clerk or Secretary, acting in
his or her official capacity.
1.1.12 "PERSON" means any individual, firm, partnership,
association, trust, corporation, limited liability company, governmental body or
other entity.
1.1.13 "PURCHASE DOCUMENTS" means this Agreement and any other
certificate, document, instrument or agreement executed in connection therewith.
1.1.14 "TAX" means any federal, state, local or foreign tax of any
kind whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
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2. PURCHASE AND SALE OF ASSETS
2.1 PURCHASE OF ASSETS. Upon the terms and subject to the conditions
contained in this Agreement, at the Closing (as defined in Section 2.7 hereof),
Seller shall sell, assign, transfer and convey to Buyer, and Buyer shall
purchase, acquire and accept from Seller, those of Seller's assets as set forth
in SCHEDULE 2.1 attached hereto (the "Purchased Assets"), and subject only to
the liabilities and obligations of Buyer which are defined in Section 2.3 hereof
(the "Assumed Liabilities").
2.2 RETAINED ASSETS. Seller will retain ownership of all of Seller's
assets other than the Purchased Assets and identified on Schedule 2.2 hereto
(the "Retained Assets").
2.3 ASSUMED LIABILITIES. Buyer shall assume the Assumed Liabilities, and
will pay, perform and discharge the Assumed Liabilities as they become due. The
Assumed Liabilities shall consist solely of the liabilities of Seller listed on
Schedule 2.3 attached hereto. Buyer shall assume no other debts, obligations,
contracts, leases or liabilities of Seller (other than the Assumed Liabilities),
and Seller shall hold Buyer harmless from, and indemnify Buyer against, any
debt, obligation, contract, lease or liability of Seller not expressly assumed
by Buyer.
2.4 RETAINED LIABILITIES. Seller will retain all liabilities other than
Assumed Liabilities.
2.5 PURCHASE PRICE. Upon the terms and subject to the conditions
contained in this Agreement, and in consideration of the sale, assignment,
transfer and delivery of the Purchased Assets, Buyer will pay, by wire transfer
of immediately available funds, to Seller, Three Hundred Twenty Thousand Dollars
($320,000).
2.6 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated
among the Purchased Assets as set forth in Schedule 2.6 attached hereto.
2.7 TIME AND PLACE OF CLOSING. The closing of the transactions described
in Sections 2.1 through 2.6 hereof (the "Closing") shall take place at Seller's
San Diego offices at 9:00 a.m. on August 15, 1997, or at such other place or
time as the parties hereto may agree. The date and time at which the Closing
actually occurs is hereinafter referred to as the "Closing Date."
2.8 EXECUTION AND DELIVERY OF DOCUMENTS OF TITLE BY SELLER. At the
Closing, Seller shall execute and deliver to Buyer a Bill of Sale in the form
of Exhibit 2.8 in order to effect the sale, conveyance, and transfer of the
Purchased Assets from Seller to Buyer. Such instruments and documents
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shall be sufficient to convey to Buyer good and merchantable title in all of the
Purchased Assets. Seller will, from time to time after the Closing Date, take
such additional actions and execute and deliver such further documents as Buyer
may reasonably request in order more effectively to sell, transfer and convey
the Purchased Assets to Buyer and to place Buyer in position to operate and
control all of the Purchased Assets.
2.9 EXECUTION AND DELIVERY OF DOCUMENTS BY BUYER. At the Closing, Buyer
shall execute and deliver to Seller an Assumption Agreement in the form of
Exhibit 2.9 in order to evidence Buyer's assumption of the Assumed Liabilities.
Buyer will, from time to time after the Closing Date, take such additional
action and deliver such further documents as Seller may reasonably request in
order effectively to assume the Assumed Liabilities.
3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
3.1 ORGANIZATION AND QUALIFICATION. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Seller has full power and authority to own, use and lease its
properties and to conduct its business as currently conducted.
3.2 AUTHORITY; NO VIOLATION. Seller has all requisite corporate power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by Seller has been duly and validly authorized and approved by all necessary
corporate action. This Agreement constitutes the legal and binding obligation
of Seller, enforceable against it in accordance with its terms. To Seller's
Knowledge, the entering into of this Agreement by Seller does not, and the
consummation by Seller of the transactions contemplated hereby, including
specifically the transfer of the Purchased Assets to Buyer by Seller, will not
violate the provisions of (a) any applicable federal, state, local or foreign
laws, (b) Seller's Charter or By-Laws, or (c) any provision of, or result in a
default or acceleration of any obligation under, or result in any change in the
rights or obligations of Seller under, any Lien, contract, agreement, license,
lease, instrument, indenture, order, arbitration award, or judgment, which
would have a Material Adverse Effect on the Purchased Assets or Buyer's right,
title and interest in and to the Purchased Assets after the Closing.
3.2 ABSENCE OF UNDISCLOSED LIABILITIES. Except for liabilities reflected
on Seller's balance sheet as of June 27 1997, liabilities arising in the
ordinary course of Seller's Business, and the Assumed Liabilities, to Seller's
Knowledge there are no undisclosed liabilities of the Business.
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3.4 TITLE, SUFFICIENCY AND CONDITION OF ASSETS. Seller has good and
marketable title to, all of the Purchased Assets, free and clear of all Liens
and the sale and delivery of the Purchased Assets to Buyer pursuant hereto shall
vest in Buyer good and marketable title thereto, free and clear of any and all
Liens and defects, other than as disclosed in Schedule 3.4 hereto or as may be
created by Buyer. To the Knowledge of Seller, all tangible properties and assets
comprising the Purchased Assets are in good operating condition and repair,
ordinary wear and tear excepted, have been well maintained, and conform with all
applicable laws, statutes, ordinances, rules and regulations. The Purchased
Assets constitute less than half of the Seller's inventory and equipment
measured by value, within the meaning of Section 6102 of the California Uniform
Commercial Code.
3.5 BROKERS. Neither Seller or anyone acting on its behalf, has engaged,
retained, or incurred any liability to any broker, investment banker, finder or
agent or has agreed to pay any brokerage fees, commissions, finder's fees or
other fees with respect to the sale of the Purchased Assets, this Agreement or
the transactions contemplated hereby.
3.6 WARRANTY OBLIGATIONS. Attached hereto as Schedule 3.6 are correct and
complete copies of warranty obligations made by Seller with respect to the
Purchased Assets. Schedule 3.6 also lists all Purchased Assets under warranty
and all pending or, to Seller's Knowledge threatened warranty claims respecting
the Purchased Assets and identifies the actions being undertaken by Seller to
address such warranty claims.
3.7 INTELLECTUAL PROPERTY. To Seller's Knowledge, without having
conducted any patent or trademark search, Seller has sufficient title and
ownership of, or license to, all patents, trademarks, service marks, trade
names, copyrights, trade secrets, information, proprietary rights and processes
necessary for the Business as now conducted, without any conflict with or
infringement of the rights of others. Schedule 3.7 sets forth (i) a true and
complete list of such patents, trademarks, service marks, trade names,
copyrights owned by Seller and included among the Purchased Assets, and (ii) all
patents, trademarks, trade names, copyrights, technology and processes not owned
by Seller but used by Seller the Business which are material to the Business and
included among the Purchased Assets. All such patents, trademarks, trade names,
copyrights, technology and processes not owned by Seller but used by the Seller
in the Business which are material to its Business are used pursuant to a
license or other right granted by a third party, except for standard
"shrink-wrap" licenses for software programs. No claims are pending against
Seller by any person with respect to the use of any of the foregoing, or
challenging or questioning the validity or effectiveness of any license or
agreement relating to the same. Seller has not received any communications
alleging that Seller has violated any of the patents, trademarks, service marks,
trade names, copyrights or trade secrets or other
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proprietary right of any person or entity. Neither the execution nor delivery
of this Agreement or any assignment of licenses ancillary hereto will, to the
best of Seller's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract
covenant or instrument to which Seller is a party.
3.8 LITIGATION, ETC. There are no actions, suits, proceedings, orders,
investigations or claims pending or threatened against Seller, or to which
Seller is a party, at law or in equity, or before or by any court, tribunal,
governmental department, commission, board, bureau, agency or instrumentality,
or any arbitration proceedings pending under collective bargaining agreements or
otherwise, which would have a Material Adverse Effect on the Purchased Assets or
would prevent or delay the consummation of the transactions contemplated by this
Agreement.
3.9 BUSINESS RECORDS. To its knowledge, Seller's files and customer lists
respecting the Business and Purchased Assets are complete and correct in all
material respects.
3.10 MATERIAL MISSTATEMENTS OR OMISSIONS. Neither this Agreement (including
the Schedules and Exhibits hereto) nor any document, certificate or instrument
furnished in connection therewith contains, with respect to Seller or the
Business, any untrue statement of a material fact or omits to state a material
fact necessary to made the statements therein not misleading.
