<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1999.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CONDUCTUS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 77-0162388
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
969 W. MAUDE AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 523-9950
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
CHARLES E. SHALVOY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONDUCTUS, INC.
969 W. MAUDE AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 523-9950
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
BROOKS STOUGH, ESQ.
WILLIAM E. GROWNEY, JR., ESQ.
KEVIN A. LUCAS, ESQ.
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
(650) 321-2400
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.0001 par value............. 3,069,243 $1.6407 $5,035,707 $1,399.93
</TABLE>
(1) The price of $1.6407 per share, which was the average of the high and low
prices of the Common Stock on the Nasdaq Stock Market on January 4, 1999, is
set forth solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED JANUARY 11, 19999
3,069,243 SHARES
[LOGO]
CONDUCTUS, INC.
COMMON STOCK
THE SELLING STOCKHOLDERS OF CONDUCTUS, INC. ARE OFFERING 3,069,243 SHARES OF
COMMON STOCK, $0.0001 PAR VALUE, OF CONDUCTUS, INC. THIS OFFERING IS NOT BEING
UNDERWRITTEN.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES CONSIDERABLE RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
From time to time, certain stockholders (the "Selling Stockholders") of
Conductus, Inc. ("Conductus" or the "Company") may offer the shares (the
"Shares") of Common Stock (the "Common Stock") in transactions (i) in the Nasdaq
SmallCap Market, (ii) in privately negotiated transactions, or (iii) by a
combination of such methods of sale. Such sales may occur at fixed prices that
are subject to change, at prevailing market prices, or at negotiated prices.
Selling Stockholders may sell Shares through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders, the purchasers of the Shares, or
both. Selling Stockholders may also sell Shares to broker-dealers buying for
their own account, and these broker-dealers may receive similar compensation
from such Selling Stockholders. Compensation received by such broker-dealers may
exceed that which is considered customary. See "Principal Stockholders and
Selling Stockholders" and "Plan of Distribution."
Conductus will not receive any of the proceeds from the sale of the Shares
by the Selling Stockholders. Conductus has agreed to bear certain expenses in
connection with the registration and sale of the Shares being offered by the
Selling Stockholders.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
------------------------
On January 6, 1999, the closing sale price of the Company's Common Stock in
the Nasdaq SmallCap Market was $1 11/16 per share. The Common Stock is traded in
the Nasdaq SmallCap Market under the symbol "CDTS."
------------------------
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. STATEMENTS CONTAINED IN
THIS PROSPECTUS THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27 OF THE SECURITIES ACT AND SECTION 21 OF THE
EXCHANGE ACT, INCLUDING, BUT NOT LIMITED TO, STATEMENTS REGARDING CONDUCTUS'
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE OF THIS PROSPECTUS, AND THE COMPANY DOES
NOT ASSUME ANY OBLIGATION TO UPDATE ANY OF THESE FORWARD-LOOKING STATEMENTS.
A FORWARD-LOOKING STATEMENT INVOLVES A PREDICTION. THE ACCURACY OF THIS
PREDICTION IS SUBJECT TO RISKS AND UNCERTAINTIES. CONDUCTUS' ACTUAL RESULTS
COULD DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH IN THIS PROSPECTUS UNDER "RISK FACTORS." YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED IN THE "RISK FACTORS" SECTION, IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS AND INCORPORATED BY REFERENCE HEREIN,
BEFORE MAKING AN INVESTMENT DECISION.
THE COMPANY
Conductus, Inc., founded in 1987 and based in Sunnyvale, California,
develops, manufactures and markets electronic components and systems based on
superconductors for applications in the worldwide telecommunications market. For
many applications, the unique properties of superconductors offer significant
performance advantages over products based on conventional copper electronic
components. These advantages can provide improved price/performance at the
system level because of enhanced sensitivity and efficiency as well as reduced
size and weight.
Conductus, Inc.
969 W. Maude Avenue
Sunnyvale, California 94086
(408) 523-9950
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered hereby............................................................... 3,069,243 shares
Common Stock to be outstanding after the offering......................................... 10,186,583 shares(1)
Nasdaq SmallCap Market symbol............................................................. CDTS
</TABLE>
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................................................. 10,582 12,543 9,454 7,497 3,432
Loss from operations........................................... (4,423) (5,109) (7,499) (5,261) (5,808)
Net loss....................................................... (4,422) (5,004) (7,543) (5,243) (6,200)
Basic and diluted net loss per share (2)....................... $ (0.80) $ (0.80) $ (1.09) $ (0.77) $ (0.88)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and diluted shares used in per share computations (2).... 5,543 6,263 6,897 6,853 7,077
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
<S> <C>
BALANCE SHEET DATA:
Working capital............................................................................. $ 4,136,902
Total assets................................................................................ 9,107,024
Long-term obligations....................................................................... 1,559,626
Accumulated deficit......................................................................... (42,970,610)
Total stockholders' equity.................................................................. 4,881,401
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of September 30, 1998. Includes
2,461,227 shares of Series B Preferred Stock convertible into Common Stock
in March 1999 and 608,016 shares of Common Stock issuable upon exercise of
warrants outstanding as of September 30, 1998, and excludes 1,099,159 shares
of Common Stock issuable upon exercise of stock options outstanding as of
September 30, 1998 at a weighted average exercise price of $3.50 per share
and 411,169 and 123,138 shares of Common Stock reserved for future options
or direct stock issuances under the Company's 1992 Stock Option/Stock
Issuance Plan and Employee Stock Purchase Plan, respectively. See Note 12 of
Notes to Consolidated Financial Statements.
(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
4
<PAGE>
RISK FACTORS
BEFORE PURCHASING SHARES OF THE COMMON STOCK, YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS WHEN EVALUATING CONDUCTUS AND ITS BUSINESS, IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY OF WHICH
ARE SUBJECT TO RISKS AND UNCERTAINTIES. WE HAVE TRIED, WHEREVER POSSIBLE, TO
IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE THE RISKS
DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US, OR THAT
WE CURRENTLY DEEM IMMATERIAL, MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
As of September 30, 1998, we had accumulated net losses of approximately
$43.0 million. We expect to incur substantial additional losses at least through
1999 as we expand our operations. Continued development of our products may
require us to commit substantial resources to research and development, the
establishment of additional pilot and commercial-scale fabrication processes and
facilities, and enhanced quality control, marketing, sales and administrative
capabilities. In order to achieve profitability, Conductus, on its own or with
collaborative partners, must successfully develop, manufacture, introduce and
market its potential products. We cannot assure you that we will ever be able to
achieve profitable operations or, if we achieve profitability, that we can
sustain it.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our operating history is limited, and our operating results are susceptible
to significant fluctuations. Thus, we cannot reliably predict future operating
results. We believe that period-to-period comparisons of our operating results
are not necessarily meaningful, and you should not rely upon such comparisons as
indications of future performance.
Our future operating results may vary significantly due to factors such as:
- Demand for our products;
- The size and timing of significant orders, and their fulfillment;
- The size and timing of government funding contracts;
- Inflexible product life cycles which may affect our ability to change and
compete;
- Changes in our pricing policies, or those of our competitors;
- Changes in our operating expenses and our ability to control costs;
- Budget cycles of our customers;
- Product quality problems;
- Hiring needs and personnel changes;
- Our ability, and our subcontractors' ability, to obtain sufficient
supplies of limited or sole-source components for our products;
- Consolidation by competitors and indirect channel partners;
- Regulatory changes; and
5
<PAGE>
- Domestic and international economic and political conditions.
In addition, we may experience changes in our mix of domestic and
international revenues, our mix of direct sales and indirect sales, and the
channels through which we sell our products. For these reasons, we may
experience fluctuations in our gross profit and operating margins.
Existing customers account for a significant portion of our total quarterly
revenues. If these existing customers do not continue to purchase our products,
our financial condition and operating results could be materially harmed. Our
products are typically shipped shortly after orders are received. Accordingly,
future quarterly revenues are difficult to predict since they depend
substantially on orders booked and shipped during those quarters. Product
revenues are also difficult to forecast because our sales cycle, which may
increase in the future, varies substantially from customer to customer and by
distribution channel. We base our expense levels and plans for expansion,
including our plan to significantly increase both our sales & marketing and
research & development efforts, in significant part on our expectations of
future revenues. Such expenses and expansion plans are relatively fixed in the
short-term. Consequently, our operating results in any given quarter are likely
to be disproportionately harmed if revenues in that quarter fall below our
expectations.
Due to the factors described above, our ability to forecast future revenues
is limited. Our operating results in some future quarter will likely fall below
the expectations of market analysts and investors. In such a case, the price of
our common stock will likely be materially harmed. Further, the price of our
common stock would be harmed if adverse conditions prevail (or are perceived to
prevail) in the market generally or with respect to the industry in which we
operate. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
INTENSE COMPETITION
The market for electronic products is intensely competitive. Although the
market for superconductive electronics currently is small and in the early
stages of development, we believe this market will become intensely competitive
if products with significant market potential are successfully developed. A
number of large American, Japanese and European companies, many of which have
substantially greater financial resources, research development staffs and
manufacturing and marketing capabilities than we do, are engaged in programs to
develop and commercialize superconductive electronic technology and products. A
number of smaller companies are also engaged in various aspects of the
development and commercialization of superconductive electronic products.
Furthermore, academic institutions, governmental agencies and other public and
private research organizations are engaged in development programs that may lead
to commercial superconductive electronic products. In addition, if the
superconductor industry develops further, new competitors with significantly
greater resources are likely to enter the field.
Our ability to compete successfully will require us to develop and maintain
our technological leadership, attract and retain highly qualified personnel,
obtain patent or other protection for our technology and products and
successfully manufacture and market our products, either on our own or with
third parties. Our failure to compete successfully could significantly harm our
business, operating results and financial condition. See
"Business--Competition."
Our planned products, if successfully developed, will compete directly with
other existing and subsequently developed products which use competing
technologies. In wireless communications applications, a number of competing
approaches and technologies are used to increase the capacity and improve the
quality of wireless networks, some of which may be less expensive or offer
better performance. These approaches include increasing the number of base
stations, increasing tower heights, locating filters and amplifiers at the top
of antennas and using advanced antenna technology. If our potential products do
not compete successfully with products using competing technologies there will
be a material adverse effect on our business, operating results and financial
condition.
6
<PAGE>
HIGH DEGREE OF DEPENDENCE UPON GOVERNMENT CONTRACTS; CUSTOMER CONCENTRATION.
A significant portion of our revenues has been derived from contracts with
agencies of the U.S. government. Our revenue from government-related contracts
represented approximately 77% of total revenue for each of the fiscal years
1995, 1996, and 1997 and 82% of total revenue for the nine month period ending
September 30, 1998. Our contracts involving the U.S. government are or may be
subject to various risks, including:
- Unilateral termination for the convenience of the government;
- Reduction or modification in the event of changes in the government's
requirements or budgetary constraints;
- Increased or unexpected costs causing losses or reduced profits under
fixed-price contracts or unallowable costs under cost reimbursement
contracts;
- Risks of potential disclosure of our confidential information to third
parties;
- The failure or inability of the prime contractor to perform its prime
contract in circumstances where we are a subcontractor;
- The failure of the government to exercise options provided for in the
contracts;
- The government's nonexclusive, royalty-free license to use technology
developed pursuant to the contracts by or on behalf of the government in
certain circumstances; and
- Exercise of "march-in" rights by the government.
March-in rights refer to the U.S. government's right to require us to
license to third parties patented technology developed under government
contracts if we fail to continue to develop the technology.
The programs in which we participate may extend for several years, but are
normally funded on an annual basis. The U.S. government may not continue to fund
programs to which our development projects apply, particularly in light of
recent legislative initiatives to reduce the funding of various U.S. government
agencies and programs. Even if such funding is continued, we may fail to compete
successfully to obtain funding pursuant to such programs. We do not anticipate
that government contract revenues will grow, and revenues from government
contracts may not continue at current levels. A reduction in, or discontinuance
of, the government's commitment or of our participation in such programs would
significantly harm our business, operating results and financial condition. See
"Business--Research and Development--Government Contracts."
To this day, a relatively small number of customers has accounted for a
significant portion of our total revenue, and we expect that this trend will
continue for the foreseeable future. Accordingly, our future operating results
will continue to substantially depend on the success of our largest customers.
Any reduction or delay in sales of our products to one or more of these key
customers could significantly harm our business, financial condition and results
of operations. Our operating results will also depend on our ability to
successfully develop relationships with additional key customers. We cannot
assure you that we will retain our largest customers or that we will be able to
recruit additional key customers.
Most of our customers can cease doing business with us with limited notice
and with little or no penalty. Our customer agreements typically do not require
minimum purchases. Further, many of our customers also have relationships with
our competitors. These relationships may affect the purchasing decisions of such
customers. We cannot assure you that our customers will not choose to direct
their business to our competitors.
7
<PAGE>
SUBSTANTIAL FUTURE CAPITAL NEEDS
Conductus' revenues from product sales have been limited, and as of
September 30, 1998, it had cash reserves of approximately $4.5 million.
All of our credit facilities contain financial and reporting covenants. In
the event of default on any of these covenants, the entire amount outstanding
could become due and payable immediately upon default, unless such default is
waived by the lender. We cannot assure you that we will satisfy such covenants
or, if we fail to satisfy such covenants, that waivers will be obtained from
lenders.
