<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 quarterly period ended September 30, 1999
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)
DELAWARE 77-0162388
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
969 W. MAUDE AVE.
SUNNYVALE, CA 94086
(Address of principal executive offices)
(408) 523-9950
(Registrant's telephone number)
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
--- ---
As of October 29, 1999 there were 7,156,716 shares of the Registrant's Common
stock outstanding.
<PAGE>
CONDUCTUS, INC.
FORM 10-Q
September 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1: FINANCIAL STATEMENTS..........................................................................1
Condensed Balance Sheets at September 30, 1999 and December 31, 1998..........................1
Condensed Statements of Operations for the Three Months and Nine
Months Ended September 30, 1999 and 1998......................................................2
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998...................................................................3
Notes to Condensed Financial Statements.......................................................4
Item 2 : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........7
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................12
PART II: OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS............................................................................13
Item 2: CHANGES IN SECURITIES........................................................................13
Item 3: DEFAULT UPON SENIOR SECURITIES...............................................................13
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................13
Item 5: OTHER INFORMATION............................................................................14
Item 6: EXHIBITS AND REPORTS ON FORM 8-K.............................................................15
</TABLE>
<PAGE>
CONDUCTUS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 182,612 $ 1,547,169
Short-term investments................................................ - 1,341,014
Accounts receivable .................................................. 2,736,452 1,109,794
Inventories........................................................... 953,208 842,384
Prepaid expenses and other current assets............................. 106,836 145,470
--------------- --------------
Total current assets................................................ 3,979,108 4,985,831
Property and equipment, net........................................... 1,509,635 2,020,324
Other assets.......................................................... 253,413 28,800
--------------- --------------
Total assets........................................................ $ 5,742,156 $ 7,034,955
=============== ==============
LIABILITIES
Current liabilities:
Current portion of long-term debt..................................... $ 780,814 $892,139
Accounts payable...................................................... 681,194 658,982
Other accrued liabilities............................................. 1,372,286 778,758
--------------- --------------
Total current liabilities........................................... 2,834,294 2,329,879
Long-term debt, net of current portion................................ 793,203 1,341,407
--------------- --------------
Total liabilities................................................... 3,627,497 3,671,286
--------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock.......................................................... 5,736,124 5,683,461
Common stock............................................................. 716 714
Additional paid-in capital............................................... 42,299,686 42,278,423
Accumulated deficit...................................................... (45,921,867) (44,598,929)
--------------- --------------
Total stockholders' equity.......................................... 2,114,659 3,363,669
--------------- --------------
Total liabilities and stockholders' equity.......................... $ 5,742,156 $ 7,034,955
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONDUCTUS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Product sales................................ $ 195,900 $ 186,312 $ 735,070 $ 623,675
Contract..................................... 293,993 1,078,270 1,642,129 2,808,395
License...................................... 10,684 - 5,010,684 -
-------------- -------------- -------------- --------------
Total revenues............................ 500,577 1,264,582 7,387,883 3,432,070
-------------- -------------- -------------- --------------
Costs and expenses:
Cost of product sales....................... 733,367 528,562 1,900,318 1,994,417
Research and development.................... 996,165 1,266,399 3,150,327 4,468,949
Selling, general and administrative......... 963,078 812,565 3,073,445 2,777,036
-------------- -------------- -------------- --------------
Total costs and expenses.................. 2,692,610 2,607,526 8,124,090 9,240,402
-------------- -------------- -------------- --------------
Loss from operations........................... (2,192,033) (1,342,944) (736,207) (5,808,332)
Interest income................................ 14,027 13,671 72,355 56,445
Interest expense............................... (80,872) (304,035) (269,201) (448,536)
Other income (expense), net.................... 20,000 - 22,504 -
-------------- -------------- -------------- --------------
Loss before taxes......................... (2,238,878) (1,633,308) (910,549) (6,200,423)
Tax expense - - (1,350) -
-------------- -------------- -------------- --------------
Net loss.................................. (2,238,878) (1,633,308) (911,899) (6,200,423)
