<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NUMBER #0-11915
CONDUCTUS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 77-0162388
- -------------------------------------------------------------------------------
<S> <C>
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
969 W. Maude Ave., Sunnyvale, California 94086
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 523-9950
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(Registrant's Telephone Number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common shares outstanding at August 10, 1998: 7,116,410
Total pages: 20
Index to Exhibits to be found on page 19
<PAGE>
CONDUCTUS, INC.
Index
<TABLE>
<S> <C>
PART I : FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1 : FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Balance Sheets at June 30, 1998 and December 31, 1997 . . . . . . . . . . 3
Condensed Statements of Operations for the Three and Six Months Ended June 30,
1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed statements of Cash Flows for the Six Months Ended June 30, 1998 and
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2 : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 3 : QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . 14
PART II : OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 1 : LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 2 : CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3 : DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4 : SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . 16
ITEM 5 : OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 6 : EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
2
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
CONDUCTUS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,272,718 $2,111,560
Restricted cash - 500,000
Short-term investments - 556,633
Accounts receivable, net 1,613,051 2,055,255
Inventories, net 668,263 610,367
Prepaid and other assets 131,487 139,479
--------- ---------
Total Current Assets 3,685,519 5,973,294
--------- ---------
Property, plant and equipment, net 2,443,137 2,700,594
Other assets 582,266 87,762
--------- ---------
Total assets $6,710,922 $8,761,650
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - bank $1,950,000 $ -
Current portion of long-term debt 1,037,356 1,547,507
Accounts payable 1,192,811 1,539,590
Other accrued liabilities 739,884 1,063,721
--------- ---------
Total current liabilities 4,920,051 4,150,818
Long-term debt, net of current portion 1,936,555 309,681
--------- ---------
Total liabilities 6,856,606 4,460,499
--------- ---------
Stockholders' equity (deficit):
Common stock 727 702
Additional paid-in capital 41,190,890 41,070,636
Accumulated deficit (41,337,301) (36,770,187)
------------ ------------
Total stockholders' equity (deficit) (145,684) 4,301,151
------------ ------------
Total liabilities and stockholders'
equity (deficit) $6,710,922 $8,761,650
----------- -----------
</TABLE>
3
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CONDUCTUS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract $ 866,512 $ 1,836,928 $ 1,730,126 $ 4,110,898
Product 173,284 648,385 437,362 1,514,045
----------- ----------- ----------- -----------
Total revenues 1,039,796 2,485,313 2,167,488 5,624,943
Operating expenses:
Cost of product 162,166 845,973 500,983 1,281,046
Research and development 1,870,884 2,898,263 4,169,136 5,876,217
Selling, general & administrative 864,953 1,020,652 1,962,756 2,146,011
Writedown of property, plant, & equipment - 100,000 - 100,000
----------- ----------- ----------- -----------
Total operating expenses 2,898,003 4,864,888 6,632,875 9,403,274
----------- ----------- ----------- -----------
Loss from operations (1,858,207) (2,379,575) (4,465,387) (3,778,331)
Interest income 14,175 79,438 42,774 176,153
Other income (expense) - (21,314) - (25,393)
Interest expense (88,878) (68,123) (144,501) (125,059)
----------- ----------- ----------- -----------
Net loss $(1,932,910) $(2,389,574) $(4,567,114) $(3,752,630)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per basic and diluted common share $ (0.27) $ (0.35) $ (0.65) $ (0.55)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing per share amounts 7,083,000 6,864,000 7,049,000 6,853,000
</TABLE>
See accompanying notes.