We anticipate that our existing sources of liquidity and anticipated
revenue, primarily from government contracts, will satisfy our projected working
capital and other cash requirements through June 1999. However, changes in our
plans or other events affecting us may result in the expenditure of such
resources before such time. The report of our independent accountants included
in this Prospectus includes an emphasis of matter paragraph related to the
continuing losses of Conductus.
We will require a commitment of substantial additional funds. However,
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, scale-back or
eliminate one or more of our research and development programs or obtain funds
through arrangements with collaborative partners or others who may require us to
relinquish rights to certain of 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 & development programs and 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 our patents;
- Our successful completion of technological, manufacturing and market
requirements;
- Changes in our 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.
Our failure to raise enough capital to meet our needs could significantly
harm our business, operating results and financial condition.
LENGTHY AND VARIABLE SALES CYCLES
Because customers who purchase our systems must commit a significant amount
of capital and other resources, sales to our customers are subject to delays
beyond our control. Our customers must consider budgetary constraints, comply
with internal procedures for approving large expenditures and complete whatever
testing is necessary for them to integrate new technologies that will affect
their key operations. While the sales cycle for an initial order of our products
is typically 6 to 12 months, we may experience longer sales cycles in the
future. Such delays or lengthened sales cycles could have a material adverse
effect on our business, operating results and financial condition.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Many computer systems
and applications experience problems handling
8
<PAGE>
dates beyond the year 1999, and will need to be modified before the Year 2000 in
order to remain functional. 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 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.
We are currently expending resources to review its products, services and
internal use software to identify those products, services and systems that are
not Year 2000 compliant. The costs related to the Year 2000 issue are expensed
as incurred, and represent a reallocation of existing resources. The project
comprises four phases: (1) identification of risks, (2) assessment of those
risks, (3) development of remediation and contingency plan, and (4)
implementation and testing. Our Year 2000 project is currently in the assessment
phase, and we believe that our greatest risks are associated with our
information systems and systems embedded in our operations and infrastructure.
We presently believe that the conversion of our internal systems will
mitigate the Year 2000 issue related to information systems. Based upon a recent
assessment of our sales, manufacturing and finance systems, we determined that
we will be required to replace these computer systems as they do not properly
utilize dates beyond December 31, 1999. We are in the early phases of the
conversion process, however if the conversion is not completed in a timely
manner, the Year 2000 issue could have a material adverse impact on our
operations. We are proceeding with the assessment of risk relating to our
remaining internal systems to determine whether we have exposure to
contingencies relating to the Year 2000 issue for the products we have sold.
We estimate that the costs of software and its implementation will not have
a material financial impact on the Company. We are unable to estimate the
remaining financial impact, if any, of the Year 2000 issue until we complete the
assessment of the potential impact of the Year 2000 issue on our remaining
internal systems, on third parties such as our suppliers and customers, on
products we have sold, and on other factors that may come to our attention.
We have begun formal communications with our significant suppliers and large
customers to determine the extent to which we are 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 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 have material
adverse effect on our financial condition.
As the Year 2000 project continues, we may discover additional Year 2000
problems, may not be able to develop, implement, or test remediation or
contingency or contingency plans, or may find that the costs of these activities
exceed current expectations and become material. Our expectations as to the
extent and timeliness of modifications required in order to achieve Year 2000
compliance is a forward-looking statement subject to risks and uncertainties.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Common Stock is likely to be highly volatile and may
be significantly affected by factors such as:
- Actual or anticipated fluctuations in our operating results;
- Announcements of technological innovations;
- New products or new contracts by us or our competitors;
- Developments with respect to our copyrights or other proprietary rights;
- Conditions and trends in the telecommunications and other technology
industries;
- Changes in financial estimates of our future results by securities
analysts;
9
<PAGE>
- Changes in economic conditions in the United States and abroad; and
- General market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. In the past, securities class
action lawsuits have often been brought against such companies following periods
of stock price volatility. We may be affected by such litigation in the future.
Such litigation could result in substantial costs and cause a diversion of
management's attention and resources. These events could significantly harm our
business, operating results and financial condition.
POSSIBLE ILLIQUIDITY OF TRADING MARKET
The shares of the Common Stock are quoted on the Nasdaq SmallCap Market
which is a significantly less liquid market than the Nasdaq National Market.
Moreover, if we should continue to experience losses from operations, we may be
unable to maintain the standards for continued quotation on the Nasdaq SmallCap
Market, and the Common Stock could be subject to removal from the Nasdaq
SmallCap Market. Trading, if any, in the Common Stock would therefore be
conducted in the over-the-counter market on an electronic bulletin board
established for securities that do not meet the Nasdaq SmallCap Market listing
requirements, or in what are commonly referred to as the "pink sheets." As a
result, you would find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Common Stock. In addition, if the Common
Stock is removed from the Nasdaq SmallCap Market, it would be subject to
so-called "penny stock" rules that impose additional sales practice and market
making requirements on broker-dealers who sell and/or make a market in such
securities. Consequently, removal of the Common Stock from the Nasdaq SmallCap
Market, if it were to occur, could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Common Stock and your ability
to sell your Common Stock in the secondary market.
In addition, if the market price of the Common Stock remains below $5.00 per
share, Conductus may become subject to certain penny stock rules even if still
quoted on the Nasdaq SmallCap Market. While such rules should not affect the
quotation of the Common Stock on the Nasdaq SmallCap Market, such rules may
further limit the market liquidity of the Common Stock and the ability of our
stockholders to sell their Common Stock in the secondary market.
EARLY STAGE OF THE SUPERCONDUCTIVE ELECTRONICS MARKET; LACK OF MARKET ACCEPTANCE
Conductus was founded in September 1987 and to date we have been engaged
principally in research and development activities. Although we have introduced
a number of superconductive electronic products, most of our revenues to date
have been derived from research and development contracts. The superconductive
electronics market is new, with limited product commercialization to date. We
cannot assure you that we will be successful in developing, introducing and
marketing new products or enhancements to existing products. Our new products
and product enhancements may not adequately meet the requirements of the
marketplace and achieve any significant degree of commercial acceptance. We
cannot assure you that even if our products meet commercial performance
standards that we will be able to manufacture adequate quantities of any
products we introduce at commercially acceptable costs or on a timely basis, or
that any such products will offer price/performance advantages sufficient to
achieve market acceptance. If we fail to successfully develop, manufacture and
commercialize products that offer sufficient price/performance advantages or to
achieve significant market acceptance on a timely and cost-effective basis, our
business, operating results and financial condition could be harmed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<PAGE>
RAPID TECHNOLOGICAL CHANGE
The field of superconductivity is characterized by rapidly advancing
technology. Our success depends upon our ability to keep pace with advancing
superconductive technology, including materials, processes and industry
standards. We have focused our development efforts to date principally on
yttrium barium copper oxide ("YBCO"). However, YBCO may not ultimately prove
commercially competitive against other currently known materials or materials
that may be discovered in the future. We will have to continue to develop and
integrate advances in technology for the fabrication of electronic circuits and
devices and manufacture of commercial quantities of its products. We will also
need to continue to develop and integrate advances in complementary
technologies. We cannot assure you that our development efforts will not be
rendered obsolete by research efforts and technological advances made by others
or that materials other than those currently used by us will not prove more
advantageous for the commercialization of superconductive electronic products.
HIGH DEGREE OF DEPENDENCE UPON OTHER COMPLEMENTARY TECHNOLOGIES; RELIANCE ON
LIMITED OR SOLE-SOURCE SUPPLIERS
Commercial uses of superconductive products depend on the commercial
availability of a number of other technologies such as specialized mechanical
refrigeration systems, cryogenically-cooled semiconductor technology and
large-area compatible wafer substrates, some of which technologies are in the
development stage. We do not intend to devote significant effort or resources to
developing these technologies; we depend on the development activities of third
parties in these areas. We cannot assure you that these technologies will be
successfully developed and commercialized, or that they will achieve market
acceptance. Furthermore, certain components of our subsystems, including
cryocoolers, are currently obtained from a single source or a limited number of
suppliers. An inability to develop alternative sources or to meet customer
demand, a prolonged interruption in supply, or a significant increase in price
of one or more components would significantly harm our business, operating
results and financial condition.
RELIANCE ON COLLABORATIVE RELATIONSHIPS
We have established and continue to seek to establish collaborative
arrangements with corporate partners, government agencies and public and private
research institutions to develop, manufacture and market superconductive
electronic products. Our success depends on the development of successful
collaborative arrangements with third parties. However, we may not be able to
enter into collaborative arrangements on commercially reasonable terms, and even
if established, such arrangements may not result in successful programs to
develop, manufacture or market superconductive electronic products. If these
programs are successful, we cannot assure you that our collaborative partners
will not seek to manufacture jointly developed products themselves or obtain
them from alternative sources. Finally, these programs may require us to share
control over our development, manufacturing and marketing programs and
relinquish rights to our technology, may be subject to unilateral termination by
our collaborative partners and may restrict our ability to engage in certain
areas of product development, manufacturing and marketing.
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS; RISK OF LITIGATION
Our efforts to protect our proprietary rights may not succeed in preventing
their misappropriation or ensure that these rights will provide us with a
competitive advantage. Pending patent applications may not result in issued
patents and the validity of our issued patents may be subject to challenge.
Third parties may also be able to design around the patented aspects of our
products. Additionally, certain of the issued patents and patent applications
are jointly owned by us and third parties. The fact that any owner or co-owner
of a patent has the right to license rights under their patent or application
which could cause us to lose exclusive control over our inventions.
11
<PAGE>
The patent positions of companies using HTS technology, including Conductus,
are uncertain and involve both complex legal and factual questions.
Consequently, there is significant risk that others, including our competitors,
have obtained or will obtain patents relating to our planned products or
technology.
A patent issue of particular importance to us relates to copper oxides, or
"cuprates," that are used to make HTS products, including the YBCO compound
which is currently the basis for our business and products. We have not obtained
any issued patents nor have we filed any patent applications covering the
composition of any cuprates or other HTS materials. However, several U.S. and
foreign patent applications involving claims to the composition of YBCO and HTS
are pending. Such applications have been filed by IBM, AT&T, the University of
Houston, and the Naval Research Laboratory. Several of these U.S. applications
are the subject of an interference proceeding currently pending in the U.S.
Patent and Trademark Office (Interference No. 101,981). Additionally, E. I. du
Pont de Nemours & Co. ("DuPont") has notified us that it is the exclusive
licensee of patents issued in Israel, Sweden, Taiwan and the United Kingdom
covering the composition of YBCO and a method for using YBCO in superconducting
applications. DuPont has stated that it is interested in sublicensing such
patents to us, on similar terms to the sublicenses of any other foreign and U.S.
patent applications licensed to DuPont by the University of Houston. We
anticipate that we will be required to obtain a license to use YBCO from one or
more of these parties in order to continue to develop and sell products based on
YBCO.
We cannot assure you that we will obtain licenses to patents covering YBCO
compositions, if such patents are issued, or to any other patents applicable to
our business, on commercially reasonable terms. In such event, we would be
required to expend significant resources to develop non-infringing alternatives
or to obtain licenses to the technology that we infringe or would infringe.
However, we may not be able to successfully design around these patents or
obtain licenses to them. Furthermore, we may have to defend ourselves at
substantial cost against allegations of infringement of third party patents. An
adverse outcome in such a suit could subject us to significant liabilities or
require us to cease using such technology. In addition, aside from the merits of
a claim, the cost of defending any such suit would constitute a major financial
burden for us, one that would significantly harm our business, operating results
and financial condition. See "Business--Patents, Proprietary Technology and
Trademarks."
LIMITED COMMERCIAL MANUFACTURING CAPABILITY
We have established a limited production facility. To date, we have focused
primarily on developing fabrication processes and producing limited quantities
of superconducting thin films and components. Although our processing technology
derives principally from semiconductor manufacturing technology, the fabrication
of HTS components is especially difficult because of specific properties unique
to HTS materials. We cannot assure you that we can develop the enhanced
processing technology necessary to develop more advanced superconducting devices
and circuits or that we will be able to attain commercial yields in the future.
Even if we can attain commercial yields, we may suffer recurring yield problems
caused by mask defects, impurities in materials and other factors. While we have
established limited production facilities for our electronics products, we may
not be able to expand our processing, production control, assembly, testing and
quality assurance capabilities to produce existing or planned superconductive
electronic products in adequate commercial quantities. Our failure to develop an
adequate manufacturing capacity would significantly harm our business, operating
results and financial condition. See "Business-- Manufacturing."
ATTRACTION AND RETENTION OF KEY EMPLOYEES; NEED TO DEVELOP INFRASTRUCTURE TO
SUPPORT COMMERCIALIZATION
We depend heavily upon the efforts of our senior management and technical
teams. The loss of the services of one or more members of these teams could slow
our product development and commercialization objectives. Due to the specialized
nature of our business, we also depend upon our ability to attract
12
<PAGE>
and retain qualified technical and key management personnel. Moreover, we target
our products towards markets that require substantial industry knowledge and
expertise. We currently have limited expertise in these areas and it is
essential that we attract and retain qualified personnel with expertise in
manufacturing, marketing, sales and support in each of its targeted markets.
Competition for qualified personnel in our market is intense and we may not be
able to continue to attract and retain qualified personnel necessary for the
development of our business. See "Business--Employees."