Preferred dividend............................. (99,680) - (411,040) -
-------------- -------------- -------------- --------------
Net loss attributable to
common stockholders......................... $(2,338,558) $(1,633,308) $(1,322,939) $ (6,200,423)
============== ============== ============== ==============
Net loss per share:
Basic and diluted........................... $ (0.33) $ $(0.23) $ (0.19) $ (0.88)
============== ============== ============== ==============
Shares used in per share calculations:
Basic and diluted........................... 7,156,716 7,117,000 7,149,792 7,077,000
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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CONDUCTUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (911,899) $(6,200,423)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ......................... 648,552 684,570
Provision for excess and obsolete inventories ......... 119,882 96,176
Compensation associated with warrant grants ........... -- 146,575
Release of allowance for doubtful accounts ............ (133,974) --
(Increase), decrease in:
Accounts receivable ................................... (1,492,685) 739,811
Inventories ........................................... (230,705) (358,428)
Prepaid expenses and other current assets ............. 38,635 (463,295)
Other assets .......................................... (63,740) 500,000
Increase, (decrease) in:
Accounts payable and other accrued liabilities ........ 225,701 (915,939)
-------------- --------------
Net cash used in operating activities ............. (1,800,233) (5,770,953)
-------------- --------------
Cash flows from investing activities:
Maturities of short-term investments .................. 1,349,880 556,633
Purchases of short-term investments ................... (8,866) --
Acquisition of other assets ........................... (75,000)
Acquisition of property and equipment ................. (99,682) (205,835)
-------------- --------------
Net cash provided by investing activities ......... 1,166,332 350,798
-------------- --------------
Cash flows from financing activities:
Proceeds from borrowings .............................. -- 4,450,000
Net proceeds from issuance of common stock ............ 21,265 225,052
Net proceeds from issuance of preferred stock ......... -- 6,374,511
Costs to register preferred stock ..................... (58,337) --
Principal repayments on long-term debt ................ (693,584) (3,734,402)
-------------- --------------
Net cash provided by (used in) financing activities (730,656) 7,315,161
-------------- --------------
Net increase (decrease) in cash and cash equivalents .. (1,364,557) 1,895,006
Cash and cash equivalents at beginning of period ......... 1,547,169 2,611,560
-------------- --------------
Cash and cash equivalents at end of period ............... $ 182,612 $ 4,506,566
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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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 September 30, 1999
and for the three and nine months ended September 30, 1999 and 1998 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,
1998 balance sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles.
BASIC AND DILUTED LOSS PER SHARE:
A reconciliation of the numerator and denominator of the basic and
diluted EPS is provided as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders......................... $ (2,338,558) $ (1,633,308) $ (1,322,939) $ (6,200,423)
============== ============== ============== ==============
Weighted average number of
shares outstanding ................... 7,156,716 7,117,000 7,149,792 7,077,000
-------------- -------------- -------------- --------------
Shares used in computing basic
and diluted loss per share ........... 7,156,716 7,117,000 7,149,792 7,077,000
-------------- -------------- -------------- --------------
Net loss per share:
Basic and diluted.................... $ (0.33) $ (0.23) $ (0.19) $ (0.88)
============== ============== ============== ===============
</TABLE>
Common equivalent shares including common stock options and warrants
that could have potentially diluted basic earnings per share that were not
included in the computations of diluted loss per share because of
anti-dilution were 2,710,374 and 2,592,335, respectively for the three and
nine-month periods ended September 30, 1999, and 552,000 and 225,852,
respectively for the three and nine-month periods ended September 30, 1998.
4
<PAGE>
CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENT PRONOUNCEMENTS:
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires companies to capitalize qualifying computer software costs, which
are incurred during the application development stage and amortize them over
the software's estimated useful life. Statement of Position 98-1 is effective
for fiscal years beginning after December 15, 1998. The adoption of Statement
of Position 98-1 had no impact on the Company's financial statements.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities." This standard requires companies to expense the costs
of start-up activities and organization costs as incurred. In general,
Statement of Position 98-5 is effective for fiscal years beginning after
December 15, 1998. The adoption of Statement of Position 98-5 had no impact
on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
new standards of accounting and reporting for derivative instruments and
hedging activities. This statement requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of
operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. Statement No. 133 will be effective for
fiscal years beginning after June 15, 2000. Conductus does not currently hold
derivative instruments or engage in hedging activities.
2. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
<S> <C> <C>
U.S. government contracts:
Unbilled
Recoverable costs and accrued profit on
progress completed - not billed.................................. $ 465,984 $ 726,342
Billed............................................................... 589,690 297,525
Commercial.............................................................. 211,439 378,562
License fee............................................................. 1,575,000 -
Allowance for doubtful accounts......................................... (105,661) (292,635)
--------------- --------------
$ 2,736,452 $ 1,109,794
</TABLE>
5
<PAGE>
CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
<S> <C> <C>
Raw materials........................................................... $ 370,812 $ 441,130
Work in process......................................................... 569,864 198,341
Finished goods.......................................................... 290,324 640,666
Allowance for excess and obsolete inventories........................... (277,792) (437,753)
--------------- --------------
$ 953,208 $ 842,384
=============== ==============
</TABLE>
4. LONG TERM DEBT:
Our credit facilities consist of a loan from a leasing company, a
bank equipment term loan, a bank line of credit and a lease line of credit
for new equipment purchases. Obligations related to our credit facilities as
of September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
<S> <C> <C>
Loan payable to leasing company......................................... $ 1,510,222 $ 1,978,366
Bank equipment term loan payable........................................ 63,795 255,180
--------------- --------------
Total.............................................................. 1,574,017 2,233,546
Less: current portion................................................... 780,814 892,139
--------------- --------------
Long-term debt..................................................... $ 793,203 $ 1,341,407
=============== ==============
</TABLE>
All of 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. Additionally,
the entire amounts outstanding could become due and payable immediately upon
default and those assets that are collateralized could be seized, unless the
lender waives such default. At September 30, 1999, Conductus was in
compliance with all financial covenants.
5. LICENSE AGREEMENT:
On May 4, 1999, the Company entered into a definitive agreement with
General Dynamics Information Systems, Inc. (GDIS) to license its high
temperature superconductive (HTS) electronics and cryoelectronics technology.
Under the license agreement, GDIS purchased rights to Conductus' HTS
thin-film technology and other intellectual property for $5,000,000 plus
future royalties and will have rights to use and sell this technology for use
in U.S. Government or state, local and foreign government markets, as
defined. Under the license agreement, GDIS made an immediate payment to the
Company of $2,900,000. In addition, GDIS will pay the Company $175,000 on the
first day of each month for 12 months beginning on July 1, 1999. The Company
and GDIS also entered into a Cross-License, Supply and Training Agreement
under which the Company and GDIS agreed to cross-license any updates to the
licensed technology developed by either party. Additionally, the Company will
provide product and training to GDIS in exchange for payment at standard
commercial rates from GDIS. As a result of this transaction, Conductus
recognized revenues of $5,000,000 during the quarter ended June 30, 1999,
which represented 68% of total revenues for the nine-month period ended
September 30, 1999.
6
<PAGE>
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 FOR THE YEAR ENDED DECEMBER 31,
1998. 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
We develop, manufacture and market electronic components and systems
based on superconductors for applications in the worldwide telecommunications
markets. As of September 30, 1999, we had accumulated losses of approximately
$45,922,000 and we expect to incur significant additional losses during the
remainder of 1999. We, alone or with collaborative partners, must
successfully develop, manufacture, introduce and market our potential
products in order to achieve profitability. We do not expect to recognize
meaningful product sales until we successfully develop and commercialize
superconductive components, systems and subsystems that address significant
market needs.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
Total revenues consist primarily of contract revenue and, to a
lesser extent, product sales. In addition, in May 1999, Conductus entered
into a definitive agreement with General Dynamics Information Systems, Inc.
(GDIS) to license its high temperature superconductive (HTS) electronics and
cryoelectronics technology. Under the license agreement, GDIS purchased
rights to Conductus' HTS thin-film technology and other intellectual property
for $5,000,000 plus future royalties and will have rights to use and sell
this technology for use in U.S. Government or state, local and foreign
government markets. As a result of this agreement, Conductus recorded license
revenues of $5,000,000 during the second quarter of 1999.
Total revenues decreased by 60% to $501,000 for the quarter ended
September 30, 1999 from $1,265,000 in the comparable period of 1998. Revenues
for the nine months ended September 30, 1999 were $7,388,000, which
represents an increase of 115% over the comparable period of 1998.
Revenue under U.S. government research and development contracts
represented approximately 59% and 22%, respectively of total revenue for the
three month and nine month periods ended September 30, 1999 compared to 85%
and 82% for the comparable periods of 1998. The decrease in contract revenues
as a percent of total revenues was primarily due to the impact of the license
revenues on total revenue and, to a lessor extent, a reduction of contract
revenues during the comparison periods. Contract revenues decreased by 73% to
$294,000 and by 42% to $1,642,000, respectively for the three and nine-month
periods ended September 30, 1999 from the comparable periods of 1998. This
decrease is primarily attributable to the completion of several government
contracts. We have submitted, or are in the process of preparing, several
proposals related to prospective contracts associated with our core wireless
business and we will continue to submit proposals as additional programs
become available. We believe we will be able to participate in several of the
contracts for which proposals have been submitted or are in preparation,
however we cannot assure you that we will receive the level of awards we
anticipate. Additionally, the recognition of revenue and receipt of payment
pursuant to these contracts and awards are subject to numerous risks.