3.11 EFFECTIVE DATE OF WARRANTIES, REPRESENTATIONS AND COVENANTS. Each
warranty, representation, and covenant set forth in this Article 3 shall be
deemed to be made on and as of and speak as of the Closing (except as otherwise
specifically provided herein). The representations and warranties contained in
this Article 3 shall not be affected or deemed waived by reason of the fact that
Buyer and/or its representatives knew or should have known that any such
representation or warranty is or might be inaccurate in any respect.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
4.1 ORGANIZATION AND QUALIFICATION. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland, with full power and authority to own, use or lease its properties and
to conduct its business as such properties are owned, used or leased and as such
business is conducted.
4.2 AUTHORITY. Buyer has the requisite corporate power and authority to
enter into this Agreement and to carry out the transactions contemplated
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hereby. The execution, delivery and performance of this Agreement by Buyer have
been duly and validly authorized and approved by all necessary corporate action
on the part of Buyer, and this Agreement constitutes the legal and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms.
Assuming the accuracy of the representations and warranties of Seller hereunder
and to the best knowledge of Buyer, the entering into of this Agreement by Buyer
does not, and the consummation by Buyer of the transactions contemplated hereby
will not, violate the provisions of (a) any applicable laws of the United States
or any other state or jurisdiction in which Buyer does business, (b) the Charter
or By-Laws of Buyer, or (c) any provision of, or result in a default or
acceleration of any obligation under, or result in any change in the rights or
obligations of Buyer under, any mortgage, Lien, lease, agreement, contract,
instrument, order, arbitration award, judgment, or decree which would have a
Material Adverse Effect on Buyer's ability to consummate the transactions
contemplated hereunder.
4.3 BROKERS. Neither Buyer nor anyone acting on its behalf has engaged,
retained or incurred any liability to any broker, investment banker, finder or
agent or has agreed to pay any brokerage fees, commissions, finder's fees or
other fees with respect to the purchase of Purchased Assets, this Agreement or
the transactions contemplated hereby.
4.4 WAIVER OF COMPLIANCE WITH THE BULK SALES ACT. In connection with the
transactions contemplated hereby, and in reliance upon Seller's representations
and warranties in Section 3.4 hereof, the parties shall waive compliance with
the provisions of Article 6 of the Uniform Commercial Code - Bulk Transfers and
the Bulk Sales Act and any other applicable bulk sales act or statute ("Bulk
Sales Acts").
5. CLOSING CONDITIONS
5.1 CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of
Buyer to consummate this Agreement and the transactions contemplated hereby
are subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
5.1.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the
representations and warranties of Seller contained in this Agreement shall
remain true and correct at the Closing Date as fully as if made on the
Closing Date; Seller shall have performed, on or before the Closing Date, all
of its obligations under this Agreement and the other Purchase Documents
which by the terms thereof are to be performed on or before the Closing Date;
and Seller shall have delivered to Buyer an Officer's Certificate dated the
Closing Date of Seller to such effect.
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5.1.2 NO PENDING ACTION. No legislation, order,
rule, ruling or regulation shall have been proposed, enacted or made by or on
behalf of any governmental body, department or agency, and no legislation
shall have been introduced in either House of Congress or in the legislature
of any state, and no investigation by any governmental authority shall have
been commenced or threatened, and no action, suit, investigation or
proceeding shall have been commenced before, and no decision shall have been
rendered by, any court or other governmental authority or arbitrator, which,
in any such case, in the reasonable judgment of Buyer could adversely affect,
restrain, prevent or rescind the transactions contemplated by this Agreement
(including, without limitation, the purchase and sale of the Purchased
Assets) or result in a Material Adverse Effect.
5.1.3 PURCHASE PERMITTED BY APPLICABLE LAWS; LEGAL
INVESTMENT. Buyer's purchase of and payment for the Purchased Assets (a)
shall not be prohibited by any applicable law or governmental order, rule,
ruling, regulation, release or interpretation, (b) shall not constitute a
fraudulent or voidable conveyance under any applicable law, and (c) shall be
permitted by all applicable laws, statutes, ordinances, regulations and rules
of the jurisdictions to which Buyer is subject.
5.1.4 PROCEEDINGS SATISFACTORY. All proceedings
taken in connection with the purchase and sale of the Purchased Assets, all
of the other Purchase Documents and all documents and papers relating
thereto, shall be in form and substance reasonably satisfactory to Buyer.
5.1.4 CONSENTS - PERMITS. Seller shall have received
(and there shall be in full force and effect) all material consents,
approvals, licenses, permits, orders and other authorizations of, and shall
have made (and there shall be in full force and effect) all such filings,
registrations, qualifications and declarations with, any Person pursuant to
any applicable law, statute, ordinance, regulation or rule or pursuant to any
agreement, order or decree to which Seller with respect to the Business is a
party or to which it is subject, in connection with the transactions
contemplated by this Agreement and the sale of the Purchased Assets.
5.1.6 INTELLECTUAL PROPERTY.
(a) With respect to patents, trademarks, service marks, trade names,
copyrights owned by Seller, included among the Purchased Assets, and listed
in Schedule 3.7, Seller shall execute and deliver to Buyer appropriate
instruments of transfer conveying to Buyer all right, title and interest in
and to such intellectual property; and
(b) With respect to any intellectual property listed in Schedule 3.7 as
licensed from others, Seller shall have obtained the consent of the owner of
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the intellectual property to license or sublicense the intellectual property to
Buyer, subject to any terms and conditions contained in the licenses of such
intellectual property to Seller
5.1.7 CREDITORS. Seller shall satisfy all creditors in
connection with Seller's operation of the Business prior to the Closing,
except as contemplated by the Assumed Liabilities, and shall remove any and
all Liens against the Purchased Assets.
5.2 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Seller to
consummate this Agreement and the transactions contemplated hereby are
subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
5.2.1 REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of Buyer in this Agreement shall remain true
and correct at the Closing Date, and Buyer shall, on or before the Closing
Date, have performed all of its obligations under this Agreement and the
other Purchase Documents which by the terms thereof are to be performed by it
on or before the Closing Date; and Buyer shall have delivered an Officer's
Certificate to Seller dated the Closing Date to such effect.
5.2.2 NO PENDING ACTION. No legislation, order, rule, ruling
or regulation shall have been proposed, enacted or made by or on behalf of
any governmental body, department or agency, and no legislation shall have
been introduced and no investigation by any governmental authority shall have
been commenced or threatened, and no action, suit, investigation or
proceeding shall have been commenced before, and no decision shall have been
rendered by, any court or other governmental authority or arbitrator, which,
in any such case, was not known by Seller on the date hereof or which could
adversely affect, restrain, prevent or rescind the transactions contemplated
by this Agreement (including, without limitation, the purchase and sale of
the Purchased Assets) or result in a Material Adverse Effect.
5.2.3 PROCEEDINGS SATISFACTORY. All proceedings taken in
connection with the assumption of Assumed Liabilities, all of the other
Purchase Documents and all documents and papers relating thereto, shall be in
form and substance reasonably satisfactory to Seller.
5.2.4 CONSENTS - PERMITS. Buyer shall have received (and there
shall be in full force and effect) all material consents, approvals,
licenses, permits, orders and other authorizations of, and shall have made
(and there shall be in full force and effect) all such filings,
registrations, qualifications and declarations with, any Person pursuant to
any applicable law, statute, ordinance, regulation or rule or pursuant to any
agreement, order or decree to which Buyer with respect to the Business is a
party or to which it is subject, in
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connection with the transactions contemplated by this Agreement, the purchase
of the Purchased Assets and the assumption of Assumed Liabilities.
5.3 CLOSING DELIVERIES. At or prior to the Closing.
5.3.1 PURCHASE PRICE. Buyer shall deliver, or cause to be
delivered to Seller, the Purchase Price.
5.3.2 PURCHASE DOCUMENTS. Buyer and Seller shall execute and
deliver, or cause to be executed and delivered, the Purchase Documents.
6. TERMINATION
6.1 TERMINATION OF AGREEMENT. This Agreement and the transactions
contemplated hereby may (at the option of the party having the right to do
so) be terminated at any time on or prior to the Closing Date as follows:
6.1.1 MUTUAL CONSENT. By mutual written consent of Buyer and
Seller;
6.1.1 COURT ORDER. By Buyer or Seller if any court of
competent jurisdiction shall have issued an order pursuant to the request of
a third party restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement;
6.1.3 FAILURE TO CLOSE. By Buyer or Seller if the
transactions contemplated hereby shall not have been consummated on or before
August 15, 1997; provided, however, that such right to terminate this
Agreement shall not be available to any party whose failure to fulfill any
obligation of this Agreement has been the cause of, or resulted in, the
failure of the transactions contemplated hereby to be consummated on or
before such date;
6.1.4 TERMINATION BY SELLER. By Seller upon notice to Buyer,
if as of the Closing (i) a condition to the performance of Seller set forth
in Section 6.2 hereof shall not be fulfilled at the time specified for the
fulfillment thereof, (ii) a default under or a breach of this Agreement shall
be made by Buyer, or (iii) any representation or warranty set forth in this
Agreement or in any instrument delivered by Buyer pursuant hereto shall be
false or misleading; or
6.1.5 TERMINATION BY BUYER. By Buyer by notice to Seller at
any time prior to the Closing if (i) a condition to the performance of Buyer
set forth in Section 6.1 hereof shall not be fulfilled at the time specified
for the fulfillment thereof, (ii) a default under or a breach of this
Agreement shall be made by Seller, (iii) any representation set forth in this
Agreement or in any
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instrument delivered by Seller pursuant hereto shall be false or misleading, or
(iv) the results of Buyer's due diligence of the Business shall not be
satisfactory to Buyer.