HIGHLY REGULATED POTENTIAL PRODUCT APPLICATIONS
The operation of cellular and PCS base stations is regulated in the United
States by the Federal Communications Commission ("FCC"). Base stations and
equipment marketed for use in base stations must meet specific technical
standards. Our ability to sell our HTS filter subsystems will depend upon the
rate of deployment of PCS, the ability of base station equipment manufacturers
and of cellular base station operators to obtain and retain the necessary FCC
approvals and licenses, and changes in regulations that may impact the
requirements for our products. Any failure or delay of base station
manufacturers or operators in obtaining necessary approvals could significantly
harm our business, operating results and financial condition.
ENVIRONMENTAL REGULATIONS
We are subject to a number of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our business. Any failure to
comply with present or future regulations could result in fines being imposed,
suspension of production or acessation of our operations. In addition, such
regulations could restrict our ability to expand or require us to acquire costly
equipment or incur other significant expenses to comply with environmental
regulations or to clean up prior discharges.
ANTITAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND OF DELAWARE LAW
Conductus has adopted a Stockholder Rights Plan which, if triggered, could
make it more difficult for a third party to acquire a majority of the
outstanding voting stock of Conductus, even if doing so would create an
immediate benefit to our stockholders. Further, certain provisions of the
Company's Restated Certificate of Incorporation and Bylaws and of Delaware
corporate law could delay or make more difficult an acquisition of Conductus by
merger, tender offer or proxy contest, even if such event would create an
immediate benefit to our stockholders. Among other things, the Company's
Restated Certificate of Incorporation does not permit stockholders to act by
written consent and the Bylaws require advance notice of any matters to be
brought before the stockholders at the annual meeting. See "Description of
Capital Stock--AntiTakeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law."
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock could make it more difficult for a third party to acquire a majority of
the outstanding voting stock of Conductus. See "Description of Capital Stock--
Common Stock," "--Preferred Stock."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends and does not anticipate paying
cash dividends on the Common Stock in the foreseeable future. See "Price Range
of Common Stock" and "Dividend Policy."
13
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by the
Selling Stockholders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our Common Stock and do
not expect to do so in the foreseeable future. We anticipate that all future
earnings, if any, generated from operations will be retained to develop and
expand our business. Any future determination with respect to the payment of
dividends will be at the discretion of the Board of Directors and will depend
upon, among other things, our operating results, financial condition and capital
requirements, the terms of then-existing indebtedness, general business
conditions and such other factors as the Board of Directors deems relevant. In
addition, the terms of our line of credit prohibits the payment of cash
dividends without the lender's consent.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company commenced trading on the Nasdaq National
Market under the trading symbol "CDTS" on August 12, 1993 and moved to the
Nasdaq SmallCap Market effective November 10, 1998. The following table presents
quarterly information on the high and low closing sales prices for shares of the
Company's Common Stock for the periods indicated as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter................................................................ $ 16 1/2 $ 15
Second Quarter............................................................... 16 1/2 9 3/4
Third Quarter................................................................ 12 7/8 7 5/8
Fourth Quarter............................................................... 9 1/2 6
1997
First Quarter................................................................ $ 9 1/4 $ 6
Second Quarter............................................................... 7 5/8 5 5/8
Third Quarter................................................................ 6 5/16 4 7/8
Fourth Quarter............................................................... 5 7/8 3 1/4
1998
First Quarter................................................................ 5 2 31/32
Second Quarter............................................................... 4 3/8 2 7/8
Third Quarter................................................................ 4 1/2 2 1/16
</TABLE>
As of January 6, 1999, the closing sale price of the Common Stock was
$1 11/16 per share.
PLAN OF DISTRIBUTION
The Company is registering the Shares offered by the Selling Stockholders
hereunder pursuant to contractual registration rights contained in the Series B
Preferred Stock and Warrant Purchase Agreement, dated September 11, 1998, by and
among the Company and the Selling Stockholders (the "Purchase Agreement"). As
used herein, "Selling Stockholders" includes donees and pledgees selling shares
received from a named Selling Stockholder after the date of this Prospectus.
The Company has filed with the Commission, under the Securities Act, a
Registration Statement on Form S-1, of which this Prospectus forms a part, with
respect to the resale of the Shares from time to time as described below. The
Company has agreed to use its best efforts to keep such Registration Statement
effective for a period of two years or, if earlier, the date that all the Shares
have been sold. The Company will receive no proceeds from this offering. All
costs, expenses and fees in connection with the registration of the Shares
offered hereby will be borne by the Company. Brokerage commissions and similar
selling expenses, if any, attributable to the sale of Shares will be borne by
the Selling Stockholders.
14
<PAGE>
The Shares offered hereby may be sold by the Selling Stockholders from time
to time in transactions in the over-the-counter market, on the Nasdaq SmallCap
Market, in privately negotiated transactions, or by a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices or
at negotiated prices. The Selling Stockholders may effect such transactions by
selling the Shares to or through broker-dealers, which may act as agents or
principals, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders and/or the
purchasers of the Shares for whom such broker-dealers may act as agents or to
whom they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). Broker-dealers may
agree with the Selling Stockholders to sell a specified number of Shares at a
stipulated price per share, and, to the extent such a broker-dealer is unable to
do so acting as agent for the Selling Stockholders, to purchase as principal any
unsold Shares. Brokers-dealers who acquire Shares as principal may thereafter
resell such Shares from time to time in transactions (which may involve crosses
and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, on the Nasdaq SmallCap Market, in privately negotiated
transactions, or by a combination of such methods of sale, at fixed prices that
may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
Shares commissions computed as described above.
In order to comply with applicable securities laws of certain states, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, in certain states the Shares may not be sold
unless they have been registered or qualified for sale or an exemption from
applicable registration or qualification requirements is available and is
complied with. Selling Stockholders may resell all or a portion of the Shares in
open market transactions in reliance upon Rule 144 of the Securities Act,
provided they meet the criteria and conform to the requirements of Rule 144.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in the distribution of the Shares may under
certain circumstances be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by them and
any profit realized on the resale of the Shares purchased by them may be deemed
to be underwriting commissions or discounts under the Securities Act. The
Selling Stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the Shares against certain
liabilities, including liabilities under Securities Act. Selling Stockholders
deemed to be "underwriters" will be subject to the prospectus delivery
requirements of the Securities Act. The Company has informed the Selling
Stockholders that the anti-manipulative provisions of Regulation M promulgated
under the Exchange Act may apply to their sales in the market.
Under applicable rules and regulations under the 1934 Act, any person
engaged in the distribution of the Shares may not simultaneously engage in
market making activities with respect to the Common Stock of the Company for a
period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, the Selling Stockholders will be
subject to applicable provisions of the 1934 Act and the rules and regulations
thereunder, including, without limitation, Rules 10b-6 and 10b-7, which
provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Stockholders.
Upon the Company being notified by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of Shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) of the Securities
Act, disclosing (i) the name of each such Selling Stockholder and of the
participating broker-dealer(s), (ii) the number of shares involved, (iii) the
price at which such shares were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and (vi) other facts
material to the transaction. In addition, upon the Company being notified by a
Selling Stockholder that a donee or pledgee intends to sell more than 500
shares, a supplement to this Prospectus will be filed.
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which are included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1997, 1996 and 1995 and the balance sheet data at December
31, 1997 and 1996 are derived from and are qualified by reference to, the
audited financial statements elsewhere in this Prospectus. The statement of
operations data for the years ended December 31, 1994 and 1993 are derived from
audited financial statements not included in this Prospectus. The statement of
operations data for the nine months ended September 30, 1998 and 1997, and the
balance sheet data at September 30, 1998 are derived from unaudited financial
statements that include, in the opinion of management, all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the results of operations for such period. The result of
operations for the nine months ended September 30, 1998 or any other period are
not necessarily indicative of future results.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEARS ENDED DECEMBER 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993(2) 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Contract....................................... $ 5,070 $ 7,048 $ 8,148 $ 9,691 $ 7,266 $ 5,834 $ 2,808
Product sales.................................. 1,409 1,588 2,434 2,852 2,188 1,663 624
--------- --------- --------- --------- --------- --------- ---------
Total revenues............................... $ 6,479 $ 8,636 $ 10,582 $ 12,543 $ 9,454 $ 7,497 $ 3,432
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Loss from operations............................. $ (4,070) $ (4,876) $ (4,423) $ (5,109) $ (7,499) $ (5,261) $ (5,808)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss......................................... $ (4,122) $ (4,544) $ (4,422) $ (5,004) $ (7,543) $ (5,243) $ (6,200)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted loss per common share(1)....... $ (1.40) $ (0.85) $ (0.80) $ (0.80) $ (1.09) $ (0.77) $ (0.88)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in per share computations(1)......... 2,940 5,323 5,543 6,263 6,897 6,853 7,077
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998(3)
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital..................................... $ 12,438 $ 7,076 $ 4,287 $ 9,135 $ 1,822 $ 4,137
Total assets........................................ 16,233 12,541 10,128 16,081 8,762 9,107
Long-term debt, less current portion................ 180 533 1,146 1,022 310 1,560
Total stockholders' equity.......................... 14,057 9,529 5,814 11,183 4,301 4,881
</TABLE>
- ------------------------
(1) Computed on the basis described for net loss per share in Note 2 of Notes to
Financial Statements of Conductus, Inc. Amounts have been restated for the
adoption of Statement of Financial Accounting Standard No. 128 "Earnings Per
Share".
(2) The results of operations of the Company for the year do not include the
results of operations of Tristan prior to its acquisition by Conductus on
May 28, 1993.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DESCRIPTION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ALONG WITH THE FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS INVOLVE PROJECTIONS BASED UPON CURRENT EXPECTATIONS, AND THEIR
ACCURACY IS SUBJECT TO RISKS AND UNCERTAINTIES. YOU SHOULD CONSIDER ANY
STATEMENTS THAT ARE NOT STATEMENTS OF HISTORICAL FACT TO BE FORWARD-LOOKING
STATEMENTS. WE HAVE TRIED, WHEREVER POSSIBLE, TO IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT"
AND SIMILAR EXPRESSIONS.
OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS AND EVENTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DISCREPANCY INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Conductus develops, manufactures and markets electronic components and
systems based on superconductors for applications in the worldwide
telecommunications markets. As of September 30, 1998, Conductus had accumulated
losses of approximately $42,971,000 and expects to incur significant additional
losses during 1998 and 1999. Conductus, alone or with collaborative partners,
must successfully develop, manufacture, introduce and market its potential
products in order to achieve profitability. Conductus does not expect to
recognize meaningful product sales until it successfully develops and
commercializes superconductive components, systems and subsystems that address
significant market needs. See "Risk Factors--Early Stage of the Superconductive
Electronics Market; Lack of Market Acceptance."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
For the nine months ended September 30, 1998, the Company's total revenues
decreased to $3,432,000, a 54% decrease from $7,497,000 for the same period in
1997. For the nine months ended September 30, 1998, revenues under U.S.
government research and development contracts were $2,808,000, a decrease of 52%
from $5,834,000 in the same period in the prior year. The decreases in total
revenues and contract revenues 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 an overall lower level of federal Research and Development funding in
the Company's technology area. At September 30, 1998, Conductus had a backlog of
approximately $421,000 under existing U.S. government contracts, most of which
is to be performed in the next 12 months, and approximately $7,000,000 in awards
from U. S. government agencies for which such agencies had not yet entered into
research contracts with the Company. The recognition of revenue and receipt of
payment pursuant to these contracts and awards are subject to numerous risks.
For the nine months ended September 30, 1998, product revenues decreased to
$623,000, a 63% decrease from $1,663,000 of product sales in same period in the
prior year. The decrease in product revenues for the nine month period resulted
primarily from decreased shipments of products from the Instrument and Systems
division and the NMR product line, which the Company disposed of during the
17
<PAGE>
third quarter of 1997, and lower volumes of other magnetic sensing products,
offset somewhat by increased volume of government and commercial wireless
communication products, as shown in the table below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED:
----------------------------
<S> <C> <C> <C>
SEPT. 30, SEPT. 30,
1998 1997 CHANGE
(A) (B) (A)--(B)
------------- ------------- -------------
Wireless Communications Products..................................... $ 403,000 $ 0 $ 403,000
San Diego Division Products.......................................... 0 596,000 (596,000)
Other Magnetic Sensing Products...................................... 220,000 1,067,000 (847,000)
------------- ------------- -------------
Total Product Sales.................................................. $ 623,000 $ 1,663,000 $ (1,040,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
For the nine months ended September 30, 1998, cost of product sales
increased to $1,994,000, a 5% increase from $1,899,000 over the same period in
1997. This increase was due to higher unit production costs on wireless. For the
nine months ended September 30, 1998, gross margins decreased to (220)% from
(14)% in the same period in 1997, primarily due to the higher wireless unit
production costs and decreased shipments of higher margin magnetic sensing
products. Margins will improve only if unit volumes increase significantly,
leading to lower per unit costs for purchased materials and overhead. Costs of
contract revenues are included in research and development expenses.
For the nine months ended September 30, 1998, research and development
expenses decreased to $4,469,000, a 42% decrease from $7,680,000 for the same
period in 1997. This decrease is primarily attributable to lower levels of
expenditures for government contracts, decreased headcount and expenditures
related to the Instruments and Systems division and NMR product lines, partially
offset by an increase in expenditures for telecommunications product
development. We expect to continue to incur significant research and development
expenses as we seek to develop and market additional products.