Product revenues for the three months ended September 30, 1999
increased by 5% to $196,000 from $186,000 in the comparable period of 1998.
This increase is primarily due to an increase of 264% in revenues from the
Company's wireless telecommunications products partially offset by a decrease
of 100% in revenue from the sale of the Company's government wireless
products. For the nine months ended September 30, 1999, product revenues
increased by 18% to $735,000 from $624,000 in the comparable period of 1998.
This increase in product revenues was primarily the result of an increase of
260% in revenue from the sale of the Company's wireless telecommunications
products during the comparison periods partially offset by a decrease of 38%
in revenue from sales of the Company's government wireless products.
7
<PAGE>
Cost of product sales was primarily composed of costs of products
related to our wireless telecommunications products. Cost of product sales
was $733,000 for the quarter ended September 30, 1999 compared to $529,000
for the comparable period of 1998. For the nine months ended September 30,
1999, cost of product sales was $1,900,000 compared to $1,994,000 for the
comparable period of 1998. The increase in cost of product sales for the
quarter ended September 30, 1999 from the comparable period of the prior year
was primarily the result of higher overhead costs related to the increases in
manufacturing infrastructure to support growth in the sales of the Company's
wireless telecommunications products. The decrease in cost of product sales
for the nine month period ended September 30, 1999 from the comparable period
of the prior year was primarily the result of a decrease in the sales of the
Company's government wireless products partially offset by an increase in the
sale of the Company's commercial wireless telecommunications.
Research and development includes both externally and internally
funded projects. Research and development expenses were $996,000 in the
quarter ended September 30, 1999 compared to $1,266,000 in the comparable
period of the prior year. For the nine-month period ended September 30, 1999,
research and development expenses were $3,150,000 compared to $4,469,000 in
the first nine months of 1998. Research and development, as a percentage of
revenue, represented 199% and 43%, respectively for the three and nine month
periods ended September 30, 1999. This compares to research and development
expenses 100% and 130% as a percentage of revenue for the comparable periods
of 1998. The decrease in research and development expense was primarily
attributable to a decrease in contract activities during the comparison
periods. The increase in research and development expenses as a percentage of
revenues for the three month period ended September 30, 1999 was primarily
the due to the impact of the decreased levels of revenues in the quarter
ended September 30, 1999 as well as the impact of the overall decrease in
contract activities during the comparison periods. The decrease in research
and development expenses as a percentage of revenues for the nine month
period ended September 30, 1999 was primarily the due to the impact of the
relatively higher level of revenue resulting from the $5.0 million license
revenue recorded in nine month period ended September 30, 1999 and, to a
lessor extent, the decrease in the level of research and development expenses
related to the relatively lower contract activities. Although spending on
internal research and development has decreased from the prior year, we
expect to continue to incur significant research and development expenses on
internally funded programs as we seek to develop additional commercial
products, particularly in the wireless communications area and, as a result,
anticipate moderate increases in research and development expenses during the
remainder of 1999.
Selling, general and administrative expenses include costs
associated with marketing, sales, and various administrative activities.
Selling, general and administrative expenses were $963,000 and $813,000 in
the quarters ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1999 and 1998, selling, general and administrative
expenses were $3,073,000 and $2,777,000, respectively. The increase in
spending during the comparison periods was primarily due to increases in
legal, consulting and other charges during the second and third quarters of
1999. As we continue to focus on the expansion of the wireless products
business, we expect sales and marketing expenses to increase during 1999 as
compared to 1998 to the extent we increase sales of commercial products,
particularly in the communications markets.
Interest and other expense, net was $47,000 and $290,000 for the
three-month periods ended September 30, 1999 and 1998, respectively. For the
nine months ended September 30, 1999 and 1998, Interest and other expense,
net was $174,000 and $392,000, respectively. The 1999 interest charges
related primarily to our loan from a leasing company as well as our bank term
loan. The decrease in interest and other expense, net was primarily related
to the impact of interest charges recorded in the third quarter of 1998
related to the financing completed during the period.
As a result of incurring losses, we have not incurred any income tax
liability. We have established a valuation allowance against our deferred tax
assets (principally the tax benefit of our net operating losses) and review
this allowance on a periodic basis. At such time that we believe that it is
more likely than not that the deferred tax asset will be realized, the
valuation allowance will be reduced.
We do not believe that inflation has had a material effect on our
financial condition or results of operations during the past two fiscal
years. However, we cannot assure you that our business will not be affected
by inflation in the future.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through:
- $13,251,000 in net proceeds from our initial public offering of
common stock in August 1993.