6.2 EFFECT OF TERMINATION AND RIGHT TO PROCEED. If this Agreement is
terminated pursuant to this Section 6, all further obligations of Buyer and
Seller under this Agreement shall terminate without further liability of
Buyer or any Affiliate thereof to Seller or of Seller to Buyer or any
Affiliate thereof. If any of the conditions to obligations of Buyer
specified herein have not been satisfied, Buyer, in addition to any other
rights which it may have, shall have the right to waive its rights to have
such conditions satisfied and elect to proceed with the transactions
contemplated hereby and, if any of the conditions to the obligations of
Seller specified herein have not been satisfied, Seller in addition to any
other rights which may be available to it, shall have the right to waive its
rights to have such conditions satisfied and elect to proceed with the
transactions contemplated hereby.
7. INDEMNIFICATION
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each and every such
representation and warranty set forth in this Agreement shall survive until
the first anniversary of the Closing Date.
7.2 INDEMNIFICATION BY SELLER. Seller shall indemnify, defend and hold
Buyer, its officers, directors, employees, owners, agents and Affiliates,
harmless from and in respect of any and all losses, damages, costs and
expenses of any kind and nature whatsoever (including, without limitation,
interest and penalties, reasonable expenses of investigation and court costs,
reasonable attorneys' fees and disbursements and the reasonable fees and
disbursements of other professionals) which may be sustained or suffered by
any of them (collectively "Losses"), arising out of, resulting from or
pertaining to any Retained Liability, any breach or inaccuracy of any
representation or warranty or the breach of or failure to perform any
warranty, covenant, undertaking or other agreement of Seller contained in
this Agreement or any other Purchase Document, liabilities under the Bulk
Sales Acts, and all environmental, ecological, health, safety, products
liability or other claims pertaining to the Business or the Purchased Assets
which relate to time periods or events occurring prior to the Closing Date.
7.3 INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold
Seller and its officers, directors, employees, consultants, owners, agents
and Affiliates, harmless from and in respect of any and all Losses which may
be sustained or suffered by any of them arising out of or resulting from or
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pertaining to any breach or inaccuracy of any representation or warranty or the
breach of or failure to perform any warranty, covenant, undertaking or other
agreement of Buyer contained in this Agreement or any other Purchase Document or
all Assumed Liabilities (other than Retained Liabilities) and for all
environmental, ecological, health, safety, products liability or other Claims
pertaining to the Business or the Purchased Assets which relate to time periods
or events occurring after the Closing Date.
7.4 NOTICE AND OPPORTUNITY TO DEFEND. If there occurs an event which a
party asserts is an indemnifiable event pursuant to Section 7.2 or 7.3, the
party seeking indemnification (the "Claiming Party") shall promptly notify
the other party obligated to provide indemnification (the "Indemnifying
Party"). If such event involves (a) any Claim, or (b) the commencement of
any action, suit or proceeding by a third person, the Claiming Party will
give the Indemnifying Party prompt written notice of such Claim or the
commencement of such action, suit or proceeding, PROVIDED, HOWEVER, that the
failure to provide prompt notice as provided herein will relieve the
Indemnifying Party of its obligations hereunder only to the extent that such
failure prejudices the Indemnifying Party hereunder. In case any such
action, suit or proceeding shall be brought against a Claiming Party and it
shall notify the Indemnifying Party of the commencement thereof, the
Indemnifying Party shall be entitled to participate therein and, to the
extent that it desires to do so, to assume the defense thereof, with counsel
reasonably satisfactory to the Claiming Party and, after notice from the
Indemnifying Party to the Claiming Party of such election so to assume the
defense thereof, the Indemnifying Party shall not be liable to the Claiming
Party hereunder for any attorneys' fees or any other expenses, in each case
subsequently incurred by the Claiming Party, in connection with the defense
of such action, suit or proceeding. The Claiming Party shall cooperate fully
with the Indemnifying Party and its counsel in the defense against any such
action, suit or proceeding. In any event, the Claiming Party shall have the
right to participate at its own expense in the defense of such action, suit
or proceeding. In no event shall an Indemnifying Party be liable for any
settlement or compromise effected without its prior consent.
7.5 PAYMENT. Payment of amounts owing by the Indemnifying Party
pursuant to Sections 8.2 through 8.3 with respect to a third party claim
shall be made within thirty days after the later of (i) settlement of the
third party claim, or (ii) the expiration of the period for appeal of a final
adjudication of such third party claim.
7.5 TAX BENEFITS; INSURANCE PROCEEDS. In determining the amount of any
damages for which any party is entitled to indemnification under this
Agreement, the gross amount thereof will be reduced by any correlative Tax
benefit or insurance proceeds realized or to be realized by such party;
provided, however, that any increase in insurance premiums or Taxes or the
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like caused by the damages or payment thereof shall be taken into consideration
and utilized to offset the reduction in damages.
7.7 DISPUTE RESOLUTION. In the event that a dispute arises between the
parties as to any claim for Indemnification under Sections 7.1 through 7.4
hereof, the Presidents of each party hereto shall, for a period of ten (10)
days, discuss the matter in question to see if it is capable of a resolution
without invoking the provisions of Section 7.4 hereof. In the event that the
matter has not been so resolved upon the conclusion of such ten (10) day
period, during the next thirty (30) days the parties shall engage in good
faith non-binding mediation with a mutually agreeable third party mediator in
an effort to resolve such matter. If the Claiming Party is the Seller, the
mediation shall occur in Baltimore, Maryland. If the Claiming Party is the
Buyer, the mediation shall occur in San Jose, California.
8. MISCELLANEOUS
8.1 FEES AND EXPENSES. Each of the parties hereto will pay and
discharge its own expenses and fees in connection of with the negotiation of
and entry into this Agreement and the consummation of the transactions
contemplated hereby.
8.2 NOTICES. All notices, requests, demands, consents and
communications necessary or required under this Agreement or any other
Purchase Document shall be made in the manner specified, or, if not
specified, shall be delivered by hand or sent by registered or certified
mail, return receipt requested, overnight courier, or by telecopy (receipt
confirmed) to:
if to Buyer:
Neocera, Inc.
10000 Virginia Manor Road
Suite 300
Beltsville, Maryland 20705-4215
Attn: President
Facsimile Transmission Number: (301) 210-1042
with a copy to:
Whiteford, Taylor & Preston L.L.P.
Seven Saint Paul Street
Suite 1400
Baltimore, Maryland 21202
Attn: Robert B. Curran, Esquire
Facsimile Transmission Number: (410) 347-9478
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if to Seller:
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, CA 94086
Attention: Charles E. Shalvoy
President
Facsimile Transmission Number: (408) 523-9979
with a copy to:
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, CA 94086
Attention: Judith A. DeFranco, Esq.
Manager, Legal Affairs
Facsimile Transmission Number: (408) 523-9979
All such notices, requests, demands, consents and other
communications shall be deemed to have been duly given or sent two (2) days
following the date on which mailed, or on the date on which delivered by hand
or overnight courier or by facsimile transmission (receipt confirmed), as the
case may be, and addressed as aforesaid.
8.3 SUCCESSORS AND ASSIGNS. All covenants and agreements set forth in
this Agreement and made by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the successors and assigns of such party,
whether or not so expressed, except that Seller may not assign or transfer
any of its rights or obligations under this Agreement without the consent in
writing of Buyer.
8.4 COUNTERPARTS, ETC. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which together shall constitute one and the same instrument, and it shall not
be necessary in making proof of this Agreement to produce or account for more
than one such counterpart. The headings of the sections and paragraphs of
this Agreement have been inserted for convenience of reference only and shall
not be deemed to be part of this Agreement. If any one or more of the
provisions contained herein, or the application thereof in any circumstances,
is held invalid, illegal or unenforceable in any respect for any reason in
any jurisdiction, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired or affected, it being intended that each of
parties' rights and privileges shall be enforceable to the fullest extent
permitted by law, and any such invalidity, illegality and unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction.
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8.5 GOVERNING LAW. This Agreement, including the validity hereof and
the rights and obligations of the parties hereunder, shall be construed in
accordance with and governed by the laws of the State of California
applicable to contracts made and to be performed entirely in such state
(without giving effect to the conflicts of laws provisions thereof).
8.6 ENTIRE AGREEMENT. This Agreement, including the Schedules referred
to herein, is complete, and all promises, representations, understandings,
warranties and agreements with reference to the subject matter hereof, and
all inducements to the making of this Agreement relied upon by all the
parties hereto, have been expressed herein or in said Schedules or Exhibits.