Selling, general and administrative expenses decreased to $2,777,000 for the
nine months ended September 30, 1998, a 12% decrease from the same period in
1997. This 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.
Total headcount decreased to 66 at September 30, 1998 from 91 at September
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 and resulting reduced headcount. 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 $9,240,000 for the nine months
ended September 30, 1998, a 28% decrease from $12,758,000 for the same period in
1997 for the reasons described above.
For the nine month period ended September 30, 1998, net interest and other
expense increased substantially over the same period in 1997, primarily due to
lower cash balances and higher debt levels. The Company has not paid federal
income taxes since inception due to its cumulative operating losses.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Total revenues decreased to $9,454,000 in 1997 from $12,543,000 in 1996 and
$10,582,000 in 1995. Total revenues consist primarily of contract revenue and,
to a lesser extent, product sales. Revenue under U.S. government research and
development contracts decreased to $7,266,000 in 1997 from $9,691,000 in 1996
and $8,148,000 in 1995 and represented approximately 77%, of total revenue in
each of the fiscal years 1997, 1996, and 1995. The decrease in contract revenues
during 1997 is largely attributable to the completion of several major contracts
during 1997. The increase in contract revenues in 1996 compared to 1995 is
largely attributable to a solid base of contracts from 1995 and the addition of
several new multi-year
18
<PAGE>
contracts. The Company had backlog of approximately $176,000 and $4,620,000 in
contracts and grants as of December 31, 1997 and 1996, respectively. In
addition, the Company had $6,373,000 and $8,976,000 in awards from U.S.
government agencies which had not been funded as of December 31, 1997 and 1996,
respectively. Conductus anticipates that government contract revenues will
continue to decline somewhat in the future compared to historical rates due to
reductions in federal R & D funding and the narrower scope of the Company's
business interests. The recognition of revenue and receipt of payment pursuant
to these contracts and awards are subject to numerous risks. See
"Business--Research and Development" and Note 11 of Notes to Financial
Statements.
Revenue from sales of large-scale superconductive magnetic sensing systems,
SQUIDs, HTS thin films and other products decreased to $2,188,000 in 1997 from
$2,852,000 in 1996 and $2,433,000 in 1995. The decrease in 1997 compared to 1996
was primarily due to the disposition during 1997 of both the Instrument and
Systems division and the NMR product line. The increase in 1996 compared to 1995
was primarily due to increased sales of superconductive sensor instruments and
systems. During the fourth quarter of 1997, the Company recognized $96,000 as
revenue on the first shipment of its ClearSite front-end system to a commercial
customer. Future sales of this product are subject to numerous technical and
market risks. See "Risk Factors--Rapid Technological Change," "--Early Stage of
the Superconductive Electronics Market; Lack of Market Acceptance" and
"--Intense Competition."
Cost of product sales were $1,845,000, $1,824,000, and $1,430,000 for 1997,
1996, and 1995, respectively. The cost of products in 1997, 1996, and 1995 were
primarily composed of costs of superconducting magnetic systems manufactured by
the Instrument and Systems division, which the Company disposed of in 1997. Cost
of product sales increased slightly from 1996 to 1997 despite lower volume of
sales due to inventory writedowns of approximately $475,000 related to the
Instrument and Systems division products and to certain SQUID product lines no
longer considered part of the Company's future strategic focus. Cost of product
sales increased in 1996 and 1995 due to increased levels of revenues from new
products introduced in 1995. Gross margins were 16%, 36%, and 41% for 1997,
1996, and 1995, respectively. The gross margin decrease in 1997 was primarily
related to the inventory writedowns mentioned previously. Gross margins
decreased in 1996 compared to 1995 because of increased sales of large systems
which have lower gross margins and increased costs of start-up in the sensor
portion of the magnetic sensor business. Costs of contract revenues are included
in research and development expenses and are discussed below.
The Company's research and development expenses decreased to $10,626,000 in
1997 from $11,774,000 in 1996 but increased from $9,819,000 in 1995, and
represented 63%, 67%, and 65%, respectively, of total operating expenses in
1997, 1996 and 1995. The decrease in 1997 compared to 1996 reflects lower levels
of contract revenues, the dispositions of the Instrument and Systems and NMR
product lines, offset somewhat by increased spending particularly on new
wireless communications products. The increase in 1996 over 1995 reflects the
increase in the Company's overall research and development activities, and an
emphasis of efforts in communications and healthcare. Research and development
includes both externally and internally funded projects. Externally funded
research and development programs, primarily under contracts with agencies of
the U.S. government, accounted for approximately $9,814,000, of total operating
costs and expenses in 1997, down from $13,178,000 in 1996, reflecting reductions
in federal R & D funding and the narrower scope of the Company's business
interests during 1997. The increase in 1996 to $13,178,000 from $9,170,000 in
1995 was due to the increase in the Company's overall research and development
activities mentioned above. The Company expects to continue to incur significant
research and development expenses on internally funded programs as it seeks to
develop additional commercial products, particularly in the communications area.
Selling, general and administrative expenses increased to $4,330,000 in 1997
from $4,054,000 in 1996 and $3,756,000 in 1995 and represented 26%, 23%, and
25%, respectively, of total operating expenses in 1997, 1996, and 1995,
respectively. These costs increased in 1997 compared to 1996 primarily due to
increased sales and marketing spending related to commercial wireless
communication products, offset somewhat by lower spending due to the disposition
of the Instrument and Systems division. These costs
19
<PAGE>
increased in 1996 compared to 1995 due to the increasing size of the Company
since the acquisition of Tristan in 1993, significant headcount additions and
increasing sales and marketing activities. Total headcount has decreased to 90
at December 31, 1997 from 133 at December 31, 1996 and 99 at December 31, 1995,
respectively due to the discontinuation of operations of the Instrument and
Systems division and the sale of the NMR probe business. The Company expects to
continue to incur increasing sales and marketing expenses to the extent it
increases sales of commercial products, particularly in the communications
markets.
The Company's total costs and expenses decreased to $16,953,000 in 1997 from
$17,652,000 in 1996 but increased from $15,005,000 in 1995. The decrease in 1997
compared to 1996 was primarily due to the dispositions of the Instrument and
Systems division and NMR product line in the third quarter of 1997, offset
somewhat by increased emphasis in communications product development, and sales
and marketing. The increase in 1996 compared to 1995 was primarily due to the
company's overall increase in research and development activity for 1996. The
Company expects the increased emphasis on communications product development and
sales and marketing to increase total costs and expenses in 1998.
Loss from operations was $7,499,000, $5,109,000, and $4,423,000, for 1997,
1996, and 1995, respectively, due to the reasons enumerated above.
Interest income from cash equivalents and investments were $267,000 in 1997,
$263,000 in 1996, and $249,000 in 1995, reflecting the relative average levels
of cash equivalents and investments for each of the years. Interest charges were
$202,000, $183,000, and $156,000 in 1997, 1996, and 1995, respectively.
Interest charges are related primarily to the Company's equipment term loan
facilities, and reflect the relative average balances outstanding under these
facilities.
As a result of incurring losses, the Company has not incurred any income tax
liability. The Company has established a valuation allowance against its
deferred tax assets and reviews this allowance on a periodic basis. At such time
that the Company believes that it is more likely than not that the deferred tax
asset will be realized, the valuation allowance will be reduced.
Conductus does not believe that inflation has had a material effect on its
financial condition or results of operations during the past three fiscal years.
However, there can be no assurance that the company's business will not be
affected by inflation in the future.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's aggregate cash and cash equivalents
totaled $4,507,000 compared to $3,169,000 as of December 31, 1997, and
$7,636,000 as of December 31, 1996. 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, $21,020,000 raised
in private placement financings (including net proceeds of $6,375,000 raised in
September 1998), $43,080,000 from U.S. government contracts, $2,660,000 in
aggregate borrowings under various lease and bank loan arrangements, and
$3,743,000 in interest income.
During the third quarter of 1998, the Company raised a net amount of
$6,375,000 in Series B Preferred Stock at $2.70 per share convertible on a 1-1
basis into Common Stock. The Company also issued warrants to purchase 492,242
shares of Common Stock at $2.70 per share. In addition, the Company has
negotiated an equipment lease line in the amount of $1,000,000 available for
future equipment purchases, received $500,000 that was a deposit released from a
prior financing transaction, and has available a bank line of credit which
provides for borrowings of up to the lessor of $2,000,000 or 80% of eligible
receivables. See Notes 9 and 17 of Notes to Financial Statements for a further
description of the Company's recent financing arrangements.
20
<PAGE>
Net cash used in operations was $4,702,000, $4,897,000, and $4,625,000, for
1997, 1996, and 1995, respectively. The decrease in net cash used in operations
for 1997 compared to 1996 was due primarily to a decrease in accounts
receivable, higher provision for excess and obsolete inventory, and the decrease
in prepaid expenses, offset somewhat by a larger net loss in 1997. The increase
in net cash used in operating activities in 1996 over 1995 was primarily due to
an increase in net loss resulting from expanding the Company's operations,
including headcount and other related costs, and increases in inventories,
offset somewhat by the increase in accounts payable and accrued liabilities. The
Company anticipates that its accounts receivable from revenues under U.S.
government contracts during 1998 will be lower than 1997 levels. Accounts
receivable and inventories from product sales are expected to increase with the
anticipated increase in revenues from product sales in 1998.
Net cash used in operations was $5,771,000 for the first nine months of 1998
compared to $2,549,000 for the same period in 1997. The increase in net cash
used in operating activities in the first nine months of 1998 was primarily due
to the larger net loss for the period, an increase in inventories 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 nine months of 1997), and depreciation and
amortization (which was approximately at the same level as the first nine months
of 1997). The accounts receivable decrease was due to lower levels of revenue,
offset somewhat by slower than anticipated collections on certain receivables.
The increase in inventories was primarily in raw material and finished goods for
wireless commercial products. The decrease in accounts payable and other accrued
liabilities was primarily due to an acceleration of payments during the third
quarter of 1998 after the Company had delayed payments during the first and
second quarters of 1998 as the Company attempted to conserve cash while it
continued to negotiate various financings.
The Company anticipates that it will incur significant additional net losses
during the balance of 1998 and through 1999. The Company anticipates that its
accounts receivable and inventories may 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 (used in) investing activities was $5,848,000 in 1997,
compared to ($4,868,000) in 1996, and $2,670,000 in 1995. The change in 1997
compared to 1996 is primarily due to the change in proceeds from sales of short
term investments and purchases of short term investments. In 1997 the Company
sold $5,956,000 more of its short term investments than it purchased to increase
cash, while in 1996 the Company purchased $3,633,000 more of short term
investments than it sold to invest cash. In 1995, the Company sold $4,238,000
more of short term investments than it purchased to increase cash. In addition,
capital expenditures decreased by $575,000 in 1997 compared to 1996, due to
lower spending on laboratory and manufacturing equipment. Capital expenditures
decreased by $304,000 in 1996 compared to 1995 due to lower spending on
laboratory and manufacturing equipment. The Company anticipates that its capital
expenditures will increase slightly in 1998 as the Company continues its
transition to manufacture greater volumes of commercial products.
Net cash provided by investing activities was $351,000 for the first nine
months of 1998 compared to net cash provided by investing activities of
$2,685,000 for the first nine 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 has negotiated a leasing facility to finance further purchases of
property and equipment, during the remainder of 1998.
Net cash from financing activities was $345,000 in 1997 compared to
$10,612,000 in 1996 and $1,722,000 in 1995. The decrease in 1997 compared to
1996 was primarily due to lower net proceeds from
21
<PAGE>
the issuance of common stock. The net cash provided by financing activities in
1996 was primarily due to the Company's follow-on offering in June of 1996 and
borrowings under the Company's equipment loans, offset by principal payments
under capital lease obligations and equipment term loans. The Company to date
has received limited revenues from product sales. The development of the
Company's potential products will require a commitment of substantial funds to
conduct further research and development and testing of its potential products,
to establish commercial-scale manufacturing and to market any resulting
products. The Company expects to use significant amounts of cash for capital
equipment and to support operations until product revenues increase.
Net cash provided by financing activities was $7,315,000 for the first nine
months of 1998 compared to net cash used in financing activities of $179,000 in
the first nine months of the prior year. Net cash provided by financing
activities in the first nine months of 1998 was primarily proceeds from
borrowings and the proceeds from the sale of preferred and common stock as
follows:
<TABLE>
<S> <C>
Note Payable................................................................... $4,450,000
Issuance of Preferred Stock.................................................... 6,375,000
Issuance of Common Stock....................................................... 225,000
----------
Total proceeds from financings and borrowings.................................. $11,050,000
----------
----------
</TABLE>
The net cash provided by proceeds from borrowings, preferred stock and
issuance of common stock was offset somewhat by principal payments on debt. In
the first nine months of 1997, net cash used in financing activities was
primarily principal payments on debt.
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. See Notes 9 and 17 of Notes to
Financial Statements.