- $9,892,000 in net proceeds from our follow-on public offering of
common stock in June 1996,
- $20,989,000 raised in private placement financings,
- $45,613,000 from U.S. government contracts,
- $1,574,000 in outstanding borrowings under various lease and bank
loan arrangements, and
- $3,856,000 in interest income.
As of September 30, 1999 our aggregate cash, cash equivalents and
short term investments totaled $183,000. Additionally, we have a bank line of
credit facility under which we may borrow up to a maximum of $2,000,000 under
the bank line of credit based on a limitation of 80% of certain eligible
receivables. As of September 30, 1999, the total amount outstanding under the
bank line of credit facility was $64,000 and no additional amount was
available under the line.
Under the equipment lease, we could finance up to a total of
$1,000,000 of future equipment acquisitions. The balance outstanding under
the equipment line as of September 30, 1999 was $180,000. This equipment
lease line expired at the close of business on September 30, 1999. We
anticipate that we will enter into a new equipment lease line to support
projected capital equipment requirements in the future, however we can give
you no assurance that a lease line will be available on acceptable terms or
at all.
Net cash used in operations was $1,800,000 during the nine months
ended September 30, 1999. Net cash used in operations was primarily the
result of net losses recorded during the period of $912,000 as well as an
increase in net assets of $963,000 during the period. We anticipate that we
will incur significant additional net losses during the remainder of 1999 and
anticipate that our accounts receivable and inventories may increase as a
result of increased working capital requirements to support wireless
telecommunications products. As a result, we anticipate the use of additional
cash in operating activities during the remainder of 1999.
Net cash provided by investing activities was $1,166,000 during the
nine months ended September 30, 1999. The balance was primarily related to
the proceeds from sales of short-term investments during the period partially
offset by investments in additional property and equipment.
Net cash used in financing activities was $731,000 during the nine
months ended September 30, 1999. This usage was primarily related to
principal payments under capital loans payable and an equipment term loan.
We anticipate total capital expenditures of less than $100,000
during the remainder of 1999, which will be funded primarily from available
cash or the bank line of credit.
All of our credit arrangements contain reporting and financial
covenants, which we are required to satisfy. We cannot assure you that we
will satisfy all such covenants in the future. We cannot assure you that if
we default on any of the covenants, we could obtain a waiver of the default
from the lender. In the event of default on any of these covenants, no
further amounts would be advanced to us 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.
9
<PAGE>
To date we have received limited revenues from product sales. The
continued development of our products will require a commitment of
substantial funds to conduct further research and development and testing, to
establish commercial-scale manufacturing and to market these products. We
expect to use significant amounts of cash for capital equipment and to
support operations until product revenues increase. Additional financing may
not be available on acceptable terms or at all. Unless we are able to raise
significant additional funds, through debt or equity issuances, asset sales
or otherwise, we will be required to delay, reduce or eliminate one or more
of our research and development programs or obtain funds from collaborative
partners or others that may require us to relinquish rights to our
technologies or potential products that we would not otherwise relinquish.
Our future capital requirements will depend on many factors, including:
- continued progress in our 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,
- our ability to establish collaborative arrangements, and
- the cost of manufacturing scale-up and the amount and timing of
future revenues.
As discussed in Note 5 of the Notes to Condensed Financial
Statements, the Company entered into a definitive agreement with General
Dynamics Information Systems, Inc. (GDIS) to license its high temperature
superconductive (HTS) electronics and cryoelectronics technology on May 4,
1999. Under the license agreement, GDIS made an immediate payment to the
Company of $2,900,000. In addition, GDIS will pay the Company $175,000 on the
first day of each month for 12 months beginning on July 1, 1999. As of
September 30, 1999, the outstanding balance of the receivable from General
Dynamics was $1,575,000.
We are currently seeking to complete a private placement of shares
of our preferred stock to fund our working capital requirements. There can be
no assurance that we will successfully complete the financing on commercially
reasonable terms, or at all, that the financing will provide us 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 Conductus.
Among other things, we may have to further scale back our operations, or seek
equity capital from alternative sources on less attractive terms.
Additionally, we may be unable to repay our debts as they come due or we 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 our operations for at least the next twelve
months. There can be no assurance, however, that changes in our plans or
other events affecting us will not result in the expenditure of such
resources before such time.
10
<PAGE>
YEAR 2000 COMPLIANCE
The potential problem presented by the year 2000 is the result of
computer programs being written using two digits rather than four to define
the applicable year. As a result, many computer systems and applications
experience problems handling dates beyond the year 1999 and will need to be
modified before the year 2000 in order to function properly. Any of our
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
system failures or miscalculations, causing disruptions of key operations.