This Agreement may not be amended except by an instrument in writing signed
on behalf of Seller and Buyer.
8.7 RESTRICTIVE COVENANTS.
8.7.1 The Seller shall not, for a period of three (3) years
following the Closing Date, without the Buyer's prior and specific written
consent, engage in any of the following activities:
(a) Offer for sale, directly or through representatives
or distributors, LTC Temperature Controllers;
(b) Interfere, directly or indirectly, with the conduct
of the Business by the Buyer, or of any Affiliate.
(c) Except at the direction of the Buyer, divulge, use,
disclose or furnish any trade secrets or any other confidential information
concerning the Business.
8.7.2 Notwithstanding the foregoing restrictive covenants,
Seller shall not be in violation of this Section 8.7 if it sells Excluded
Products.
8.7.3 The Seller and Buyer acknowledge and agree that (a) the
restrictions set forth in this Section 8.7 are reasonable in terms of scope,
duration, geographic area, and otherwise, and (b) the protections afforded to
the Buyer, and its Affiliates, hereunder are necessary to protect their
legitimate business interests.
8.8 ATTORNEYS' FEES: COSTS. If either party resorts to mediation,
litigation or other legal process to enforce its rights under this Agreement,
the prevailing party shall be entitled to an award of its reasonable costs
and attorney's fees.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first set forth above.
ATTEST: NEOCERA, INC.
__________________________ __________________________
By:_______________________ By:_______________________
Title:____________________
ATTEST:
__________________________ CONDUCTUS, INC.
By:_______________________ By:_______________________
Title:____________________
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SCHEDULE 2.1
PURCHASED ASSETS
Seller shall deliver to Buyer the following:
1. All drawings, specifications and similar materials of the
Business in hard copy and electronic form (where available);
2. All intellectual property of the Business, including,
without limitation, the following rights as more fully
identified on Schedule 3.7 hereto:
a) All patents used in the Business;
b) All licenses used in the Business;
c) All trademarks used in the Business;
d) All copyrights used in the Business;
e) All know-how used in the Business;
3. All documents, including CE Certification and NIST
traceability files;
4. The fixtures, tools and equipment of the Business used in
the assembly, test, calibration, and support of the
Business as follows:
a) Lab View Drivers for LTC;
b) LTC firmware source code;
c) LTC interface software;
d) LTC test software;
e) LTC calibration software;
f) Source code for the interface, test and calibration
software (1 diskette);
g) Calibration procedure documentation;
h) Test calibration fixture with precision resistors;
i) Xeltek SuperPro programmer with cable and 2 adaptors;
j) Tech Tools Econorom ee220 emulator, (1 emulator,
1 cable, 1 floppy disk); and
k) Lattice Starter Kit.
5. All inventories of the Business, including raw
materials, finished goods, and test and marketing
demonstration units existing on the Closing Date.
6. All customer files and records relating to the
Business and Purchased Assets.
7. All brochures, marketing literature, and customer
lists.
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SCHEDULE 2.2
RETAINED ASSETS
Seller shall retain ownership of the following assets:
1. All fixtures, tools and equipment of Seller, whether used
in the Business or not, not listed in SCHEDULE 2.1.4; and
2. All right and interest in Excluded Assets .
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SCHEDULE 2.3
ASSUMED LIABILITIES
Buyer shall be responsible for the following:
1. Ongoing factory service for out-of-warranty customers of LTC
Temperature Controllers; and
2. Warranty service after the Closing for LTC Temperature
Controllers which are still covered by their original
warranty.
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SCHEDULE 2.6
ALLOCATION OF PURCHASE PRICE
The Purchase Price shall be allocated as follows:
Fixed Assets: $157,000.00
Inventory: $105,000.00
Goodwill: $ 58,000.00
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SCHEDULE 3.4
LIENS AND DEFECTS
None
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SCHEDULE 3.6
WARRANTY OBLIGATIONS
U.S. SALES OF PRODUCTS
WARRANTY: LIMITATION OF LIABILITY. UNLESS SPECIFIED OTHERWISE IN WRITING,
PRODUCTS SOLD BY SELLER ARE WARRANTED TO BE FREE OF DEFECTS IN MATERIALS OR
WORKMANSHIP FOR A PERIOD OF ONE YEAR FROM THE DATE OF DELIVERY TO BUYER.
SELLER'S SOLE AND EXCLUSIVE OBLIGATION IS TO REPAIR OR REPLACE ANY PRODUCT OR
PRODUCTS WITH ANY DEFECT WARRANTED AGAINST, PROVIDED THAT SELLER RECEIVED
WRITTEN NOTICE OF THE DEFECT DURING THE PERIOD OF WARRANTY, AND ANY DEFECTIVE
PRODUCT IS RETURNED AT BUYER'S EXPENSE TO SELLER AT A LOCATION TO BE DESIGNATED
BY SELLER. THE EXPENSE OF REMOVAL AND REINSTALLATION OF ANY PRODUCT OR PRODUCTS
IS NOT INCLUDED IN THIS WARRANTY. THESE WARRANTIES ARE IN LIEU OF AND EXCLUDE
ALL OTHER EXPRESS OR IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATIONS, ANY
IMPLIED WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IN NO
EVENT SHALL SELLER BE LIABLE FOR ANY SPECIAL, INCIDENTAL, OR CONSEQUENTIAL
DAMAGES TO BUYER OR ANY THIRD PARTY CAUSED BY ANY DEFECTIVE PRODUCT, WHETHER THE
DEFECT IS WARRANTED AGAINST OR NOT, OR FOR ANY BREACH OF THIS AGREEMENT, NOR
SHALL SELLER BE LIABLE TO BUYER FOR ANY AMOUNT EXCEEDING THE PURCHASE PRICE OF
THE PRODUCT. SELLER SHALL HAVE NO OBLIGATION UNDER THIS AGREEMENT TO MAKE
REPAIRS OR REPLACEMENTS NECESSITATED BY CATASTROPHE, FAULT, IMPROPER USE OR
NEGLIGENCE.
SALES THROUGH DISTRIBUTOR
WARRANTY AND DISCLAIMER. Conductus warrants to Distributor
only that the Products will be free from material defects in materials and
workmanship. Obligations under this warranty shall be limited to replacing,
repairing, or giving credit for the purchase price, at Conductus's option, of
any instrument returned, shipment prepaid, to its factory for that purpose
within one year of delivery to Distributor, provided prior authorization for
such return has been given by an authorized Conductus representative.
This warranty will not apply to any instrument which
Conductus's inspection discloses to have become defective or unworkable due
to abuse, mishandling, misuse, accident, alteration, negligence, improper
installation, or other causes. This warranty will not apply to any
instrument or component not manufactured by Conductus. When items
manufactured by others are included in Products the original manufacturer's
warranty, if any,
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is extended to Distributor to the extent permitted by that manufacturer.
OUTSTANDING WARRANTY CLAIMS
NONE.
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SCHEDULE 3.7
INTELLECTUAL PROPERTY
(a) Intellectual Property owned by Seller:
1. Unregistered rights in the marks "LTC-10," "LTC-10G,"
"LTC-11," "LTC-20," and "LTC-21;"
2. Unregistered copyrights in all control software for LTC
Temperature Controllers;
(b) Third Party Intellectual Property licensed by Seller:
None.
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ASSET PURCHASE AGREEMENT
This Agreement dated as of September 3, 1997, is by and between Niki Glass
Co. Ltd., a Japanese corporation ("Buyer") and Conductus, Inc., a Delaware
corporation ("Seller").
This Agreement sets forth the terms and conditions upon which Buyer will
purchase from Seller, and Seller will sell to Buyer, certain assets of Seller's
Instrument and Systems Division ("CISD"), subject to those liabilities of Seller
which are specifically hereinafter described, for the consideration provided
herein.
In consideration of the foregoing, the mutual representations, warranties
and covenants set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties to
this Agreement hereby agree as follows:
1. DEFINITIONS
1.1 DEFINITIONS. For the purposes of this Agreement, all capitalized words or
expressions used in this Agreement shall have the meanings specified in this
Article 1 (such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
1.1.1 "AFFILIATE" means when used with respect to any Person if such Person
is a corporation, any officer or director thereof and any Person which is,
directly or indirectly, the beneficial owner (by itself or as part of any group)
of more than five percent (5%) of any class of any equity security thereof, and,
if such beneficial owner is a partnership, any general or limited partner
thereof, or if such beneficial owner is a corporation, any Person controlling,
controlled by or under common control with such beneficial owner, or any officer
or director of such beneficial owner or of any corporation occupying any such
control relationship.
1.1.2 "AGREEMENT" means this Asset Purchase Agreement (together with all
Exhibits and Schedules hereto) as in effect from time to time.
1.1.3 "CHARTER" means the Certificate of Incorporation, Articles of
Incorporation or Organization or other organizational document of a corporation,
as amended and restated through the date hereof.
1.1.4 "CLAIM" means an action, suit, proceeding, hearing, investigation,
litigation, charge, complaint, claim or demand.