To date we have received limited revenues from product sales. The
development of our planned products will require a commitment of substantial
additional funds. Additional financing may not be available on acceptable terms
or at all. Unless we are is able to raise significant additional funds, through
debt or equity issuances, asset sales or otherwise, we will be required to
delay, scale-back 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. The Company's future capital requirements will depend
on many factors, including continued progress in its research and development
programs, the magnitude of these programs, the time and cost involved in
obtaining any required regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patents, successful completion of
technological, manufacturing and market requirements, changes in existing
research relationships, the availability of funding under government contracts,
the ability of the Company to establish collaborative arrangements and the cost
of manufacturing scale-up and the amount and timing of future revenues.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. 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 remain functional. 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
22
<PAGE>
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company is currently expending resources to review its products,
services and internal use software to identify those products, services and
systems that are not Year 2000 compliant. The costs related to the Year 2000
issue are expensed as incurred, and represent a reallocation of existing
resources. The project comprises four phases: (1) identification of risks, (2)
assessment of those risks, (3) development of remediation and contingency plan,
and (4) implementation and testing. The Company's Year 2000 project is currently
in the assessment phase, and the Company believes that its greatest risks are
associated with its information systems and systems embedded in its operations
and infrastructure.
The Company presently believes that the conversion of its internal systems
will mitigate the Year 2000 issue related to information systems. Based upon a
recently 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 is in the early phases of the conversion process, however if the
conversion is not completed in a timely manner, the Year 2000 issue could have a
material adverse impact on the operations of the Company. The Company is
proceeding with the assessment of risk relating to its remaining internal
systems, the determining whether it has exposure to contingencies relating to
the Year 2000 issue for the products it has sold.
The Company estimates that the costs 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.
The Company has 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.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test remediation or
contingency or contingency plans, or may find that the costs of these activities
exceed current expectations and become material. The Companies expectations as
to the extent and timeliness of modifications required in order to achieve Year
2000 compliance is a forward-looking statement subject to risks and
uncertainties.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 (SFAS 130) "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. SFAS 130 will become effective for our 1998 fiscal year.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 (SFAS 131) "Disclosures about Segments of an Enterprise and Other
Information." SFAS No. 131 requires publicly-held companies to report financial
and other information about key revenue-producing segments of the entity for
which such information is available and is utilized by the chief operation
decision makers. Specific information to be reported for individual segments
includes profit and loss, certain revenue and expense items and total assets. A
reconciliation of segment financial information to amounts reported in the
financial statements would be provided. SFAS 131 will become effective for our
1998 fiscal year.
We are currently studying the implications of these statements and have not
yet determined the impact of their adoption.
23
<PAGE>
BUSINESS
YOU SHOULD READ THE FOLLOWING DESCRIPTION OF OUR BUSINESS ALONG WITH THE
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS INVOLVE PROJECTIONS BASED UPON CURRENT EXPECTATIONS, AND THEIR
ACCURACY IS SUBJECT TO RISKS AND UNCERTAINTIES. YOU SHOULD CONSIDER ANY
STATEMENTS THAT ARE NOT STATEMENTS OF HISTORICAL FACT TO BE FORWARD-LOOKING
STATEMENTS. WE HAVE TRIED, WHEREVER POSSIBLE, TO IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT"
AND SIMILAR EXPRESSIONS.
OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS AND EVENTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DISCREPANCY INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS SECTION, THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Conductus, Inc. ("Conductus" or the "Company") develops, manufactures and
markets electronic components and subsystems based on High-Temperature
Superconductor ("HTS") technology. The unique properties of superconductors
provide the basis for electronic products with significant potential performance
advantages over products based on competing materials such as copper and
semiconductors. Depending on the application, these advantages include enhanced
sensitivity, efficiency, speed and operating frequency, as well as reduced power
consumption, size, weight, and cost.
In 1997, the Company focused its efforts on applications for the
telecommunications market that take advantage of the superior performance and
benefits afforded by HTS technology. Conductus has developed a line of
ClearSite-TM- front-end receiver subsystems (herein after referred to as
"ClearSite products") for cellular and personal communication services ("PCS")
base stations which may significantly enhance the services provided by network
services providers. ClearSite products can provide significant benefits in base
station performance, reduce the size of the filter components required and
enable network services providers and OEMs to rapidly deploy new and enhance
existing analog and digital cellular systems for increasingly demanding carrier
network and service provider environments.
In the existing cellular communications infrastructures, network service
providers must overcome problems of limited CAPACITY, insufficient COVERAGE, and
increasing INTERFERENCE. With the rollout of PCS, both cellular and PCS network
operators face the increasing need for cost-effective solutions that address
these problems. As the wireless communications infrastructure expands, the
incidence of such problems is increasing, often leading to decreased customer
satisfaction and increased customer turnover. These problems decrease a network
operator's ability to compete effectively and impact the ability to maximize
billable minutes.
ClearSite products, which feature a compact form factor and rugged housing,
effectively improve coverage, reduce interference and increase network capacity,
thus improving the network operators' ability to compete effectively and
increase billable airtime. Conductus has begun initial product shipments to
certain customers, continues to support field test trials with customers and is
developing additional ClearSite products for near-term introduction.
Conductus began field testing its ClearSite products in wireless base
stations in 1996 with four cellular operators in the U.S. Testing progressed to
the beta stage late in that year with the initiation of an extended field trial
with Cellcom, Inc. ("Cellcom"), a service provider in Wisconsin. This trial,
which concluded in April 1997 with the first commercial order for multiple
ClearSite products, successfully demonstrated a significant reduction in the
number of dropped calls and enhanced voice quality. Commercial product shipments
began in December 1997.
24
<PAGE>
From its incorporation in 1987 to 1997, Conductus pursued development of
materials and process technology for HTS as well as applications research. These
efforts were sponsored in part by military and government agency funding. The
Company initiated commercial product shipments of HTS films in 1990 and of HTS
systems in 1992 addressing multiple markets, including the communications,
health care and instrumentation markets. In late 1996, the Company made the
strategic decision to focus on the rapidly growing telecommunications market. In
the third quarter of 1997, the Company completed two organizational changes
aimed at focusing on wireless communications. The Company closed its Instrument
and Systems division and sold its NMR spectroscopy probe business. Research and
development efforts are now focused on developing applications in the
communications market, including superconducting circuits for high-speed
telecommunications switching.
The Company's target wireless market is both global and growing. According
to Federal Communications Commission and industry reports, there are over 25,000
installed cellular base stations in the U.S. In addition, industry sources
estimate that more than 70,000 PCS base stations will be installed throughout
the U.S. by the end of 2005. The present cellular communications network,
operating at frequencies near 850 MHz, was established when the typical cellular
phone was capable of transmitting up to 3 watts of radio frequency power and the
number of subscribers was relatively low. Today, portable handsets that transmit
only 0.6 watts are increasingly replacing higher-power mobile telephones,
thereby decreasing the effective receiving range of existing base stations. As a
result, in rural areas where base stations are widely separated, current
cellular customers can experience dropped calls due to "dead zones" in coverage.
At the same time, the increasing demand for cellular service in urban areas has
led to the utilization by service providers of a greater number of channels
within their allotted frequency bands, thereby increasing the incidence of
interference. Moreover, the arrival of PCS and other competing services has
placed new emphasis upon quality of service for established cellular operators.
The Company's current customers include such leading wireless service
providers as AllTel, RadioFone, Cellcom and NTT-DoCoMo. In addition, the Company
has completed initial field tests with Carolina West Wireless, Kansas Cellular
and Citizens Mohave, has ongoing tests with U.S. Cellular and COMMNET, and is
scheduling trials with Cellular One, Ameritech and three regional Bell wireless
groups. The Company also has established significant strategic alliances and
development agreements with industry leaders such as Lucent Technologies and
CTI-Cryogenics, a division of Helix Technology Corporation. With the continued
growth of global telecommunications networks, network service providers are
increasingly outsourcing critical components in an effort to shrink
time-to-market, reduce production and development costs, and circumvent the
increasing scarcity of skilled specialists in advanced telecommunications
technology.
The Company's current sales and marketing strategy relies primarily on
direct sales for its communications products. The Company believes that its
products have significant long-term potential as new generations of
telecommunications equipment are installed throughout the world due to the
integration of technology advances and the opening of new markets. The Company
intends to leverage its product line, established relationships with industry
leaders, and experienced team of engineers to provide support and services to
network operators worldwide.
BACKGROUND
SUPERCONDUCTORS
Superconductors are materials that have the ability to transport electrical
energy with little or no loss when cooled to a "critical" temperature. The
intrinsic properties of superconductors are unique in nature and offer potential
performance benefits to electrical and electronic systems. These include
low-loss signal transmission, extreme magnetic sensitivity and efficient
high-speed switching. When electrical currents flow through ordinary materials,
they encounter resistance which consumes energy by converting electrical energy
into heat energy. Depending on whether direct or alternating current is applied,
superconductors
25
<PAGE>
have the ability to transport electrical current with no resistance at all or
with only a tiny fraction (typically less than one percent) of what is found in
the best conventional conductors. This property is extremely beneficial in
electronic components whose increased efficiency leads to enhanced signal
strength, improved signal resolution and compact form-factor. Other intrinsic
properties of superconductors enable the fabrication of unique electronic
devices, including high-speed electronic switches and ultra-sensitive magnetic
sensors.
From 1911, when superconductivity was first discovered, until 1986, the
critical temperatures for all known superconductors did not exceed 23 K (-418
DEG. F). As a result, superconductivity was not widely used in commercial
applications because of the high cost and complexities associated with reaching
and maintaining such low temperatures. In 1986, a new class of superconducting
materials, referred to as high-temperature superconductors ("HTS"), was
discovered having critical temperatures above 77 K (-320 DEG. F), the boiling
point of liquid nitrogen. These high critical temperatures allow HTS materials
to be cooled to a superconducting state using liquid nitrogen, which is
inexpensive and relatively easy to use, or using relatively simple mechanical
refrigerators. Conductus believes that this ability to obtain the benefits of
superconducting technology at more easily achieved temperatures enables much
broader commercial applications.
The cooling required for HTS materials can also be useful for other
materials. Many electronic technologies, including CMOS, GaAs, optoelectronics
and even copper, exhibit enhanced performance at reduced temperatures, but the
most compelling performance improvements are enabled by superconductive
electronics. When the unique advantages of superconductive electronics are
complemented by the advantages of other cryoelectronic technologies, the result
is a hybrid system whose overall performance can justify the additional expense
associated with cryogenic cooling. Conductus is currently employing this hybrid
approach in its front-end receiver systems, which combine superconductive
filters with cryogenically-cooled low noise amplifiers.
CONDUCTUS' APPROACH
Conductus develops, manufactures and markets superconductive electronic
devices and components using thin-film technology based upon the material
yttrium barium copper oxide ("YBCO"), which the Company has judged to be best
suited for electronic applications. Conductus combines what it believes to be
the world's most advanced YBCO thin-film technology with expertise in electronic
device and component design, analog and digital electronic engineering,
cryogenic packaging, mechanical engineering and system integration. Conductus
believes that systems containing superconductive electronic technology will
offer performance that is unavailable from competing technology, will reduce the
costs of performing desired functions, or, in many cases, do both.
CHOICE OF MATERIAL. Although a number of high-temperature superconductors
have been identified, Conductus has focused upon the development of YBCO for
electronic applications. See "Risk Factors--Uncertainty of Patents and
Proprietary Rights; Risk of Litigation." YBCO is the only HTS material for which
there has been both significant development and successful demonstration of
multilayer technology, i.e., the use of multiple thin-film materials deposited
one upon another. Conductus believes that such multilayer structures are
important for many electronic components and devices, where they can be used for
better film quality and stability and enhanced device functionality. Conductus
has developed several proprietary processes for producing YBCO and other
thin-film materials as well as for fabricating superconducting components and
devices. These processes include thin-film growth, photolithography, etching and
other procedures similar to those used in the manufacture of electronic devices.
THIN-FILM EXPERTISE. Conductus produces superconducting components using a
thin-film fabrication approach. The Company's superconductive circuits and
components are fabricated on the surface of wafers using vapor-phase thin-film
growth followed by circuit processing steps similar to those used to manufacture
semiconductor devices. The fabrication of HTS components and circuits entails
26
<PAGE>
certain specialized processes, which are the subject of Conductus' patents or
proprietary know-how, in order for HTS materials such as YBCO to exhibit
desirable superconducting properties. Conductus, in many instances, has
performed pioneering work in materials, processes and structures based on
thin-film superconductive technology, and has developed processes it believes
are capable of routinely producing a variety of high quality films in quantity
for several applications, including multiple layer thin-film materials suitable
for more complex devices and components. Compared to "thick-film" approaches and
ceramic fabrication techniques, the Company believes that the thin-film approach
is more versatile and provides more compact components and that the
superconducting properties of the materials produced in this way are superior.
FOCUS ON COMPLETE SOLUTIONS. Conductus believes that superconductive
component technology can best be provided to customers in the form of integrated
subsystems that incorporate the superconductive components, additional
electronic circuits and devices, and the self-contained refrigeration equipment
and packaging required to maintain the reduced temperatures necessary to sustain
superconductivity. For this reason, in addition to its thin-film expertise,
Conductus has also established significant expertise and know-how in areas that
it believes are necessary for the commercial development of superconductive
technology, including electronic device and component design, analog and digital
electronic engineering, cryogenic packaging (including cryoelectronics, thermal
management, vacuum engineering and cryocoolers), mechanical engineering and
system integration. Conductus seeks to make the presence of superconductive and
cryogenic components an entirely integral feature of its products that requires
no special expertise or skill on the part of the user. By skillful integration
of the refrigeration system into its communications filter subsystems, for
example, and by selection of a refrigeration approach with proven durability,
Conductus believes that its products can be easily accommodated and well
accepted by end users. Furthermore, the Company believes that providing its
technology at the subsystem level to system manufacturers in specific markets
will allow it to rapidly and efficiently expand both its product line and its
customer base.