Important operations, which could be disrupted, include, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
We have expended resources to review our products, services and
internal use software to identify those products, services and systems that
may not properly process the year 2000 date. The costs related to potential
year 2000 problems are expensed as incurred, and represent a reallocation of
existing resources.
Our compliance project comprises four phases: (1) identification of
risks, (2) assessment of those risks, (3) development of remedies and
contingency plans, and (4) implementation and testing. The following
describes the status of our year 2000 compliance project, and our estimates
regarding future compliance expenses, in relation to four pertinent aspects
of our business:
SALES, MANUFACTURING AND FINANCE INFORMATION SYSTEMS. We are
currently in the fourth phase of our compliance project. Our vendors have
confirmed that the versions of software currently in use are year 2000
compliant. We are in the process on final testing and implementation of
upgrades and anticipate we will be completed by the end of November 1999. We
do not anticipate incurring any material expenses to complete our tests on
these systems.
NETWORK HARDWARE, SOFTWARE AND DESKTOP WORKSTATIONS. We are
completing phase four and are in the process of upgrading all non-compliant
hardware and software. We estimate that all non-compliant hardware and
software will be replaced by the end of November 1999 and we estimate that we
will not be required to spend any significant additional funds to complete
the implementation.
PRODUCTS WE HAVE SOLD. Our completed assessment indicates that these
products are year 2000 compliant. We do not anticipate incurring any material
expenses related to products we have sold or to any current product designs.
FABRICATION AND MANUFACTURING EQUIPMENT. We are completing phase
four and are completing the review of remedies and contingency plans. We
expect to complete phase four by the end of November 1999.
We are in the process of completing formal communications with our
significant suppliers and large customers to determine the extent to which we
are vulnerable to their failure to fix their own year 2000 problems. We
cannot assure you that the systems of other companies on which our systems
rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with our systems, would not
harm us.
Based on the current status of the year 2000 compliance project, we
do not believe we will be required to expend material additional funds to
complete final implementation or review. However, as our year 2000 compliance
project continues, we (a) may discover additional year 2000 problems, (b) may
not be able to develop, implement, or test remedies or contingency plans, or
(c) may find that the costs of these activities exceed current expectations
and become material. These contingencies could force us to spend additional
time and money to avoid potential year 2000 problems.
11
<PAGE>
In the event we do not complete our compliance program as scheduled,
the year 2000 could cause significant problems. If all of our key operations
cease to function properly, we could experience an enterprise-wide shutdown
for an unknown period of time. We are unable to assess the magnitude of any
losses that could result from this worst case scenario.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Conductus' general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. Our
exposure to financial market risks relates primarily to our exposure to the
impact of changes in interest rates on our fixed income investment portfolio
and long-term debt obligations.
FIXED INCOME INVESTMENTS
The primary objective of our investment activities is to preserve
our principal while maximizing yields without significantly increasing risk.
To achieve this objective, we maintain a portfolio that consists primarily of
short-term, high-quality commercial paper and foreign debt. All of our fixed
income investments have maturities of less than one year. Hence, our exposure
related to changes in interest rates is somewhat limited due to the
short-term nature of our portfolio. We do not use derivative financial
instruments in our investment portfolio.
DEBT OBLIGATIONS
Conductus' outstanding debt consists of term loan obligations that
are primarily based on fixed rates. Therefore, our exposure to changes in
interest rates is limited because any increase or decrease in interest rates
would not significantly increase or decrease interest expense on our debt
obligations.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS - NOT APPLICABLE
ITEM 2: CHANGES IN SECURITIES - NOT APPLICABLE
ITEM 3: DEFAULT UPON SENIOR SECURITIES - NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on August 19, 1999.
(a) The meeting included the election of the Board of Directors,
submitted as Item No. 1, whose names are as follows:
John F. Shoch, Ph.D.
Charles E. Shalvoy
Martin Cooper
Robert M. Janowiak
Martin J. Kaplan
(b) Other matters voted upon at the stockholders meeting were:
Proposal No. 2, Approval of Amendment to and restatement of the
Company's restated certificate of incorporation;
Proposal No. 3, Approval of Amendment to the Company's 1992 Stock
Option / Stock Issuance Plan;
Proposal No. 4, Approval of Amendment to the Company's Employee
Stock Purchase Plan;
Proposal No. 5, Ratification of the selection of
PricewaterhouseCoopers LLP as the Company's
Independent Accountants for the year ended
December 31, 1999.