4
<PAGE>
CONDUCTUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,567,114) $ (3,752,630)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 451,496 430,796
Writedown of property, plant, & equipment 100,000
Provision for excess and obsolete inventory 96,176
Changes in:
Accounts receivable 442,204 667,928
Inventories (154,072) 154,720
Prepaid and other assets (486,512) 114,394
Accounts payable and other accrued liabilities (670,616) (49,830)
--------- ---------
Net cash used in operating activities (4,888,438) (2,334,622)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of short-term investments 556,633 19,924,912
Purchases of short-term investments - (17,466,378)
Acquisition of property and equipment (194,038) (515,414)
--------- ---------
Net cash provided by investing activities 362,595 1,943,120
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings 4,450,000 410,133
Net proceeds from issuance of common stock 120,278 192,087
Principal payments on long-term debt (1,383,277) (543,263)
--------- ---------
Net cash provided by financing activities 3,187,001 58,957
--------- ---------
Net decrease in cash and cash equivalents (1,338,842) (332,545)
Cash and cash equivalents at beginning of period 2,611,560 1,119,991
--------- ---------
Cash and cash equivalents at end of period $ 1,272,718 $ 787,446
--------- ---------
---------- ---------
</TABLE>
See accompanying notes.
5
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CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL INFORMATION:
The accompanying unaudited interim financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. The unaudited financial statements as of June
30, 1998 and for the three and six months ended June 30, 1998 and 1997
include, in the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial information
set forth herein. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for an entire year. The
December 31, 1997 balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
CASH, CASH EQUIVALENTS, AND INVESTMENTS:
At June 30, 1998, all of Conductus Inc.'s (the "Company" or
"Conductus") highly liquid investments had original maturities of less than
ninety days, and accordingly are considered cash equivalents.
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 and other factors in evaluating net
realizable value.
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>
- --------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Numerator - basic and diluted EPS:
- --------------------------------------------------------------------------------------------------------------------------
Net loss $(1,932,910) $(2,389,574) $(4,567,114) $(3,752,630)
- --------------------------------------------------------------------------------------------------------------------------
Denominator - basic and diluted EPS:
- --------------------------------------------------------------------------------------------------------------------------
Common Stock outstanding 7,083,000 6,864,000 7,049,000 6,853,000
- --------------------------------------------------------------------------------------------------------------------------
Basic loss per share $(0.27) $(0.35) $(0.65) $(0.55)
------- ------- ------- -------
------- ------- ------- -------
- --------------------------------------------------------------------------------------------------------------------------
Diluted loss per share $(0.27) $(0.35) $(0.65) $(0.55)
------- ------- ------- -------
------- ------- ------- -------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the above computations, common equivalent shares are excluded from the
basic and diluted loss per share as their effect is anti-dilutive. Common
equivalent shares that could potentially dilute basic earnings per share in
the future and that were not included in the
6
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computations of diluted loss per share because of anti-dilution were
approximately 92,000 and 342,000 for the three months ended June 30, 1998 and
1997 respectively, and approximately 110,000 and 387,000 for the six months
ended June 30, 1998 and 1997 respectively.
RECENT PRONOUNCEMENTS:
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. This statement requires the disclosure of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as net income plus
revenues, expenses, gains and losses that, under generally accepted
accounting principles, are excluded from net loss. The component of
comprehensive loss, which is excluded from net loss, is not significant and
therefore, no separate statement of comprehensive income has been presented.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise" ("SFAS 14"). SFAS 131
changes current practice under SFAS 14 by establishing a new framework on
which to base segment reporting and also requires interim reporting of
segment information. This statement is effective for fiscal years beginning
after December 15, 1997. The statement's interim reporting disclosures are
not required until the first quarter immediately subsequent to the fiscal
year in which SFAS 131 is effective.
2. ACCOUNTS RECEIVABLE :
Accounts receivable, net, consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
U. S. government contracts:
Unbilled $811,768 $1,146,283
Billed 941,418 793,382
Commercial 160,807 363,822
Reserves (300,942) (248,232)
--------- ---------
$1,613,051 $2,055,255
---------- ----------
---------- ----------
</TABLE>
3. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Raw materials and purchased parts $ 480,148 $ 293,336
Work in process 38,259 366,550
Finished goods 526,877 231,326
Reserves (377,021) (280,845)
------------ -----------
$ 668,263 $ 610,367
------------ -----------
------------ -----------
</TABLE>
7
<PAGE>
4. LONG TERM DEBT:
At June 30, 1998, the Company's credit facilities consisted of
a note payable from a leasing company, a bank bridge loan, three bank
equipment term loans, and a bank line of credit.