1.1.5 "LIEN" means, with respect to any asset, any mortgage, deed of trust,
pledge, hypothecation, assignment, security interest, lien, charge, restriction,
adverse claim by a third party, title defect or encumbrance of any kind.
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1.1.6 "MATERIAL ADVERSE EFFECT" means a material adverse impact or effect on
the business, operations, assets, liabilities, prospects or condition (financial
or otherwise) of the Purchased Assets.
1.1.7 "OFFICER'S CERTIFICATE" means a certificate signed in the name of a
corporation by its President, Chief Executive Officer, Treasurer, Chief
Financial Officer, or, if so specified, the Clerk or Secretary, acting in his or
her official capacity.
1.1.8 "PERSON" means any individual, firm, partnership, association, trust,
corporation, limited liability company, governmental body or other entity.
1.1.9 "PRODUCT LINE" means Seller's iMag -Registered Trademark- system,
XMag-TM- system, RLM bridge, TIT system and such custom SQUID systems as were
delivered to and accepted by customers of Buyer prior to the date of Closing.
1.1.10 "PURCHASE DOCUMENTS" means this Agreement and any other certificate,
document, instrument or agreement executed in connection therewith.
1.1.11 "TAX" means any federal, state, local or foreign tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
2. PURCHASE AND SALE OF ASSETS
2.1 PURCHASE OF ASSETS. Upon the terms and subject to the conditions contained
in this Agreement, at the Closing (as defined in Section 2.9 hereof), Seller
shall sell, assign, transfer and convey to Buyer, and Buyer shall purchase,
acquire and accept from Seller, those of Seller's assets as set forth in
SCHEDULE 2.1 attached hereto (the "Purchased Assets"), and subject only to the
liabilities and obligations of Buyer which are defined in Section 2.4 hereof
(the "Assumed Liabilities").
2.2 GRANT OF LICENSE. Seller shall grant Buyer a nonexclusive, royalty-free,
perpetual license, without right of sublicense to U.S. Patent No. 5,532,592,
titled "SQUID Control Apparatus with Non-Cryogenic Flux-Locked Loop Disposed in
Closed Proximity to the SQUID of Seller.
2.3 RETAINED ASSETS. Seller will retain ownership of all of Seller's assets
other than the Purchased Assets and identified on SCHEDULE 2.3 hereto (the
"Retained Assets").
2.3 ASSUMED LIABILITIES. Buyer shall assume the Assumed Liabilities, and will
pay, perform and discharge the Assumed Liabilities as they become due. The
Assumed Liabilities shall consist solely of the liabilities of Seller listed on
SCHEDULE 2.4 attached hereto. Buyer shall assume no other debts, obligations,
contracts, leases or liabilities of Seller (other than the Assumed Liabilities),
and Seller shall hold Buyer harmless from, and indemnify Buyer against, any
debt, obligation, contract, lease or liability of Seller not expressly assumed
by Buyer.
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2.5 RETAINED LIABILITIES. Seller will retain all liabilities other than
Assumed Liabilities including, without limitation, those liabilities listed in
SCHEDULE 2.5 attached hereto.
2.6 PURCHASE PRICE. Upon the terms and subject to the conditions contained in
this Agreement, and in consideration of the sale, assignment, transfer and
delivery of the Purchased Assets, Buyer will pay, by wire transfer of
immediately available funds, to Seller, one hundred ninety thousand dollars
($190,000) plus such California State sales tax as may be applicable to the
transaction.
2.7 REVENUE SHARE. For a period of three (3) years after Closing, Buyer shall
pay Seller three percent (3%) of Net Revenue from sale of XMag systems and
components, except that the SWCC unit shall not be subject to a royalty payment.
For purposes of this Section 2.7, "Net Revenue" shall mean the net amounts
received by Buyer less separately stated amounts such as sales, value added and
similar taxes and governmental charges, transportation, installation, duties,
insurance and similar charges.
2.8 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated among
the Purchased Assets as set forth in SCHEDULE 2.8 attached hereto.
2.9 TIME AND PLACE OF CLOSING. The closing of the transactions described in
Sections 2.1 through 2.8 hereof (the "Closing") shall take place at Seller's
Sunnyvale offices at 9:30 a.m. on September 3, 1997, or at such other place or
time as the parties hereto may agree. The date and time at which the Closing
actually occurs is hereinafter referred to as the "Closing Date."
2.10 EXECUTION AND DELIVERY OF DOCUMENTS BY SELLER. At the Closing, Seller
shall execute and deliver to Buyer a Bill of Sale in the form of EXHIBIT
2.10(a) and a License in the form of Exhibit 2.10(b) in order to effect the
sale, conveyance, and transfer of the Purchased Assets from Seller to Buyer.
Such instruments and documents shall be sufficient to convey to Buyer good
and merchantable title in all of the Purchased Assets. Seller will, from
time to time after the Closing Date, take such additional actions and execute
and deliver such further documents as Buyer may reasonably request in order
more effectively to sell, transfer and convey the Purchased Assets to Buyer
and to place Buyer in position to operate and control all of the Purchased
Assets.
2.11 EXECUTION AND DELIVERY OF DOCUMENTS BY BUYER. At the Closing, Buyer shall
execute and deliver to Seller an Assumption Agreement in the form of Exhibit
2.11(a) and a Sublease Agreement in the form of Exhibit 2.11(b) in order to
evidence Buyer's assumption of the Assumed Liabilities. Buyer will, from time
to time after the Closing Date, take such additional action and deliver such
further documents as Seller may reasonably request in order effectively to
assume the Assumed Liabilities.
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3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
3.1 ORGANIZATION AND QUALIFICATION. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Seller has full power and authority to own, use and lease its properties and to
conduct its business as currently conducted.
3.2 AUTHORITY; NO VIOLATION. Seller has all requisite corporate power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by Seller has been duly and validly authorized and approved by all necessary
corporate action. This Agreement constitutes the legal and binding obligation
of Seller, enforceable against it in accordance with its terms. To Seller's
Knowledge, the entering into of this Agreement by Seller does not, and the
consummation by Seller of the transactions contemplated hereby, including
specifically the transfer of the Purchased Assets to Buyer by Seller, will not
violate the provisions of (a) any applicable federal, state, local or foreign
laws, (b) Seller's Charter or By-Laws, or (c) any provision of, or result in a
default or acceleration of any obligation under, or result in any change in the
rights or obligations of Seller under, any Lien, contract, agreement, license,
lease, instrument, indenture, order, arbitration award, or judgment, which
would have a Material Adverse Effect on the Purchased Assets or Buyer's right,
title and interest in and to the Purchased Assets after the Closing.
3.3 TITLE, SUFFICIENCY AND CONDITION OF ASSETS. Seller has good and marketable
title to, all of the Purchased Assets, free and clear of all Liens and the sale
and delivery of the Purchased Assets to Buyer pursuant hereto shall vest in
Buyer good and marketable title thereto, free and clear of any and all Liens and
defects, other than as disclosed in SCHEDULE 3.3 hereto or as may be created by
Buyer.
3.4 BROKERS. Neither Seller nor anyone acting on its behalf, has engaged,
retained, or incurred any liability to any broker, investment banker, finder or
agent or has agreed to pay any brokerage fees, commissions, finder's fees or
other fees with respect to the sale of the Purchased Assets, this Agreement or
the transactions contemplated hereby.
3.5 INTELLECTUAL PROPERTY. To Seller's Knowledge, without having conducted any
patent or trademark search, Seller has sufficient title and ownership of, or
license to, all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for the
Product Line, without any conflict with or infringement of the rights of others.
SCHEDULE 3.5 sets forth (i) a true and complete list of such patents,
trademarks, service marks, trade names, copyrights owned by Seller and used in
the Product Line, and (ii) all patents, trademarks, trade names, copyrights,
technology and processes not owned by Seller but used by Seller in the Product
Line. No claims are pending against Seller by any person with respect to the
use of any of the foregoing, or challenging
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or questioning the validity or effectiveness of any license or agreement
relating to the same. Seller has not received any communications alleging that
Seller has violated any of the patents, trademarks, service marks, trade names,
copyrights or trade secrets or other proprietary right of any person or entity.
Neither the execution nor delivery of this Agreement or any assignment of
licenses ancillary hereto will, to the best of Seller's knowledge, conflict with
or result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract covenant or instrument to which Seller is a party.
3.6 MATERIAL MISSTATEMENTS OR OMISSIONS. Neither this Agreement (including the
Schedules and Exhibits hereto) nor any document, certificate or instrument
furnished in connection therewith contains, with respect to Seller or the
Product Line, any untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein not misleading.
3.7 EFFECTIVE DATE OF WARRANTIES, REPRESENTATIONS AND COVENANTS. Each
warranty, representation, and covenant set forth in this Article 3 shall be
deemed to be made on and as of and speak as of the Closing (except as otherwise
specifically provided herein). The representations and warranties contained in
this Article 3 shall not be affected or deemed waived by reason of the fact that
Buyer and/or its representatives knew or should have known that any such
representation or warranty is or might be inaccurate in any respect.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
4.1 ORGANIZATION AND QUALIFICATION. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Japan, with full power
and authority to own, use or lease its properties and to conduct its business as
such properties are owned, used or leased and as such business is conducted.