Shares of Common Stock and Preferred Stock voted as follows:
Proposal No. 1
(Election of Board of Directors)
<TABLE>
<CAPTION>
Total Vote
Total Vote Withheld
For each From Each
Director Director
--------------- ---------------
<S> <C> <C>
John F. Shoch, Ph.D. 7,146,073 187,388
Charles E. Shalvoy 7,146,073 187,388
Martin Cooper 7,142,270 191,191
Robert M. Janowiak 7,143,770 189,691
Martin J. Kaplan 7,146,270 187,191
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
For Against Abstain Non Vote
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Proposal No. 2
(Approval of Amendment
And restatement of the
Company's restated certificate
of incorporation) 4,556,460 435,524 10,100 2,331,377
Proposal No. 3
(Approval of Amendment to
the Company's 1992 Stock
Option / Stock Issuance Plan) 4,331,890 603,551 29,650 2,368,370
Proposal No. 4
(Approval of Amendment to the
Company's Employee Stock
Purchase Plan) 4,662,580 288,961 13,550 2,368,370
Proposal No. 5
(Ratification of the selection of
PricewaterhouseCoopers LLP
as the Company's Independent
Accountants for the year ended
December 31, 1999) 7,298,425 29,836 5,200 0
</TABLE>
ITEM 5: OTHER INFORMATION
Holders of our common stock currently enjoy the substantial benefit
of being able to easily buy or sell our common stock because our common stock
is listed on the Nasdaq SmallCap Market trading system. In November 1998,
Nasdaq informed us that, on the basis of our Quarterly Report on Form 10-Q
for the quarter ending September 30, 1998, our net tangible assets had fallen
below the level required for continued listing of our common stock on the
Nasdaq National Market trading system. Subsequently, we submitted information
to Nasdaq regarding our anticipated future net tangible assets and certain
financing plans. Based on this submission, we applied to have our common
stock listed on the Nasdaq SmallCap Market. Pending approval of our
application, our common stock began trading on the Nasdaq SmallCap Market.
Nasdaq informed us that our application to be listed on the Nasdaq SmallCap
Market had been denied. We requested an oral hearing on the subject, which
was held on May 13, 1999, and delisting of our common stock was stayed
pending the results of this hearing. In July 1999, we were informed that were
granted a temporary exception from the net tangible assets requirement
subject to meeting certain conditions. The terms of the exception required
that our net tangible assets, as reflected in our Quarterly Report on Form
10-Q for the quarter ending June 30, 1999, exceed $3.5 million. Pursuant to
the terms of the exception that was granted, our common stock symbol was
changed and began trading under the symbol CDTSC.
On August 20, 1999, the Nasdaq Listing Qualifications Panel notified
us that we had submitted the required filing evidencing compliance with the
terms of the exceptions and, therefore, continued listing on the Nasdaq
SmallCap Market was approved. Additionally, the hearing file was closed and
effective Tuesday, August 24, 1999, the Company's trading symbol was returned
to CDTS.
14
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------
<S> <C>
2.1(1) Stock Exchange Agreement dated as of May 28, 1993, between the
Company and Tristan Technologies, Inc.
3.1(2) Restated Certificate of Incorporation.
3.2(3) Restated Bylaws.
3.3(4) Certificate of Designation of Series B Preferred Stock.
4.1(3) Stockholder Rights Plan.
10.1(1) 1987 Stock Option Plan.
10.2(1) Amended 1989 Stock Option Plan.
10.3(5) 1992 Stock Option/Stock Purchase Plan.
10.4(6) 1994 Employee Stock Purchase Plan.
10.5(1) Second Amended and Restated Registration Rights Agreement
dated June 3, 1993.
10.6(4) Form of Series B Preferred Stock and Warrant Purchase
Agreement, dated September, 1998, and September 22, 1998,
between the Company and the Series B Investors.
10.7(4) Form of Warrant to Purchase Common Stock between the Company
and the Series B Investors.
10.8(7) Employment Agreement dated May 3, 1994 between Registrant and
Mr. Charles E. Shalvoy.
10.9(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.10(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.
10.11(8) Collaboration Agreement between Registrant and CTI dated
September 19, 1995.
10.12(8) 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.
10.13(9)+ Superconducting Filter Technology Joint Development Agreement
dated April 25, 1996 between the Registrant and Lucent
Technologies Inc.
10.14(4) Engagement Letter between the Company and Sutro and Co. Inc.,
dated March 24, 1998.