BUSINESS AND DEVELOPMENT STRATEGY
Conductus' strategy for developing, manufacturing and marketing
superconductive electronics products includes the following key elements:
FOCUS ON COMPLETE SOLUTIONS. Conductus believes that superconductive
component technology can best be provided to customers in the form of integrated
subsystems that incorporate the superconductive components, additional
electronic circuits and devices, and the self-contained refrigeration equipment
and packaging required to maintain the reduced temperatures necessary to sustain
superconductivity. For this reason, in addition to its thin-film expertise,
Conductus has also established significant expertise and know-how in areas that
it believes are necessary for the commercial development of superconductive
technology, including electronic device and component design, analog and digital
electronic engineering, cryogenic packaging (including cryoelectronics, thermal
management, vacuum engineering and cryocoolers), mechanical engineering and
system integration. Conductus seeks to make the presence of superconductive and
cryogenic components an entirely integral feature of its products that requires
no special expertise or skill on the part of the user. By skillful integration
of the refrigeration system into its communications filter subsystems, for
example, and by selection of a refrigeration approach with proven durability,
Conductus believes that its products can be easily accommodated and well
accepted by end users. Furthermore, the Company believes that providing its
technology at the subsystem level to system manufacturers in specific markets
will allow it to rapidly and efficiently expand both its product line and its
customer base.
COMMERCIALIZE PRODUCTS WITH SIGNIFICANT MARKET POTENTIAL. Conductus
believes that the largest potential near-term market for superconductor-based
products is the wireless communications market. The Company is actively
marketing front-end systems as well as developing additional HTS component-based
27
<PAGE>
subsystems for this market. In the cellular market, Conductus completed field
trials of its low-noise receiver filter subsystems for base stations in mid-1997
and began commercial shipments of ClearSite-TM- front-end receiver systems in
October 1997. In addition, the Company continues to develop additional
subsystems of greater complexity for the cellular market. All these products
contain HTS filters and cryogenically-cooled low-noise amplifiers in an
integrated package that includes a refrigeration system.
DEVELOP COMMERCIAL INFRASTRUCTURE. Conductus is building the manufacturing,
sales and marketing infrastructure it believes is necessary to support the
commercialization of its products in target markets. This includes development
of thin-film deposition techniques suitable for volume manufacture, acquisition
and build-out of manufacturing and assembly areas, hiring of employees with
significant marketing experience in key product areas and expansion of its sales
team. The Company's sales and marketing strategy is to use a direct sales
organization for the initial commercialization of its subsystem products for the
communications market and later to develop additional sales channels through OEM
customers for this equipment.
MAINTAIN TECHNOLOGY LEADERSHIP. Conductus has devoted significant resources
to developing proprietary HTS thin-film manufacturing and process technologies.
Based on publicly available information, the Company believes that its
technologies are more advanced than those of other companies or research
laboratories. The Company has successfully developed and marketed products
including single- and multilayer YBCO films, superconducting NMR spectroscopy
probes and SQUID sensors and systems. Conductus has utilized its technology
skills to develop filters, low-noise amplifiers, radio-frequency receivers and
other devices. Conductus has also established significant expertise and know-how
in areas essential to product commercialization, including electronic device and
component design, analog and digital electronic engineering, cryogenic
packaging, mechanical engineering and system integration. Conductus currently
owns, alone or with others, 22 U.S. patents and three related foreign patents.
Additionally, as part of the sale of its NMR business to Bruker Instruments,
Inc. ("Bruker"), it transferred ownership of an additional 6 patents for which
it has retained nonexclusive, royalty-free licenses outside the NMR field of
use. Conductus currently has eight patent applications pending in the U.S. and
related patents pending in other countries relating to various aspects of its
technologies.
WIRELESS COMMUNICATIONS APPLICATIONS
The initial applications for superconductive technology in the
communications market are in the area of infrastructure equipment for wireless
base stations. Commercial wireless communications systems use radio frequency
signals to establish communications between customers using portable or mobile
telephones and base stations operated by service providers. Cellular telephone
networks are divided into specific coverage areas called cells, each of which
has a base station for sending and receiving voice and other communications
within the cell. The base station contains electronic equipment required to send
and receive radio signals. In setting up a base station, the service provider
seeks to install equipment with sufficient sensitivity within the frequency band
assigned to it to handle communications with the lowest power handsets over its
entire geographical area and with sufficient selectivity to avoid interfering
signals from adjacent frequency bands. Filters within these base stations select
frequencies within the operator's assigned bands and reject unwanted
frequencies. Amplifiers boost the strength of signals coming in and out of the
base station. The operator's assigned frequency range is then allocated using
one of several schemes to provide telephone service to multiple subscribers. The
capacity of the system depends upon the number of effective channels; that is,
channels whose signal quality is sufficient to satisfy customer demands for
clear communications.
Cellular base stations currently face a number of operating problems. These
include signal interference caused by multiple communications channels, poor
signal quality resulting from lower-power, hand-held telephones and strained
capacity due to the growing demand for cellular service. The advent of PCS
(Personal Communications Services) technology will place additional demands on
the performance of wireless base stations and upon the size of the hardware
therein. Conductus believes that superconductive
28
<PAGE>
filters used in conjunction with cryogenically-cooled amplifiers have the
potential to offer solutions to several operating problems in cellular base
stations as well as to provide solutions to anticipated problems in the growing
network of PCS base stations.
BENEFITS OF SUPERCONDUCTIVE TECHNOLOGY FOR WIRELESS COMMUNICATIONS
Superconductive technology can offer significant benefits in base station
receivers. The unique characteristics of superconducting materials can be
exploited to create filters that simultaneously deliver superior performance
with respect to adjacent-band interference rejection and with respect to
insertion loss (reduction of the desired signal because of the filter.) Because
the superconductor is nearly lossless at microwave frequencies, extremely sharp
filters--ones with a large number of poles--can be fabricated without incurring
substantial insertion losses. Because of their low-loss property,
superconductors provide the closest physically-attainable approximation to a
perfect filter, which would allow 100% of the desired signals to pass through
and screen out 100% of the unwanted signals. Given their ability to provide
outstanding performance with respect to multiple parameters, superconducting
filters are well suited for use as preselect filters in cellular or PCS base
stations. High-performance transmit filters made from superconducting materials
may also offer significant benefits in future base station applications as the
power-handling capability of these implementations continue to improve.
An immediate benefit of superconductor technology in base station
applications is the ability to provide superior interference rejection by virtue
of making filters with a large number of poles practical to implement.
Superconducting filters can be made with 12, 16 or even 19 poles to effectively
reject adjacent-band interference which can otherwise saturate amplifiers in the
receiver front end and introduce distortion into voice channels. Losses of 1 dB
or less are typical for superconducting filters even with these high-order
designs (ones with a large number of poles). The number of adjacent-band
interference sources is increasing as additional wireless services such as
specialized mobile radio and 2-way paging are introduced. In the PCS spectrum,
the potential for up to six service providers to operate in a given area and the
inevitability of co-location of transmitters may drive the need for filters with
improved rejection capabilities.
A second benefit of superior superconducting filters is the potential
ability to fully utilize the available spectrum without introducing guard bands
or blocked channels at the band edge. By using extremely sharp adjacent-band
rejection filters--often referred to as "brick-wall" filters--it is possible to
maintain a greater number of voice channels in the band. This opportunity is
particularly attractive in the PCS spectrum in which very narrow, 5 MHz
frequency blocks have been licensed to carriers in addition to earlier
wide-band, 15 MHz blocks. In the narrow-band case, the conventional
configuration for CDMA systems is to utilize three 1.25 MHz carriers within each
block, with the remaining 1.25 MHz not utilized for guard-band purposes. This
provides plenty of separation from adjacent, competing services but is very
wasteful of spectrum. By using a sufficiently sharp superconducting filter, it
may be possible to instead have a fourth channel within a single narrow-band
block. Generally speaking, even in less dramatic broad-band use, extremely sharp
filters can increase the effective capacity of wireless systems.
A third benefit of superconductor and, more generally, cryoelectronic
technology in base stations is the potential for providing extended coverage by
virtue of reducing the noise floor in the receiver front end of the base
station. This benefit is derived from a combination of highly efficient
superconducting filters that contribute minimal losses along with advanced
ultra-low-noise amplifiers whose own noise levels are reduced by the cryogenic
temperatures already present for the associated superconducting filters.
Superconducting filters contribute very small amounts of noise because their
quality or "Q" factors--a measure of the ratio between stored and dissipated
energy--are much higher than can be achieved using other base station filter
technologies. Properly-designed semiconductor low-noise amplifiers (LNAs)--for
example, certain gallium arsenide HEMTs--exhibit enhanced noise performance when
operated significantly below room temperatures. Co-locating these LNAs with
superconducting filters to take advantage of the cryogenics required in the
latter case provides an ultra-low-noise receiver front end. Reducing the noise
29
<PAGE>
figure of a base station's receiver enhances its sensitivity to incoming
signals, which potentially both increases its range and improves coverage within
a cell.
The fourth benefit offered by superconductor technology is the potential for
form-factor reductions in filter subsystems that utilize thin-film
superconductor components. The same basic steps of film deposition,
photolithography and etching that are familiar in the semiconductor industry are
used in fabricating thin-film superconducting devices. The resultant thin-film
superconducting filters are planar devices that utilize microstrip technology to
realize high-performance microwave filters in a very compact form. Even a
19-pole cellular filter can easily fit on a 3-inch wafer. Superconducting
filters do require the use of a cryogenic refrigerator, which can occupy perhaps
a cubic foot or so of space. However, six or even twelve filters can be cooled
by one such refrigerator, leading to an integrated filter subsystem package that
is smaller and lighter than competing technology can provide.
APPLICATIONS FOR SUPERCONDUCTING FILTERS
There are applications for superconducting filter technology in existing
wireless systems as well as in forthcoming infrastructures such as PCS.
Superconducting preselect filters offer performance advantages to analog systems
like AMPS cellular as well as to digital protocols such as CDMA, TDMA and GSM.
Depending upon the application, one or more of the benefits of the technology
noted above will come into play. There can be no assurance that even if the
Company's products provide such technological benefits that Conductus will be
able to manufacture adequate quantities of any products it introduces at
commercially acceptable costs or on a timely basis or that any such products
will offer sufficient price/performance advantages to achieve market acceptance.
See "Risk Factors--Early Stage of the Superconductive Electronics Market; Lack
of Market Acceptance."
In current cellular systems, the needs of urban and rural operators are
quite different. Urban base stations are typically high-capacity cells in harsh
or otherwise congested RF environments. Key issues are interference rejection
and maximizing capacity. In contrast, rural base stations see relatively low
call volumes but struggle with problems with the reverse channel path
(mobile/portable handset to base communications) because of the lower power
levels transmitted by hand-held phones compared to earlier mobile systems whose
maximum transmit power was five times that of the small portables in use today.
In this environment, range extension and coverage improvement are the key
issues.
The growing PCS infrastructure presents a variety of opportunities for
superconducting filter technology. With multiple bands, large numbers of base
stations, new interference sources and tight space constraints, all the virtues
of superconducting filter technology are likely to be needed to solve problems,
some of which cannot be anticipated at this early stage of the deployment. The
match-up between benefits and applications for superconductors in wireless
systems is summarized in the chart below.
<TABLE>
<CAPTION>
SUPERCONDUCTOR RURAL URBAN
BENEFIT REASON CELLULAR CELLULAR PCS
- --------------------------------------- --------------------------------------- ----------------- ----------------- ---
<S> <C> <C> <C> <C>
Reduced Interference................... Sharp filters X X
Increased Capacity..................... Sharp filters X X
Improved Coverage/..................... Reduced system noise X X
Extended Range
Compact form-factor.................... Thin-film technology X X
</TABLE>
WIRELESS COMMUNICATIONS MARKET
CELLULAR MARKET. According to Federal Communications Commission and
industry reports, there are more than 25,000 installed cellular base stations in
the United States. The present cellular communications network, operating at
frequencies near 850 MHz, was established at a time when the typical cellular
telephone was a mobile unit capable of transmitting up to 3 watts of radio
frequency power and the total number of subscribers was relatively low. Today,
portable handsets that transmit only 0.6
30
<PAGE>
watts are increasingly replacing higher-power mobile telephones, thereby
decreasing the effective receiving range of existing base stations. As a result,
in rural areas where base stations are widely separated, current cellular
customers can experience dropped calls due to "dead zones" in coverage. At the
same time, the increasing demand for cellular service in urban areas has led to
the utilization by service providers of a greater number of channels within
their allotted frequency bands, thereby increasing the incidence of
interference. In addition, the arrival of PCS and other competing services has
placed new emphasis upon quality of service for established cellular operators.