On April 22, 1998, the Company entered into a sale leaseback
commitment with a leasing company, which was classified as a note payable to
the leasing company, collateralized by the Company's property, plant, and
equipment. The effective interest rate is 13.98% and there are certain
reporting and financial covenants which the Company is required to satisfy.
The Company also granted to the leasing company warrants to purchase up to
$125,000 of the Company's stock at a price equal to $4.11. The fair value of
such warrants is approximately $102,000 and will be amortized over the three
year life of the loan. The total amount loaned to the Company under this
facility is $2,500,000; however, of this total, $500,000 will not be
available to the Company until the Company successfully completes an equity
offering pursuant to the terms of the loan agreement.
On April 23, 1998, the Company entered into a bridge loan credit
facility agreement with its bank. The facility provides for borrowings of up
to $2,000,000, with interest at the bank's prime rate plus 2%. The facility
matures on August 21, 1998, and the Company is currently negotiating an
extension with the bank. The agreement grants to the bank warrants to
purchase 50,000 shares of the Company's stock at $3.625 per share. Such
warrants have a term of five years and a fair value of approximately $132,000.
Borrowings under this facility are collateralized by a first priority
security interest in all of the Company's property, including intellectual
property rights, and a second priority security interest in the Company's
property, plant, and equipment. At June 30, 1998, there was $50,000
available under this facility.
The three equipment term loans bear interest at the bank's prime
rate plus 2%, with principal and interest payments paid monthly. These term
loans mature on the later of the maturity dates set forth in each of the
original term loan agreements or the date of completion of an equity
financing transaction; provided, however, that if the Company chooses to
collateralize the term loans with restricted cash deposits, then the maturity
dates for the term loans shall remain as stated in each of the original term
loan agreements. At June 30, 1998, there was approximately $ 632,000
outstanding under these loans, and no further amounts were available.
The bank line of credit agreement provides for borrowings of up
to the lesser of $2,000,000 or 80% of eligible receivables. Borrowings under
this facility bear interest at the bank's prime rate plus 2.0% and will be
collateralized by accounts receivable, equipment and other assets of the
Company. At June 30, 1998, there were no amounts outstanding under this
facility.
At June 30, 1998, the Company was in default of its tangible net
worth covenant. The Company received a waiver for this default from the
Lender.
All the credit facilities contain reporting and financial
covenants. In the event of default on any of these covenants, no further
amounts would be advanced to the Company under any facility, the entire
amounts outstanding could become due and payable immediately upon default,
and those assets that are collateral could be seized, unless such default is
waived by the lender.
8
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Item 2 : Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. Conductus Inc.'s (the "Company" or
"Conductus") actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors" in Part 1
of the Company's Annual Report on Form 10-K/A as of and for the year ended
December 31, 1997. The following discussion should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report on Form 10-Q.
OVERVIEW
Conductus develops, manufactures and markets electronic
components and systems based on superconductors for applications in the
worldwide telecommunications markets. As of June 30, 1998, Conductus had
accumulated losses of approximately $41,337,000 and expects to incur
significant additional losses at least during 1998. 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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND
1997
The Company's total revenues decreased to $1,040,000 for the
second quarter of 1998, a 58% decrease from $2,485,000 for the same period in
1997. For the six months ended June 30, 1998, the Company's total revenues
decreased to $2,167,000, a 61% decrease from $5,625,000 for the same period
in 1997. Total revenue consists primarily of contract revenue and, to a
lesser extent, product sales. Revenues under U.S. government research and
development contracts were $867,000 for the second quarter of 1998, a
decrease of 53% from $1,837,000 in the same period in the prior year. For the
six months ended June 30, 1998, revenues under U.S. government research and
development contracts were $1,730,000, a decrease of 58% from $4,111,000 in
the same period in the prior year. Both of these decreases reflect the focus
of the Company's business on products for the wireless communications
market, following the disposal of the Instrument and System division and the
NMR product line in the third quarter of 1997, and a lower level of federal R
& D funding in the Company's technology area. At June 30, 1998, Conductus had
a backlog of approximately $477,000 under existing U.S. government contracts,
most of which is to be performed in the next 12 months, and approximately
$5,312,000 in awards from U. S. government agencies for which such agencies
had not yet entered into research contracts with the Company. The Company
anticipates that contract revenues for the third quarter of 1998 may slightly
exceed those of the second quarter of 1998, although there can be no
assurance as to the level of contract revenue in any future period. The
recognition of revenue and receipt of payment pursuant to these contracts and
awards are subject to numerous risks.