4.2 AUTHORITY. Buyer has the requisite corporate power and authority to enter
into this Agreement and to carry out the transactions contemplated hereby. The
execution, delivery and performance of this Agreement by Buyer have been duly
and validly authorized and approved by all necessary corporate action on the
part of Buyer, and this Agreement constitutes the legal and binding obligation
of Buyer, enforceable against Buyer in accordance with its terms. Assuming the
accuracy of the representations and warranties of Seller hereunder and to the
best knowledge of Buyer, the entering into of this Agreement by Buyer does not,
and the consummation by Buyer of the transactions contemplated hereby will not,
violate the provisions of (a) any applicable laws of the United States or any
other state or jurisdiction in which Buyer does business, (b) the Charter or
By-Laws of Buyer, or (c) any provision of, or result in a default or
acceleration of any obligation under, or result in any change in the rights or
obligations of Buyer under, any mortgage, Lien, lease, agreement, contract,
instrument, order, arbitration award, judgment, or
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decree which would have a Material Adverse Effect on Buyer's ability to
consummate the transactions contemplated hereunder.
4.3 BROKERS. Neither Buyer nor anyone acting on its behalf has engaged,
retained or incurred any liability to any broker, investment banker, finder or
agent or has agreed to pay any brokerage fees, commissions, finder's fees or
other fees with respect to the purchase of Purchased Assets, this Agreement or
the transactions contemplated hereby.
4.4 WAIVER OF COMPLIANCE WITH THE BULK SALES ACT. In connection with the
transactions contemplated hereby, and in reliance upon Seller's representations
and warranties in Section 3.3 hereof, the parties shall waive compliance with
the provisions of Article 6 of the Uniform Commercial Code - Bulk Transfers and
the Bulk Sales Act and any other applicable bulk sales act or statute ("Bulk
Sales Acts").
5. CLOSING CONDITIONS
5.1 CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of Buyer to consummate
this Agreement and the transactions contemplated hereby are subject to the
fulfillment, prior to or at the Closing, of the following conditions precedent:
5.1.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the
representations and warranties of Seller contained in this Agreement shall
remain true and correct at the Closing Date as fully as if made on the Closing
Date; Seller shall have performed, on or before the Closing Date, all of its
obligations under this Agreement and the other Purchase Documents which by the
terms thereof are to be performed on or before the Closing Date; and Seller
shall have delivered to Buyer an Officer's Certificate dated the Closing Date of
Seller to such effect.
5.1.2 NO PENDING ACTION. No legislation, order, rule, ruling or regulation
shall have been proposed, enacted or made by or on behalf of any governmental
body, department or agency, and no legislation shall have been introduced in
either House of Congress or in the legislature of any state, and no
investigation by any governmental authority shall have been commenced or
threatened, and no action, suit, investigation or proceeding shall have been
commenced before, and no decision shall have been rendered by, any court or
other governmental authority or arbitrator, which, in any such case, in the
reasonable judgment of Buyer could adversely affect, restrain, prevent or
rescind the transactions contemplated by this Agreement (including, without
limitation, the purchase and sale of the Purchased Assets) or result in a
Material Adverse Effect.
5.1.3 PURCHASE PERMITTED BY APPLICABLE LAWS; LEGAL INVESTMENT. Buyer's
purchase of and payment for the Purchased Assets (a) shall not be prohibited by
any applicable law or governmental order, rule, ruling, regulation, release or
interpretation, (b) shall not constitute a fraudulent or voidable conveyance
under
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any applicable law, and (c) shall be permitted by all applicable laws, statutes,
ordinances, regulations and rules of the jurisdictions to which Buyer is
subject.
5.1.4 PROCEEDINGS SATISFACTORY. All proceedings taken in connection with
the purchase and sale of the Purchased Assets, all of the other Purchase
Documents and all documents and papers relating thereto, shall be in form and
substance reasonably satisfactory to Buyer.
5.1.5 CONSENTS - PERMITS. Seller shall have received (and there shall be in
full force and effect) all material consents, approvals, licenses, permits,
orders and other authorizations of, and shall have made (and there shall be in
full force and effect) all such filings, registrations, qualifications and
declarations with, any Person pursuant to any applicable law, statute,
ordinance, regulation or rule or pursuant to any agreement, order or decree to
which Seller with respect to the Product Line is a party or to which it is
subject, in connection with the transactions contemplated by this Agreement and
the sale of the Purchased Assets.
5.1.6 INTELLECTUAL PROPERTY. With respect to patents, trademarks, service
marks, trade names, copyrights owned by Seller, included among the Purchased
Assets, and listed in SCHEDULE 3.5, Seller shall execute and deliver to Buyer
appropriate instruments of transfer conveying to Buyer all right, title and
interest in and to such intellectual property; and
5.1.7 CREDITORS. Seller shall satisfy all creditors in connection with
Seller's operation of the Product Line prior to the Closing, except as
contemplated by the Assumed Liabilities, and shall remove any and all Liens
against the Purchased Assets.
5.2 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Seller to
consummate this Agreement and the transactions contemplated hereby are subject
to the fulfillment, prior to or at the Closing, of the following conditions
precedent:
5.2.1 REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Buyer in this Agreement shall remain true and correct at the
Closing Date, and Buyer shall, on or before the Closing Date, have performed all
of its obligations under this Agreement and the other Purchase Documents which
by the terms thereof are to be performed by it on or before the Closing Date.
5.2.2 NO PENDING ACTION. No legislation, order, rule, ruling or regulation
shall have been proposed, enacted or made by or on behalf of any governmental
body, department or agency, and no legislation shall have been introduced and no
investigation by any governmental authority shall have been commenced or
threatened, and no action, suit, investigation or proceeding shall have been
commenced before, and no decision shall have been rendered by, any court or
other governmental authority or arbitrator, which, in any such case, was not
known by Seller on the date hereof or which could adversely affect, restrain,
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prevent or rescind the transactions contemplated by this Agreement (including,
without limitation, the purchase and sale of the Purchased Assets) or result in
a Material Adverse Effect.
5.2.3 CONSENTS - PERMITS. Buyer shall have received (and there shall be in
full force and effect) all material consents, approvals, licenses, permits,
orders and other authorizations of, and shall have made (and there shall be in
full force and effect) all such filings, registrations, qualifications and
declarations with, any Person pursuant to any applicable law, statute,
ordinance, regulation or rule or pursuant to any agreement, order or decree to
which Buyer with respect to the Product Line is a party or to which it is
subject, in connection with the transactions contemplated by this Agreement, the
purchase of the Purchased Assets and the assumption of Assumed Liabilities.
5.3 CLOSING DELIVERIES. Closing deliveries shall be made at or prior to the
Closing.
5.3.1 PURCHASE PRICE. Buyer shall deliver, or cause to be delivered to
Seller, the Purchase Price.
5.3.2 PURCHASE DOCUMENTS. Buyer and Seller shall execute and deliver, or
cause to be executed and delivered, the Purchase Documents.
6. TERMINATION
6.1 TERMINATION OF AGREEMENT. This Agreement and the transactions
contemplated hereby may (at the option of the party having the right to do
so) be terminated at any time on or prior to the Closing Date as follows:
6.1.1 MUTUAL CONSENT. By mutual written consent of Buyer and Seller;
6.1.2 COURT ORDER. By Buyer or Seller if any court of competent
jurisdiction shall have issued an order pursuant to the request of a third
party restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement;
6.1.3 FAILURE TO CLOSE. By Buyer or Seller if the transactions
contemplated hereby shall not have been consummated on or before September 15,
1997; provided, however, that such right to terminate this Agreement shall not
be available to any party whose failure to fulfill any obligation of this
Agreement has been the cause of, or resulted in, the failure of the transactions
contemplated hereby to be consummated on or before such date;
6.1.4 TERMINATION BY SELLER. By Seller upon notice to Buyer, if as
of the Closing (i) a condition to the performance of Seller set forth in
Section 6.2 hereof shall not be fulfilled at the time specified for the
fulfillment thereof, (ii) a default under or a breach of this Agreement shall
be made by Buyer, or (iii) any representation or
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warranty set forth in this Agreement or in any instrument delivered by Buyer
pursuant hereto shall be materially false or misleading; or
6.1.5 TERMINATION BY BUYER. By Buyer by notice to Seller at any
time prior to the Closing if (i) a condition to the performance of Buyer set
forth in Section 6.1 hereof shall not be fulfilled at the time specified for
the fulfillment thereof, (ii) a default under or a breach of this Agreement
shall be made by Seller, (iii) any representation set forth in this Agreement
or in any instrument delivered by Seller pursuant hereto shall be materially
false or misleading, or (iv) the results of Buyer's due diligence shall not
be satisfactory to Buyer.