In rural areas, where the primary problem is base station range, solutions
that increase the strength of the received signal or decrease the system noise
level can provide enhanced reception, and thus reduce the occurrence of dead
zones. One solution, which entails significant costs, is to increase the number
of base stations and thereby reduce the required range for each station. Another
solution, which is potentially more economical, is to enhance the signal
reception and noise filtering capabilities of existing base stations. Extended
field trials of Conductus' ClearSite-TM- brand front-end receiver system in the
rural environment have demonstrated the system's ability to fill in holes in
coverage between specific cell sites. In recent trials conducted by the Company,
ClearSite-TM- systems demonstrated a 20% reduction in dropped calls and provided
notable improvements in voice quality.
In urban areas, the high density of cellular users creates problems of
interference and system capacity. In every area, there are two cellular service
providers, each allotted its own operating band within the frequency spectrum.
Near the edges of each provider's operating frequency range, the performance of
cellular systems can be hampered by interference from the competing carrier and
from a variety of other signal sources. Carriers can attempt to avoid this
interference by not using channels at the edges of their operating bands,
however this diminishes system capacity. An alternative approach is to address
interference by using highly selective filters in the base station receiver.
With superconducting materials, which exhibit extremely low energy loss, filters
can be fabricated with a higher number of poles, thereby increasing filter
selectivity. With increased selectivity, increased capacity and better
performance are simultaneously attainable.
PCS MARKET. PCS is a newer, urban-based communication system designed to
provide wireless telephone service utilizing radio frequency signals in a
frequency band near 2 GHz. This all-digital system is being designed to handle
both voice and data transmissions, including features such as Internet access.
Although it utilizes the same basic building blocks as a cellular system, the
higher operating frequency of PCS compared with the cellular network limits the
range of its signal transmission. Because of this limited range of signal
transmission, industry estimates are that more than 70,000 PCS base stations
will be installed throughout the U.S. by the end of the year 2005.
The projected large number and primarily urban location of PCS base stations
drives the need for equipment cost and size reduction. However, signal losses in
base station components such as filters, antennas and cables are exacerbated by
higher frequency operation. Conventional receiver components limit sensitivity
and therefore base station range. Conventional filters tend to be physically
large and proposed PCS base station architectures call for the use of multiple
filters in each station. Collectively, these issues present a difficult set of
requirements for the designers of both current and forthcoming PCS base station
equipment. Conductus believes that as the PCS build-out proceeds, the incidence
of problems such as adjacent-band interference and gaps in coverage will
steadily increase and the opportunities for applications for superconductive
filter subsystems will grow accordingly. Due to slower than expected progress in
the PCS deployment, the Company does not expect to begin volume shipments of
product for that market before 2000.
FUTURE APPLICATIONS
Conductus is exploring the application of superconductive and cryoelectronic
technologies to a variety of applications in the broader communications market.
Among these are subsystems for communications
31
<PAGE>
satellites, antenna components and various elements of high-speed and/or
high-bandwidth communications equipment. Generally speaking, many electronic
technologies, including CMOS, GaAs, optoelectronics and even copper, exhibit
enhanced performance at reduced temperatures, but the most compelling
performance improvements are enabled by superconductive electronics. When the
unique advantages of superconductive electronics are complemented by the
advantages of other cryoelectronic technologies, the result is a hybrid system
whose overall performance may justify the costs and complexities associated with
cryogenic cooling.
In the future, cryoelectronics in communications systems may expand to more
complex digital applications. The reason is that the ever-increasing bandwidth
of digital and wireless communication networks has created a need for
ultra-high-bandwidth cryoelectronics to process and route digital information.
Although fiber-optical transport networks are expected to transmit 100 Gb/s
data, conventional electronic switching technology is not capable of processing
at such high data rates. This situation creates an electronic bottleneck in
telecommunication networks for high-throughput applications such as Internet
backbone switching, satellite communications, local-area and wide-area graphics
networks, and video on demand. Superconductive digital technology, interfaced to
optical fiber via cooled semiconductor electronics, can increase the capacity
and functionality of future ultra-high-speed networks and enable many real-time
communication and multimedia applications. The high-speed, low-power properties
of Josephson junctions, which are active switching devices made from
superconductors, could be applied to communications systems to significantly
improve data transmission rates and reduce system power requirements and costs.
These devices can be several times faster than the fastest semiconductor
transistor and consume thousands of times less power. Josephson junction circuit
technology is in the early stages of development, and significant additional
advancements will be required before superconductive products incorporating this
technology could become available. Nevertheless, the combination of high speed,
low power dissipation and fast synchronization makes superconductive digital
technology increasingly attractive for future communications applications. See
"Risk Factors--Early Stage of the Superconductive Electronics Market; Lack of
Market Acceptance" and "-- Intense Competition."
COMMERCIALIZATION STATUS
Conductus began field testing prototypes of the ClearSite front-end receiver
systems for wireless base station applications in 1996, working with a number of
cellular operators in several regions of the United States. The product
progressed to the beta stage late in that year with the initiation of an
extended field trial with Cellcom, Incorporated, a service provider in
Wisconsin. The trial was concluded in the Spring of 1997, resulting in data on
the performance of the system in reducing dropped calls and enhancing voice
quality and leading to the first commercial orders for the product.
Based upon these field trial results and on additional inputs from customers
throughout the industry, additional features were engineered into the ClearSite
front-end receiver system and it was released to the market late in 1997. As
finally configured, the ClearSite front-end receiver system incorporates
superconducting filters and cryogenic low-noise amplifiers as well as built-in
rf diagnostics, alarm systems, remote monitoring capabilities and bypass
circuitry in case of system failure. Initial shipments have been for omnisite
systems--incorporating two filters and two amplifiers--designed to be installed
inside base stations. These systems are configured for either of the frequency
bands currently allotted to cellular operators (both "A" and "B" bands.)
Scheduled for release during 1998 are three-sector systems (incorporating six
filter/amplifier pairs) and tower-mount versions of the product for both
carriers. Therefore, by the end of 1998, ClearSite front-end receiver systems
for cellular are planned to be a family of products designed to address all
types of installations in the domestic market. There can be no assurance that
the Company will be successful in developing, introducing and marketing new
products or enhancements to existing products or will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve any significant degree of commercial
32
<PAGE>
acceptance. Furthermore, there can be no assurance that even if the Company's
products meet commercial performance standards that Conductus will be able to
manufacture adequate quantities of any products it introduces at commercially
acceptable costs or on a timely basis or that any such products will offer
sufficient price/performance advantages to achieve market acceptance. See "Risk
Factors--Early Stage of the Superconductive Electronics Market; Lack of Market
Acceptance."
STRATEGIC ALLIANCES AND DEVELOPMENT AGREEMENTS
Conductus is party to a number of collaborative arrangements with
corporations and research institutions with respect to the research, development
and marketing of certain of its potential products. Conductus evaluates, on an
ongoing basis, potential collaborative relationships and intends to continue to
pursue such relationships. The Company's future success will depend
significantly on its collaborative arrangement with third parties. There can be
no assurance that these arrangements will result in commercially successful
products. See "Risk Factors--Reliance on Collaborative Relationships".
LUCENT TECHNOLOGIES, INC. ("LUCENT") Conductus and Lucent entered into a
joint development and licensing agreement in April 1996, under which Conductus
is developing a superconductive transceiver filter subsystem for the PCS market.
Both Conductus and Lucent are to provide technical support to the program.
Initial tests of a prototype of the receiver portion of the subsystem were
conducted in April 1996. A more complex prototype subsystem containing six HTS
receiver channels and three conventional transmit filters was delivered to
Lucent at the end of that year. Each party will retain rights to the
intellectual property it develops under the program, subject to certain
nonexclusive licensing rights of the other party, and jointly developed
intellectual property will be jointly owned.
CTI-CRYOGENICS. ("CTI") Conductus and CTI-Cryogenics, a division of Helix
Technology Corporation, entered into a collaboration agreement in September
1995, under which CTI will work with Conductus to design interfaces between CTI
cryocoolers and Conductus subsystems.
HIGH-TEMPERATURE SUPERCONDUCTOR THIN-FILM MANUFACTURING ALLIANCE. Conductus
is a principal member of the HTMA, which was formed in November 1995 to develop
cost-effective manufacturing methods for YBCO thin-films for radio-frequency
applications, establish industry standards and provide second-sourcing and
technology transfer among the companies under a program currently funded in part
by the Department of Defense Advanced Research Projects Agency ("DARPA").
Superconductor Technologies, Inc. ("STI") is the other principal member of the
HTMA. Other members include Stanford University, the Georgia Research
Corporation, Focused Research, Microelectronic Control and Sensing Incorporated,
IBIS and BDM Federal. Under the HTMA, each party will have certain access to the
technology of the other parties that is developed under the program.
RESEARCH AND DEVELOPMENT
GOVERNMENT CONTRACTS
The Company's research and development expenses in the fiscal years 1995,
1996 and 1997 and in the nine months ended September 30, 1998, were
approximately $9,819,000, $11,774,000, $10,626,000 and $4,469,000, respectively.
Externally funded research and development programs, primarily under contracts
with agencies of the U.S. government, accounted for approximately $9,176,000,
$13,178,000, and $9,814,000 of total operating expenses in the fiscal years
1997, 1996, and 1995, respectively. The Company's revenue from
government-related contracts represented approximately 77% of total revenues for
each of fiscal years 1995, 1996, and 1997. Conductus believes that it will
continue to be heavily dependent on U.S. government contracts to fund a
significant portion of its research and development programs. The Company's
strategy is to fund a significant portion of its research and development,
particularly for wireless communications and digital electronics applications,
through contracts with agencies of the U.S. government. As of December 31, 1997,
the Company had received aggregate awards since its inception of
33
<PAGE>
approximately $46,821,000 from U.S. government agencies, including approximately
$40,272,000, recognized as revenue by the Company through December 31, 1997, and
approximately $6,373,000, in awards for which it has not yet entered into
research contracts. As of December 31, 1997, Conductus had approximately
$176,000, under existing U.S. government contracts which provide that most of
the research and development is to be performed in the next 12 months. Revenue
under U.S. government research and development contracts decreased to $7,266,000
in 1997 from $9,691,000 in 1996 and $8,148,000 in 1995 and represented
approximately 77% of total revenue in each of the fiscal years 1997, 1996, and
1995. The decrease in contract revenues during 1997 is largely attributable to
the completion of several major contracts during 1997. The Company had $176,000
and $4,620,000 in contracts and grants and $6,373,000 and $8,976,000 in awards
from U.S. government agencies as of December 31, 1997 and 1996, respectively.
Conductus anticipates that government contract revenues will continue to decline
somewhat in the future compared to historical rates due to reductions in federal
R & D funding and the narrower scope of the Company's business interests. The
recognition of revenue and receipt of payment pursuant to these contracts and
awards are subject to numerous risks. See "Business--Research and Development"
and Note 11 of Notes to Financial Statements. See "Management's Discussion of
and Analysis of Financial Condition and Results of Operations--Results of
Operations."
The Company's contracts involving the U.S. government are or may be subject
to numerous risks. These risks include: unilateral termination for the
convenience of the government; reduction or modification in the event of changes
in the government's requirements or budgetary constraints; increased or
unexpected costs causing losses or reduced profits under fixed-price contracts
or unallowable costs under cost reimbursement contracts; risks of potential
disclosure of Conductus' confidential information to third parties; the failure
or inability of the prime contractor to perform its prime contract in
circumstances where Conductus is a subcontractor; the failure of the government
to exercise options provided for in the contracts; the government's
nonexclusive, royalty-free license to use technology developed pursuant to the
contracts by or on behalf of the government in certain circumstances; and
exercise of "march-in" rights by the government. March-in rights refer to the
right of the U.S. government or government agency to require the Company to
license patented technology developed under contracts funded by the government
if the contractor fails to continue to develop the technology. In addition,
there can be no assurance that the U.S. government will continue its commitment
to programs to which the Company's development projects are applicable,
particularly in light of recent legislative initiatives to reduce the funding of
various U.S. government agencies and programs, or that the Company can compete
successfully to obtain funding pursuant to such programs, See "Risk
Factors--High Degree of Dependence Upon Government Contracts; Customer
Concentration."
PATENTS, PROPRIETARY TECHNOLOGY AND TRADEMARKS
Conductus has received 28 U.S. patents and three related foreign patents.
Six issued patents were assigned to Bruker under an asset purchase agreement
entered into in July 1997. Conductus retains a nonexclusive, royalty-free
license to those patents outside the NMR field of use. The remaining 22 patents
have unexpired terms ranging from 12 to 17 years. Additionally, the Company has
8 patent applications pending before the U.S. Patent and Trademark Office.
International counterparts of several of these pending applications or issued
patents have been filed under the Patent Cooperation Treaty with a number of
applications currently pending in various countries worldwide. These patents and
patent applications cover Conductus processes and products in many aspects of
its business. The Company will continue to file other U.S. and key international
patent applications as part of its business strategy to protect technology it
considers important to providing a competitive market advantage for its
technologies. There can be no assurance, however, that its applications will
result in issued patents, that the validity of its issued patents will not be
subject to challenge or that third parties will not be able to design around the
patented aspects of the Company's products. The Company also relies upon trade
secrets, unpatented know-how, continuing technological innovation, employee and
third-party nondisclosure agreements and the pursuit of licensing opportunities
in order to develop and maintain its competitive position. The Company's efforts
to
34
<PAGE>
protect its proprietary rights may not be successful, prevent their
misappropriation or ensure that these rights will provide the Company with a
competitive advantage. Additionally, certain of the issued patents and patent
applications are jointly owned by the Company and third parties. Any party owner
has the right to license rights under such patents and applications, which could
result in Conductus not having exclusive control over such inventions.