Product revenues decreased to $173,000 in the second quarter of
1998, a 73% decrease from $648,000 of product sales in same period in the
prior year. For the six months ended June 30, 1998, product revenues
decreased to $437,000 in the second quarter of 1998, a 71% decrease from
$1,514,000 of product sales in same period in the prior year. The
9
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decrease in product revenues resulted primarily from decreased shipments of
products from the Instrument and Systems division, which the Company disposed
of during the third quarter of 1997, and lower volumes of other magnetic
sensing products, offset somewhat by increased volume of government and
commercial wireless communications products, as shown in the table below:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
Three months ended: Six months ended:
- -----------------------------------------------------------------------------------------------------------------------
June 30, June 30, Change June 30, June 30, Change
1998 1997 (A) - (B) 1998 1997 (C) - (D)
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Wireless communications products $78,000 $-0- $ 78,000 $228,000 $-0- $228,000
- -----------------------------------------------------------------------------------------------------------------------
San Diego division products -0- 154,000 (154,000) -0- 596,000 (596,000)
- -----------------------------------------------------------------------------------------------------------------------
Other magnetic sensing products 95,000 494,000 (399,000) 209,000 918,000 (709,000)
------ ------- --------- ------- ------- ---------
- -----------------------------------------------------------------------------------------------------------------------
Total product sales $173,000 $648,000 $(475,000) $437,000 $1,514,000 $(1,077,000)
-------- -------- ---------- -------- ---------- ------------
-------- -------- ---------- -------- ---------- ------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Cost of product sales decreased to $162,000 for the second
quarter of 1998, a 81% decrease over the same period in 1997, primarily due
to decreased product sales, offset somewhat by higher unit production costs
on wireless and magnetic sensing products. The cost of products for the
second quarter of 1997 also included a $300,000 inventory writedown related
to the San Diego Instrument and System division inventory. For the six
months ended June 30, 1998, cost of product sales decreased to $501,000, a
61% decrease over the same period in 1997, also primarily due to decreased
product sales, offset somewhat by higher unit production costs on wireless
and magnetic sensing products, and $110,000 inventory writedown recorded in
the first quarter of 1998 related to higher levels of wireless product
inventories and customer demo units. The six month figure for 1997 also
includes the $300,000 San Diego inventory writedown. Gross margins increased
to 6% in the second quarter of 1998 from -31% in the same period in 1997,
reflecting lower unit product costs and the absence of significant writedowns
in the second quarter of 1998. For the six months ended June 30, 1998, gross
margins decreased to -15% from 15% in the same period in 1997, primarily due
to the higher unit production costs and the increase in the inventory
valuation reserve due to the introduction of the wireless product, both
occurring in the first quarter of 1998. Margins are anticipated to improve to
the extent unit volumes increase significantly, which could lead to lower per
unit costs for purchased materials and overhead. Costs of contract revenues
are included in research and development expenses.