6.2 EFFECT OF TERMINATION AND RIGHT TO PROCEED. If this Agreement is
terminated pursuant to this Section 6, all further obligations of Buyer and
Seller under this Agreement shall terminate without further liability of Buyer
or any Affiliate thereof to Seller or of Seller to Buyer or any Affiliate
thereof. If any of the conditions to obligations of Buyer specified herein have
not been satisfied, Buyer, in addition to any other rights which it may have,
shall have the right to waive its rights to have such conditions satisfied and
elect to proceed with the transactions contemplated hereby and, if any of the
conditions to the obligations of Seller specified herein have not been
satisfied, Seller in addition to any other rights which may be available to it,
shall have the right to waive its rights to have such conditions satisfied and
elect to proceed with the transactions contemplated hereby.
7. INDEMNIFICATION
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each and every such
representation and warranty set forth in this Agreement shall survive until the
first anniversary of the Closing Date.
7.2 INDEMNIFICATION BY SELLER. Seller shall indemnify, defend and hold Buyer,
its officers, directors, employees, owners, agents and Affiliates, harmless from
and in respect of any and all losses, damages, costs and expenses of any kind
and nature whatsoever (including, without limitation, interest and penalties,
reasonable expenses of investigation and court costs, reasonable attorneys' fees
and disbursements and the reasonable fees and disbursements of other
professionals) which may be sustained or suffered by any of them (collectively
"Losses"), arising out of, resulting from or pertaining to any Retained
Liability, any breach or inaccuracy of any representation or warranty or the
breach of or failure to perform any warranty, covenant, undertaking or other
agreement of Seller contained in this Agreement or any other Purchase Document,
liabilities under the Bulk Sales Acts, and all environmental, ecological,
health, safety, products liability or other claims pertaining to the Purchased
Assets which relate to time periods or events occurring prior to the Closing
Date.
7.3 INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold Seller
and its officers, directors, employees, consultants, owners, agents and
Affiliates,
9
<PAGE>
harmless from and in respect of any and all Losses which may be sustained or
suffered by any of them arising out of or resulting from or pertaining to any
breach or inaccuracy of any representation or warranty or the breach of or
failure to perform any warranty, covenant, undertaking or other agreement of
Buyer contained in this Agreement or any other Purchase Document or all Assumed
Liabilities (other than Retained Liabilities) and for all environmental,
ecological, health, safety, products liability or other Claims pertaining to the
Assumed Liabilities or the Purchased Assets which relate to time periods or
events occurring after the Closing Date.
7.4 NOTICE AND OPPORTUNITY TO DEFEND. If there occurs an event which a party
asserts is an indemnifiable event pursuant to Section 7.2 or 7.3, the party
seeking indemnification (the "Claiming Party") shall promptly notify the other
party obligated to provide indemnification (the "Indemnifying Party"). If such
event involves (a) any Claim, or (b) the commencement of any action, suit or
proceeding by a third person, the Claiming Party will give the Indemnifying
Party prompt written notice of such Claim or the commencement of such action,
suit or proceeding, PROVIDED, HOWEVER, that the failure to provide prompt notice
as provided herein will relieve the Indemnifying Party of its obligations
hereunder only to the extent that such failure prejudices the Indemnifying Party
hereunder. In case any such action, suit or proceeding shall be brought against
a Claiming Party and it shall notify the Indemnifying Party of the commencement
thereof, the Indemnifying Party shall be entitled to participate therein and, to
the extent that it desires to do so, to assume the defense thereof, with counsel
reasonably satisfactory to the Claiming Party and, after notice from the
Indemnifying Party to the Claiming Party of such election so to assume the
defense thereof, the Indemnifying Party shall not be liable to the Claiming
Party hereunder for any attorneys' fees or any other expenses, in each case
subsequently incurred by the Claiming Party, in connection with the defense of
such action, suit or proceeding. The Claiming Party shall cooperate fully with
the Indemnifying Party and its counsel in the defense against any such action,
suit or proceeding. In any event, the Claiming Party shall have the right to
participate at its own expense in the defense of such action, suit or
proceeding. In no event shall an Indemnifying Party be liable for any
settlement or compromise effected without its prior consent.
7.5 PAYMENT. Payment of amounts owing by the Indemnifying Party pursuant to
Sections 7.2 through 7.3 with respect to a third party claim shall be made
within thirty days after the later of (i) settlement of the third party claim,
or (ii) the expiration of the period for appeal of a final adjudication of such
third party claim.
7.6 TAX BENEFITS; INSURANCE PROCEEDS. In determining the amount of any damages
for which any party is entitled to indemnification under this Agreement, the
gross amount thereof will be reduced by any correlative Tax benefit or insurance
proceeds realized or to be realized by such party; provided, however, that any
increase in insurance premiums or Taxes or the like caused by the damages or
10
<PAGE>
payment thereof shall be taken into consideration and utilized to offset the
reduction in damages.
7.7 DISPUTE RESOLUTION. In the event that a dispute arises between the parties
as to any claim for Indemnification under Sections 7.1 through 7.4 hereof, the
Presidents of each party hereto shall, for a period of ten (10) days, discuss
the matter in question to see if it is capable of a resolution without invoking
the provisions of Section 7.4 hereof. In the event that the matter has not been
so resolved upon the conclusion of such ten (10) day period, during the next
thirty (30) days the parties shall engage in good faith non-binding mediation
with a mutually agreeable third party mediator in an effort to resolve such
matter. The mediation shall occur in San Jose, California.
8. Restrictive Covenants.
8.1 NONCOMPETITION. For a period of three (3) years after the date of Closing,
Seller will not, except with written permission of Buyer, offer for sale,
directly or through representatives or distributors, products which compete
directly with Mag systems or RLM Bridges.
8.2 RETENTION OF DOCUMENTATION. Seller may retain a single copy of technical
documentation under suitable administrative control only for archival purposes
and to satisfy any residual warranty obligations. Seller shall keep the
documents in strict confidence and shall not use them for any other purpose
whatsoever and shall not divulge them to any party whatsosever. Seller may
retain copies of the customer lists for any purpose.
8.3 NONUSE OF DOCUMENTATION. Seller will not, except with the written
permission of Buyer, at any time after closing use any portion of the retained,
nonpublic, technical documentation to compete with Buyer. Seller may use
customer lists for any purpose.
8.4 RESTRICTIONS REASONABLE. Seller and Buyer acknowledge and agree that (a)
the restrictions set forth in this Section 8 are reasonable in terms of scope,
duration, geographic area, and otherwise, and (b) the protections afforded to
the Buyer, and its Affiliates, hereunder are necessary to protect their
legitimate business interests.
9. SUPPLY OF SQUID SENSORS.
For a period of three (3) years after closing, Seller will offer such
SQUID sensors as it offers to the general public for sale to Buyer at a price no
higher than it offers those sensors to other customers for similar quantities,
delivery times, warranty and payment terms.
Seller will continue to honor the warranty terms on SQUID sensors
previously delivered to Buyer.
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10. SUPPORT FOR XMAG.
10.1 PROBE PURCHASE. Buyer will make, deliver, install and warrant (except for
SQUID sensors contained therein) a probe for the XMAG sold to the University of
Nebraska for a price of $_______ and a delivery date of _____.
10.2 SERVICE CONTRACT. Seller and Buyer will enter into a time and materials
service contract in the form set forth in Exhibit 10.2 for warranty service of
XMAG systems sold to the University of Nebraska and Scienchem in Taiwan.
11. MISCELLANEOUS
11.1 FEES AND EXPENSES. Each of the parties hereto will pay and discharge its
own expenses and fees in connection of with the negotiation of and entry into
this Agreement and the consummation of the transactions contemplated hereby.
11.2 NOTICES. All notices, requests, demands, consents and communications
necessary or required under this Agreement or any other Purchase Document shall
be made in the manner specified, or, if not specified, shall be delivered by
hand or sent by registered or certified mail, return receipt requested,
overnight courier, or by telecopy (receipt confirmed) to:
if to Buyer:
Niki Glass Co. Ltd.
16-9 Hagoromo 5-chrome
Takaishi-City
Osaka 592 Japan
Attn.: Takefumi Niki
President
Facsimile Transmission Number:
with a copy to:
Konaka, Toyama & Hosoya
Attn.: Yoshinori Hosoya
Facsimile Transmission Number: 001-81-3-3587-0101
if to Seller:
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, CA 94086
Attention: Charles E. Shalvoy
President
Facsimile Transmission Number: (408) 523-9979
12
<PAGE>
with a copy to:
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, CA 94086
Attention: Judith A. DeFranco, Esq.
Manager, Legal Affairs
Facsimile Transmission Number: (408) 523-9979
All such notices, requests, demands, consents and other communications
shall be deemed to have been duly given or sent two (2) days following the date
on which mailed, or on the date on which delivered by hand or overnight courier
or by facsimile transmission (receipt confirmed), as the case may be, and
addressed as aforesaid.
11.3 SUCCESSORS AND ASSIGNS. All covenants and agreements set forth in this
Agreement and made by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the successors and assigns of such party, whether or not
so expressed, except that Seller may not assign or transfer any of its rights or
obligations under this Agreement without the consent in writing of Buyer.