10.15(4) Amendment to Engagement Letter between the Company and Sutro
and Co. Inc., dated September 2, 1998.
10.16(4) Engagement Letter between the Company and Davenport and Co.,
dated September 2, 1998.
10.17(4) Master Lease Agreement between the Company and Leasing
Technologies International, Inc., dated June 15, 1998.
10.18(1) Lease Agreement dated May 3, 1993 between the Registrant and
Mozart-McKee Limited Partnership for Sunnyvale facilities.
10.19(7) Lease Agreement dated December 8, 1994 between Registrant and
Mozart-McKee Limited Partnership for Sunnyvale facilities.
10.20(7) Business Loan Agreement dated August 15, 1994 between
Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
10.21(10) Loan Modification Agreement dated June 30, 1997, between
Registration and Silicon Valley Bank modifying the Business
Loan Agreement dated August 15, 1994.
10.22(10) Loan Modification Agreement dated November 12, 1997, between
Registration and Silicon Valley Bank modifying the Business
Loan Agreement dated August 15, 1994.
10.23(10) Loan Modification Agreement dated December 23, 1997, between
Registration and Silicon Valley Bank modifying the Business
Loan Agreement dated August 15, 1994.
10.24(11) Business Loan Agreement dated March 8, 1996 between
Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
10.25(12) Business Loan Agreement dated December 27, 1996 between
Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
10.26(4) Master Loan and Security Agreement between the Company and
Transamerica Business Credit Corporation, dated June 26, 1998.
10.27(4) Stock Subscription Warrant Agreement between the Company and
Transamerica Business Credit Corporation, dated June 26, 1998.
10.28(13) Silicon Valley Bank Loan Agreement.
10.29(13) Collateral Assignment, Patent Mortgage and Security Agreement
between the Company and Silicon Valley Bank.
10.30(10)+ Asset Purchase Agreement dated July 9, 1997 between
Registrant and Bruker Instruments, Inc. for sale of assets of
Registrant's NMR Probe business.
10.31(10) Asset Purchase Agreement dated August 15, 1997 between
Registrant and Neocera, Inc. for sale of Registrant's assets
related to its temperature controller business.
10.32(10) 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.
10.33(14)+ License Agreement with General Dynamics, dated May 4, 1999.
10.34(14)+ Cross-License, Supply and Training Agreement, dated May 4,
1999.
27.1 Financial Data Schedule.
</TABLE>
+ Confidential treatment granted or requested as to certain portions
of these exhibits.
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (Number 33-64020), filed with the SEC on May 15,
1996, as amended.
(2) Incorporated herein by reference to the Company's 1993 Annual Report on
Form 10-K.
(3) Incorporated herein by reference to the Company's Registration
Statement on Form 8-K filed with the SEC on January 22, 1998.
(4) Incorporated herein by reference to the Company's Form 10-Q, filed with
the SEC on November 16, 1998.
(5) Incorporated herein by reference to the Company's Registration
Statement on Form S-8, filed with the SEC on November 26, 1997.
(6) Incorporated herein by reference to the Company's Registration
Statement on Form S-8, filed with the SEC on August 5, 1994.
(7) Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-K.
(8) Incorporated herein by reference to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Number 333-3815), filed with the
SEC on June 17, 1996.
(9) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 (Number 333-3815), filed with the SEC on May 10,
1996, as amended.
(10) Incorporated herein by reference to the Company's 1998 Annual Report on
Form 10-K.
(11) Incorporated herein by reference to the Company's 1995 Annual Report on
Form 10-K.
(12) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-K.
(13) Incorporated herein by reference to the Company's Form 10-Q, filed with
the SEC on May 14, 1998.
(14) Incorporated herein by reference to the Company's Form 10-Q, filed with
the SEC on May 17, 1999.
(B) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
16
<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.
Dated: November 12, 1999 /s/ Ron Wilderink
---------------------------------------
Ron Wilderink, Vice President of Finance
and Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 182,612
<SECURITIES> 0
<RECEIVABLES> 2,736,452
<ALLOWANCES> 0
<INVENTORY> 953,208
<CURRENT-ASSETS> 3,979,108
<PP&E> 9,532,708
<DEPRECIATION> 8,023,073
<TOTAL-ASSETS> 5,742,156
<CURRENT-LIABILITIES> 2,834,294
<BONDS> 0
0
5,736,124
<COMMON> 716
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,742,156
<SALES> 0
<TOTAL-REVENUES> 500,577
<CGS> 0
<TOTAL-COSTS> 2,692,610
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,872
<INCOME-PRETAX> (2,238,878)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,238,878)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