Research and development expenses decreased to $1,871,000 in the
second quarter of 1998, a 35% decrease from $2,898,000 for the same period in
1997. For the six months ended June 30, 1998, research and development
expenses decreased to $4,169,000, a 29% decrease from $5,876,000 for the same
period in 1997. Both decreases are primarily attributable to lower levels of
expenditures for government contracts, and decreased headcount and
expenditures related to the Instruments and Systems division and NMR product
lines, partially offset by increases in expenditures for telecommunications
product development. The Company expects to continue to incur significant
research and development expenses as it seeks to develop and market
additional products.
Selling, general and administrative expenses decreased to $
865,000 for the second quarter of 1998, a 15% decrease over the same period
in 1997 and decreased to $1,963,000 for the six months ended June 30, 1998, a
9% decrease over the same period in 1997. This
10
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decrease reflects the disposal of the Instrument and System division, largely
offset by higher spending in Sales and Marketing for wireless communications
products. As the Company begins to market commercial products, the Company
anticipates that there will be additional sales and marketing costs above
those incurred in 1997. The writedown of property, plant, and equipment in
the second quarter of 1997 related to the disposal of the Instrument and
System division.
Total headcount decreased to 74 at June 30, 1998 from 115 at
June 30, 1997, reflecting reductions in personnel in the Instrument and
Systems division and the NMR product line and the lower level of government
contract research work. The headcount reductions are the result of the
Company's continuing focus on telecommunications market opportunities, as
well as the need to conserve cash and control expenses in line with
anticipated revenue levels.
The Company's total operating expenses were $2,898,000 for the
second quarter of 1998, an 40% decrease from the $4,865,000 for the same
period in 1997 and $6,633,000 for the six months ended June 30, 1998, a 29%
decrease from the $9,403,000 for the same period in 1997 for the reasons
described above.
The change in interest income and expense in the three and six
month periods ended June 30, 1998 compared to the same periods in the prior
year reflect lower levels of cash and debt in the respective periods. The
Company has not paid federal income taxes since inception due to its
cumulative operating losses.
LIQUIDITY AND CAPITAL RESOURCES
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 placement financings, $41,136,000 from U.S. government contracts,
$11,006,000 in aggregate borrowings under various lease and bank loan
arrangements, and $3,729,000 in interest income. As of June 30, 1998, the
Company's aggregate cash and cash equivalents totaled $1,273,000.
During the second quarter of 1998, the Company took several
steps to conserve cash and improve its liquidity. These include a $2,500,000
note facility (of which $500,000 is not currently available to the Company)
and a $2,000,000 Bridge Loan Facility. See Note 4 for further description of
the financing arrangements put in place during the second quarter of 1998.
Net cash used in operations was $4,888,000 for the first six
months of 1998 compared to $2,335,000 for the same period in 1997. The
increase in net cash used in operating activities in the first six months of
1998 was primarily due to the larger net loss for the period, an increase in
inventories and prepaid and other assets and a decrease in accounts payable and
other accrued liabilities, offset partially by the decrease in accounts
receivable (though somewhat less than the decrease in accounts receivable for
the first six months of 1997), and depreciation and amortization (which was
approximately at the same level as the first six months of 1997). The
accounts receivable decrease was due to lower levels of revenue, offset
somewhat by slower than anticipated collections on certain government
receivables. The increase in inventories was primarily in the raw material
and purchased parts for wireless commercial products. The decrease in
accounts payable and other accrued liabilities was primarily due to an
acceleration of payments during the second quarter of 1998 after the Company
had delayed payments during the first quarter of 1998 as the Company
attempted to conserve cash while it continued to negotiate various financing.
The Company anticipates that it will incur significant
additional net losses during the balance of 1998. The Company anticipates
that its accounts receivable and inventories may
11
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increase during 1998 as a result of increased working capital requirements to
support telecommunications products. As a result, the Company anticipates
the use of additional cash in operating activities during the balance of 1998.