11.4 COUNTERPARTS, ETC. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement. If any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason in any
jurisdiction, the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions hereof shall not be in any
way impaired or affected, it being intended that each of parties' rights and
privileges shall be enforceable to the fullest extent permitted by law, and any
such invalidity, illegality and unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
11.5 GOVERNING LAW. This Agreement, including the validity hereof and the
rights and obligations of the parties hereunder, shall be construed in
accordance with and governed by the laws of the State of California applicable
to contracts made and to be performed entirely in such state (without giving
effect to the conflicts of laws provisions thereof). subject to the provisions
of Section 7.7, the exclusive jurusdiction and venue over any dispute arising in
connection with or as a result of this Agreement shall be a court of the State
of California of competent jurisdiction located in San Diego County, California.
13
<PAGE>
11.6 ENTIRE AGREEMENT. This Agreement, including the Schedules referred to
herein, is complete, and all promises, representations, understandings,
warranties and agreements with reference to the subject matter hereof, and all
inducements to the making of this Agreement relied upon by all the parties
hereto, have been expressed herein or in said Schedules or Exhibits. This
Agreement may not be amended except by an instrument in writing signed on behalf
of Seller and Buyer.
11.7 ATTORNEYS' FEES: COSTS. If either party resorts to mediation, litigation
or other legal process to enforce its rights under this Agreement, the
prevailing party shall be entitled to an award of its reasonable costs and
attorney's fees.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first set forth above.
ATTEST: NIKI GLASS CO. LTD..
__________________________ __________________________
By:_______________________ By:_______________________
Title:____________________
ATTEST: CONDUCTUS, INC.
__________________________ __________________________
By:_______________________ By:_______________________
Title:____________________
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<PAGE>
SCHEDULE 2.1
PURCHASED ASSETS
Seller shall deliver to Buyer the following:
1. All drawings, specifications and similar materials for the Product Line in
hard copy and electronic form (where available);
2. Intellectual property specific to the Product Line, including, the
following rights as more fully identified on SCHEDULE 3.5 hereto;
a) All trademarks used to identify the Product Line as follows:
1. IMAG;
2. XMAG;
b) All copyrights used in the Product Line, including copyright in
firmware, software and manuals; and
c) All know-how related to the Product Line, including all documentation
regarding such know-how;
3. The fixtures, tools and equipment of the Product Line used in the assembly,
test, calibration, and support of the Product Line as follows:
Description Tab # Quantity
a) Tekscope-100 mhz-portable THS 710 17 1
b) Ultrasonic "3210" 51 1
c) Large Torch Cart 56 1
d) Oxygen Cylinder 57 1
e) Acetylene Cylinder 58 1
f) Drill Press Enco 70 1
g) Belt Disc Sander 71 1
h) Flammable Cabinet 73 1
i) Veeco Leak Detector-MS 9 76 1
j) Veeco Leak Dector-MS 17 77 1
k) Stanford Function Generator-model 108 1
DS33
l) HP 54601B - O-Scope 376 1
m) HP 34401A Multimeter 382 1
n) Chart Recorder 555 1
o) Microscope 560 1
p) Engine Stand 568 1
q) Vacuum Pump 572 1
r) HP Dynamic Signal Analyzer 598 1
s) Mass Flowmeter 602 1
t) Power Stat Variable Auto. Trans 610 1
u) Lock-in Amplifier - Stanford 619 1
SR510
v) AT 6400 (used) 827 1
w) AT 6400 (used) 828 1
x) 3 Layer Shield 848 1
y) 3 Axis Fluxgate Magnetometer 885 1
z) Soldering Iron TBD 1
1
<PAGE>
Description Tab # Quantity
aa) Black Cabinets TBD 4
bb) Office Desks TBD 4
cc) File Cabinets TBD 4
dd) Desk Chairs TBD 4
ee) Work Benches TBD 2
ff) Small Tools - sets N/A 2
gg) Labview with Labwindows N/A 1
hh) Borland 4.5-5.0 N/A 1
ii) Protogen N/A 1
4. Inventories of the Product Line, including all raw materials, work in
process, finished goods, and test and marketing demonstration units
existing on the Closing Date, but excluding SQUID Sensors and the
1-channel HTS system sold to Oriental Scientific, which will be
retained by the Seller.
5. A copy of all customer files and records relating to the Product Line
and Purchased Assets.
6. All brochures, marketing literature, and customer lists.
7. Other fixed assets and equipment as follows:
Description Tab # Quantity
a) Compressor 49 1
b) Small Torch with 2 cylinders 53 1
c) Triple Beam Balance 63 1
d) Leak Detector Cart with Parts 65 1
e) Hoist CM Series 622 68 1
f) Telephone System & Phones Various 21
g) HP DC Power supply 116 1
h) 4 Drawer File Cabinet-Purchasing 201 1
i) 4 Drawer File Cabinet-Purchasing 202 1
j) HP 165B Logic Analyzer 381 1
k) Bead Blaster 551 1
l) Hydraulic Press 561 1
m) Extreme Isolation X-Former 615 1
n) Gauss Meter - F.W. Bell - 9200 617 1
o) Conference Table & Chairs 763-771 9
p) Overhead Projector & Screen 773 2
q) Canon Copier-NP6030 780 1
r) Refrigerator 783 1
s) Heat Gun 823 1
t) UNGAR Heat Gun 825 1
u) Lab Dewar 830 1
v) Cal Comp Plotter 846 1
w) Cannon Fax - L777 849 1
x) File cabinets TBD 6
y) Desks TBD 6
z) Chairs TBD 6
2
<PAGE>
aa) White boards (if available) TBD 10
bb) Work benches - non-formica tops TBD 6
cc) Pentium computer (Barker's) 957-958 1
dd) 486 Computer-generic TBD 1
ee) Panavises N/A 4
ff) Regulators N/A 3
gg) Bookcases-Purchasing TBD 4
hh) Wastebaskets N/A 10
ii) Soldering Stations TBD 2
jj) MVE Dewar N/A 1
3
<PAGE>
SCHEDULE 2.3
RETAINED ASSETS
Seller shall retain ownership of the following assets:
1. All fixtures, tools and equipment of Seller, whether used in the
Business or not, except for those assets listed in SCHEDULE 2.1; and
2. U.S. Patent No. 5,532,592, titled "SQUID Control Apparatus with
Non-Cryogenic Flux-Locked Loop Disposed in Closed Proximity to the
SQUID;"
3. All intellectual property related to the design and manufacture of
SQUID sensors;
4. All purchased software for accessing computer data files; and
5. All licenses for patents from third parties.
1
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SCHEDULE 2.4
ASSUMED LIABILITIES
Buyer shall be responsible for the following:
1. all responsibility for manufacture, delivery and warranty service for
all XMAG systems sold by Niki;
2. all liability arising from the cancellation by Conductus of orders for
options for XMAG systems sold by Niki;
3. all liability arising from the cancellation by Conductus of orders for
RLM bridges sold by Niki;
4. all responsibility for completion, delivery and warranty service of
the TIT system, including any liability for late delivery;
5. all liability associated with the cancellation of delivery of the
Riken scanning microscope system; and
6. all responsibility for warranty service for custom systems sold by
Niki.
1
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SCHEDULE 2.5
RETAINED LIABILITIES
Seller shall retain all liability for:
1. Warranty service for all SQUID sensors sold by Seller;
2. All liability, including warranty service, for all XMAG systems, other
than those sold to customers of Buyer, including systems sold to the University
of Nebraska and Scienchem Corp. in Taiwan.
1
<PAGE>
SCHEDULE 2.8
ALLOCATION OF PURCHASE PRICE
The Purchase Price shall be allocated as follows:
1. Fixed Assets $30,000
2. Inventory $50,000
3. Lease Assumption $26,000
4. Ongoing R&D $84,000
1
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SCHEDULE 3.3
LIENS AND DEFECTS
None
1
<PAGE>
SCHEDULE 3.5
INTELLECTUAL PROPERTY
(i) Intellectual Property owned by Seller:
1. U.S. Patent No. 5,532,592, titled "SQUID Control Apparatus with
Non-Cryogenic Flux-Locked Loop Disposed in Closed Proximity to the SQUID;
2. Registered trademark "IMAG";
3. Common law trademark "XMAG;"
4. Copyright in all software, firmware and manuals.
(b) Third Party Intellectual Property licensed by Seller:
1. License from Sperry Unisys for U.S. Patent No. 4,663,590 titled
"Single frequency noise reduction circuit for squids;"
2. License from BTI for U.S. Patent No. 4,389,612 titled "Apparatus
for Reducing Low Frequency Noise in DC Biased SQUIDS.
1
<PAGE>
[LETTERHEAD]
EXHIBIT 23.01
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 and 33-79946, and 333-41099)
of our reports dated February 9, 1998 (except for Notes 1 and 17, as to which
the date is April 17, 1998), on our audits of the financial statements and
financial statement schedule of Conductus, Inc. as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996 and 1995 which reports
are included in this Annual Report on Form 10-K.
San Jose, California
April 17, 1998
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<PERIOD-START> JAN-01-1997
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