Net cash provided by investing activities was $363,000 for the
first six months of 1998 compared to net cash provided by investing
activities of $1,943,000 for the first six months of 1997. In 1998, net cash
was provided by net reductions in short-term investments, offset to some
extent by purchases of property and equipment. In 1997, net cash was also
primarily provided by net reductions in short term investments offset
somewhat by purchases of property and equipment. The Company anticipates
that its purchases of property and equipment for the remainder of 1998 may be
somewhat lower than 1997 levels. The Company is pursuing leasing
arrangements to finance further purchases of property and equipment, if any,
during the remainder of 1998.
Net cash provided by financing activities was $3,187,000 for the
first six months of 1998 compared to net cash provided by financing
activities of $59,000 in the first six months of the prior year. Net cash
provided by financing activities in the first six months of 1998 was
primarily proceeds from borrowings as follows:
<TABLE>
<CAPTION>
<S> <C>
Note payable $2,500,000
Bridge loan 1,950,000
----------
Total proceeds from borrowings $4,450,000
----------
----------
</TABLE>
Of the proceeds under the note payable, $500,000 will not be available to the
Company until the Company successfully completes an equity offering
pursuant to the terms of the loan agreement. Net proceeds from the issuance
of common stock provided net cash of $120,000 for the first six months of
1998. The net cash provided by proceeds from borrowings and issuance of
common stock was offset somewhat by principal payments on debt. In the first
six months of 1997, net cash provided by financing activities was primarily
by proceeds from borrowings under credit facilities, offset somewhat by
principal payments on debt.
The Company is currently seeking to complete an $8,000,000
private placement of preferred stock. The Company has received non-binding
commitments for a significant portion of this financing. If the Company
completes the financing, approximately $2.5 million of the net proceeds would
be used to repay existing indebtedness and collateralize existing term loans
and the balance would be available to fund the Company's working capital
requirements. There can be no assurance that the Company can successfully
complete the financing on commercially reasonable terms, or at all, that the
financing will provide the Company with sufficient liquidity, or that the
financing will not have a significant dilutive effect on existing investors.
Failure to successfully complete the financing on a timely basis will have a
material adverse effect on the Company. Among other things, the Company may
have to further scale back its operations, or seek equity capital from
alternative sources on less attractive terms. It may be unable to repay its
debts as they come due or it may have to take other action.
Conductus anticipates that its existing available cash, together
with the planned net proceeds from the private placement and other sources of
liquidity, and anticipated revenue, primarily from government contracts,
should be adequate to fund the Company's operations for at least the next
twelve months. 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 continues to
explore equity financing alternatives. There can be no assurance that
additional equity funding will be available on acceptable terms or at all.
All of the Company's credit arrangements contain reporting and
financial covenants which the Company is required to satisfy. There can be
no assurance that the Company will satisfy all such covenants in the future.
There can be no assurance that if the Company defaults on any of the
covenants, waiver of such default could be obtained from the lender. In the
event of default on any of these covenants, no further amounts would be
advanced to the Company under any facility, the entire amounts outstanding
could become due and payable immediately upon default, and those assets that
are collateral could be seized, unless such default is waived by the lender.
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 product. The actual
12
<PAGE>
amount of the Company's future capital requirements will depend on many
factors that affects its business.
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 these computer systems as they do not 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 will be mitigated. However, if the conversion is not
completed timely, 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 affected 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 on
the Company. 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 PRONOUNCEMENTS:
COMPREHENSIVE INCOME
13
<PAGE>
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. This statement requires the disclosure of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as net income plus
revenues, expenses, gains and losses that, under generally accepted
accounting principles, are excluded from net loss. The component of
comprehensive loss, which is excluded from net loss, is not significant and
therefore, no separate statement of comprehensive income has been presented.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise" ("SFAS 14"). SFAS 131
changes current practice under SFAS 14 by establishing a new framework on
which to base segment reporting and also requires interim reporting of
segment information. This statement is effective for fiscal years beginning
after December 15, 1997. The statement's interim reporting disclosures are
not required until the first quarter immediately subsequent to the fiscal
year in which SFAS 131 is effective.
ITEM 3: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK - NOT APPLICABLE.
14
<PAGE>
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS - NOT APPLICABLE.
ITEM 2: CHANGES IN SECURITIES - NOT APPLICABLE.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE.
15
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Stockholders was held on May 29, 1998, and with
respect to the vote on Item No. 2 was adjourned until June 25, 1998.
(b) The meeting included the election of the Board of Directors,
submitted as Item No.1, whose names are as follows:
John F. Shoch
Martin Cooper
Charles E. Shalvoy
Robert N. Janowiak
Martin A. Kaplan
(c) Other matters voted upon at the stockholders meeting were:
Item No. 2, Approval of Amendment to and restatement of the Company's
restated certificate of incorporation;
Item No. 3, Approval of Amendments to 1992 Stock Option/Stock Issuance
Plan;
Item No. 4, Ratification of the selection of PricewaterhouseCoopers LLP
as the Company's Independent Accountants for the year ended
December 31, 1998.
Shares of Common Stock voted were as follows:
Item No. 1 (Election of Board of Directors)
<TABLE>
<CAPTION>
Total Vote For Total Vote Withheld
Each Director from Each Director
------------- -------------------
<S> <C> <C>
John F. Shoch 5,829,802 373,875
Martin Cooper 5,816,918 386,759
Charles E. Shalvoy 5,817,362 386,315
Robert N. Janowiak 5,818,918 384,759
Martin A. Kaplan 5,974,952 374,827
</TABLE>
<TABLE>
<CAPTION>
for Against Abstain No Vote
------ ---------- --------- ---------
<S> <C> <C> <C> <C>
Item No. 2
(Approval of Amendment
to and restatement
of the Company's
restated certificate
of incorporation) 4,077,534 182,538 31,524 2,058,183
Item No. 3
(Approval of
Amendments to 1992
Stock Option/Stock
Issuance Plan) 4,620,400 1,495,521 129,834 104,024
Item No. 4
(Selection of
Independent
Accountants) 6,318,654 14,449 16,676 -0-
--
</TABLE>
16
<PAGE>
ITEM 5: OTHER INFORMATION.
Pursuant to an amendment by the Securities and Exchange Commission
to Rule 14a-4 of rules promulgated under the Securities Exchange Act of 1934,
as amended, effective as of June 29, 1998, please note that if Conductus'
stockholders fail to notify the Company prior to February 10, 1999, of any
stockholder proposals for which inclusion in the Company's 1999 Proxy Statement
is not sought, then the proxies held by the management of Conductus for
voting at the 1999 Annual Meeting of Stockholders may be voted with respect to
such stockholder proposals at management's discretion without any discussion
of the matters in such 1999 Proxy Statement.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS - SEE BELOW.
(B) REPORTS ON FORM 8-K - NOT APPLICABLE.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONDUCTUS, INC.
--------------
Registrant
Dated: August 14, 1998 /S/ Ainslie Mayberry
--------------------
Ainslie Mayberry
Chief Financial Officer
and Duly Authorized Officer
/S/ Charles E. Shalvoy
----------------------
Charles E. Shalvoy
President and Chief Executive Officer
and Duly Authorized Officer
18
<PAGE>
EXHIBIT INDEX
Exhibits
- --------
27.01 Financial Data Schedule
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,272,718
<SECURITIES> 0
<RECEIVABLES> 1,913,993
<ALLOWANCES> 300,942
<INVENTORY> 668,263
<CURRENT-ASSETS> 3,685,519
<PP&E> 9,376,118
<DEPRECIATION> (6,932,981)
<TOTAL-ASSETS> 6,710,922
<CURRENT-LIABILITIES> 4,984,935
<BONDS> 0
0
0
<COMMON> 727
<OTHER-SE> 41,190,889
<TOTAL-LIABILITY-AND-EQUITY> 6,710,922
<SALES> 0
<TOTAL-REVENUES> 2,167,488
<CGS> 0
<TOTAL-COSTS> 6,632,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144,501
<INCOME-PRETAX> (4,567,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,567,114)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