The Company believes that, since the discovery of HTS in 1986, several
thousand patent applications have been filed worldwide and over 600 patents have
been granted in the U.S. relating to high temperature superconductivity. In some
cases, these patents may be overlapping, and could require a number of licenses
from different entities. There are interference proceedings pending regarding
rights to inventions claimed in some of the applications. Accordingly, the
patent positions of companies using HTS technology, including Conductus, are
uncertain and involve both complex legal and factual questions. Consequently,
there is significant risk that others, including competitors of the Company,
have obtained or will obtain patents relating to the Company's planned products
or technology and that the Company will be unable to obtain licenses, or will be
unable to obtain licenses on commercially reasonable bases.
A patent issue of particular importance to the Company relates to copper
oxides or "cuprates," that are used to make HTS products, including YBCO.
Conductus has neither obtained any issued patents nor has it filed any patent
applications covering the composition of any cuprates or other HTS materials.
However, several U.S. and foreign patent applications, including applications
filed by IBM, AT&T, the University of Houston, the Naval Research Laboratory and
others, are pending that cover the composition of YBCO and related HTS. See
"Overview--Conductus' Approach." The Company understands that at least several
of such U.S. applications are the subject of an interference proceeding
currently pending in the U.S. Patent and Trademark Office (Interference No.
101,981). Additionally, E. I. duPont de Nemours & Co. ("DuPont") has notified
Conductus that it is the exclusive licensee of patents issued in Israel, Sweden,
Taiwan and the United Kingdom covering the composition of YBCO and a method for
using YBCO in superconducting applications. The Company anticipates that it will
be required to obtain a license to use YBCO from one or more of these parties in
order to continue to develop and sell products based on YBCO.
There can be no assurance that the Company would be able to obtain licenses
to patents covering YBCO compositions, when issued, or to any other patents
applicable to the Company's business on commercially reasonable terms. In such
an event, the Company could be required to expend significant resources to
develop non-infringing technology alternatives or to obtain licenses to the
technology that the Company infringes or would infringe. There can be no
assurance that the Company would be able to successfully design around these
third party patents or to obtain licenses to technology that it may require.
Furthermore, there can be no assurance that the Company will not be obligated to
defend itself at substantial cost against allegations of infringement of third
party patents. An adverse outcome in such a suit could subject the Company to
significant liabilities to third parties, or require the Company to cease using
such technology. In addition, aside from the merits of a claim, the cost of
defending any such suit would constitute a major financial burden for the
Company that would have a material adverse effect on its business, operating
results, and financial condition.
Conductus has granted to various entities non-exclusive, royalty-bearing
licenses to certain of its proprietary technology for the manufacture and
distribution of various equipment, including rotating target holders, substrate
heaters and mutual inductance probes to be used in cryogenic measurement
systems. Through its strategic relationships, Conductus has received rights to
certain intellectual property developed by its partners, as well as commitments
from those partners to offer licenses to certain background technology.
Conductus cannot, however, be certain that such licenses will be on terms that
allow Conductus to compete effectively in the marketplace.
Additionally, successful marketing of a material portion of Conductus'
ClearSite products depends in part on nonexclusive licenses obtained from
various licensers. There can be no assurance that such licenses
35
<PAGE>
will not be terminated by licensors or that Conductus will be able to develop
alternate products that do not require these or other licenses.
Conductus owns the United States registered trademarks
"CONDUCTUS-Registered Trademark-," the Conductus logo, "Mr.
SQUID-Registered Trademark-" and claims the rights to the trademarks
"ClearSite-TM-," and "pcSQUID-TM-." See "Risk Factors--Uncertainty of Patents
and Proprietary Rights; Risk of Litigation."
MANUFACTURING
Conductus has performed pioneering work in materials, processes and
structures based on thin-film superconducting technology, and has developed
processes it believes are capable of routinely producing a variety of
high-quality films for several applications, including multilayer thin-film
materials suitable for more complex devices and components. Conductus has
established a pilot production facility at its headquarters in Sunnyvale,
California to fabricate, test and assemble HTS and LTS thin films and
components. The Company fabricates two-, three- and four-inch wafers in two
cleanroom areas that consist, in the aggregate, of approximately 2,600 square
feet and that have ratings of subclass 1,000 and 10,000 (meaning there are fewer
than 1,000 or 10,000 particles larger than 0.5 microns per cubic foot of air).
Additionally, Conductus assembles systems in a 3,250 square foot manufacturing
facility which includes class 10,000 cleanrooms of approximately 1,250 square
feet. See "Properties." Conductus combines what it believes to be the world's
most advanced YBCO thin-film technology with expertise in electronic and device
component design, analog and digital electronic engineering, cryogenic
packaging, mechanical engineering and system integration.
The primary materials and equipment used in Conductus' ClearSite products
include substrates, YBCO precursors and processing equipment. The Company
procures its substrates from several suppliers. The Company primarily utilizes
elemental metals (yttrium, barium and copper) to produce YBCO. These substances
are available from numerous vendors. In limited cases, the Company uses YBCO
targets, which it purchases from two sources. The Company's processing equipment
is assembled from off-the-shelf components which can be obtained from multiple
sources.
Conductus believes that most of its products will be in the form of
subsystems that incorporate superconducting and cryoelectronic components with
cryogenic refrigerators and conventional electronic assemblies. Apart from the
superconducting components which are manufactured by Conductus, the Company
anticipates that most other components of its subsystems will be purchased as
standard products from commercial vendors or specially ordered from various
suppliers. These include cryogenic refrigerators, printed circuit boards,
product cases and housings, vacuum vessels and other components. Certain
ClearSite product components, including cryocoolers, are currently obtained from
a single source or a limited number of suppliers. Although the Company does not
believe that it is ultimately dependent upon any supplier as a sole source or
limited source for any critical components, the inability of the Company to
develop alternative sources, if required, an inability to meet demand, a
prolonged interruption in supply or a significant increase in price of one or
more components would have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors--High Degree of
Dependence Upon Other Complementary Technologies; Reliance on Limited or
Sole-source Suppliers."
Conductus is focusing on the development of its production processes and is
manufacturing limited quantities of superconducting components and products
incorporating those components at its Sunnyvale, California, facility. Apart
from the production of superconducting components, the Company expects that its
manufacturing activities generally will be limited to cleaning, final assembly,
vacuum bakeout and testing. Conductus is producing these products in limited
commercial quantities and is continuing to expand its capabilities. See "Risk
Factors--Limited Commercial Manufacturing Capability." In July 1997, Conductus
ceased operation of its Instrument and Systems Division in San Diego, California
and consolidated its manufacturing in Sunnyvale, California.
36
<PAGE>
COMPETITION
Although the market for superconductive electronics currently is small and
in the early stages of development, Conductus believes this market will become
intensely competitive if products with significant market potential are
successfully developed.
A number of large American, Japanese and European companies are engaged in
research and development programs that the Company believes could lead to the
development and/or commercialization of superconductive electronic products.
These include, among others: DuPont, IBM, TRW, and Northrop-Grumman Corporation
in the U.S.; and Fujitsu Ltd., Hitachi Ltd., NEC Corp., and Sumitomo Electric
Industries, Ltd. in Japan. The Company also believes that a number of smaller
companies are engaged in various aspects of the development and
commercialization of superconductive electronics products. These include, among
others, Hypres, Inc. in digital circuits; and Illinois Superconductor Corp. and
Superconductor Technologies Inc. in wireless communications. Furthermore,
academic institutions, governmental agencies and other public and private
research organizations are engaged in development programs which may lead to
competitive arrangements for commercializing superconductive electronics
products. In addition, if the superconductor industry does develop further, new
competitors with significantly greater resources are likely to enter the field.
Conductus' ability to compete successfully will require it to develop and
maintain technologically advanced products, attract and retain highly qualified
personnel, obtain patent or other protection for its technology and products and
manufacture and market its products, either alone or with third parties. See
"Risk Factors--Intense Competition."
Several of the Company's existing collaborative arrangements permit, and
future arrangements also may permit, the Company and each partner to use the
technology developed under these arrangements. Accordingly, the Company may
compete with its partners for commercial sales of any products developed under
these arrangements.
The Company's potential products, if successfully developed, may compete
directly with other existing and subsequently developed products using
competitive, conventional technologies. There can be no assurance that the
Company's products will have sufficient performance advantages over these other
products to attract significant commercial interest. These and related factors
may limit market acceptance of products incorporating superconductive
technology. Conductus believes that the principal competitive factors in the
market for superconductive electronics will be the following: the ability to
develop commercial applications of superconductive technology; product
performance, including, where appropriate, speed, sensitivity, size and power
dissipation; price; product quality and reputation. Conductus believes that it
is competitive with respect to these factors. Nonetheless, because the market
for superconductive electronics is at an early stage, the relative competitive
position of the Company in the future is difficult to predict.
SALES AND MARKETING
In order to successfully commercialize its products the Company is expanding
its sales, marketing and distribution staffing and activities. During 1998, the
Company hired a new Vice President Sales and Marketing who will be responsible
for expanding the sales organization for the commercial wireless market. The
Company's current sales and marketing strategy relies primarily on direct sales
for its communications products. Its magnetic sensors are sold primarily to an
OEM. See "Risk Factors-- Attraction and Retention of Key Employees; Need to
Develop Infrastructure to Support Commercialization."
With the proceeds from the Offering, the Company intends to add additional
headcount to support its sales and marketing efforts. These employees will be
actively engaged in direct marketing to customers, as well as in sales and
marketing support. The Company actively markets its products through direct mail
advertisements and advertisements in trade journals, as well as through
demonstration of its technology and products at industry trade shows. The
Company's employees have published the results of their
37
<PAGE>
research at Conductus widely in trade and technical journals. Additionally,
Conductus' employees have frequently presented Conductus' technology as invited
speakers at conferences worldwide.
For the fiscal years 1995, 1996, 1997 and for the nine month period ended
September 30, 1998, commercial sales to one customer of $1,172,000, $1,560,000,
$896,000, and $75,500 were 11%, 12%, 9% and 2% of total revenues, respectively.
This customer, Niki Glass Ltd., acts primarily as a distributor of the Company's
magnetic sensing products, selling to end-users
ENVIRONMENTAL MATTERS
The Company uses certain hazardous materials in its research and
manufacturing operations. As a result, Conductus is subject to federal, state
and local governmental regulations. Conductus believes that it has complied with
all regulations and has all permits necessary to conduct its business. See "Risk
Factors-- Environmental Regulations."
EMPLOYEES
As of December 31, 1998, the Company had a total of 53 full-time equivalent
employees of which 22 hold advanced degrees. Of the total full-time employees,
30 were engaged in research and product development, 9 in manufacturing, 3 in
sales and marketing, and 11 in administration and finance. None of the Company's
employees is represented by a labor union. The Company has not experienced any
work stoppages and considers its relations with its employees to be good.
FACILITIES
The Company's principal facility, including its pilot production facility,
is located in two buildings providing approximately 40,000 square feet of
available space located in two buildings in Sunnyvale, California, with leases
which will expire in August 2000 and 2001. During 1997, the Company subleased
its facility in San Diego, California, to Niki Glass, in connection with an
asset sale of certain of the assets of the Instrument and Systems division. That
lease expired in February 1998.
38
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company, and their ages as of December 1,
1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Charles E. Shalvoy............................ 50 President, Chief Executive Officer and Director
Ronald Wilderink.............................. 40 Vice President of Finance and Chief Financial Officer
Jim Simmons................................... 49 Vice President, Sales and Marketing
Graham Y. Mostyn.............................. 44 Vice President, Engineering
Randy W. Simon, Ph.D.......................... 44 Vice President, Technology Programs
John F. Shoch, Ph.D.(1)(2).................... 49 Chairman of the Board
Martin Cooper(1).............................. 69 Director
Robert M. Janowiak............................ 61 Director
Martin J. Kaplan(2)........................... 60 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
MR. SHALVOY joined the Company in June 1994 as President, Chief Executive
Officer and Director. From 1988 to 1994, he was President and Chief Operating
Officer of Therma-Wave, Inc., a manufacturer of semiconductor production
equipment. Prior to that he was employed by Aehr Test Systems, Emerson Electric
Corp. and Raychem Corporation in a variety of senior management positions. Mr.
Shalvoy holds a B.S. in Mechanical Engineering from the University of Notre Dame
and an M.B.A. from Stanford University.
MR. WILDERINK was appointed Chief Financial Officer in 1998. From 1995 until
1998, he was Vice President, Corporate Controller of Oak Technology, Inc., a
multinational semiconductor manufacturer. His prior experience includes
management positions in the finance organizations of Bell Microproducts, Inc., a
distributor of high technology products, and VMX, Inc., a manufacturer of
integrated voice processing systems. Mr. Wilderink holds a B.S. degree in
Accounting from San Jose State University.
MR. SIMMONS joined the Company in November 1998 as Vice President Sales and
Marketing. From 1994 to 1998 he was Vice President, Marketing and Sales of
Superconductor Technologies, Inc., a manufacturer of high-temperature
superconducting wireless subsystems. His prior experience includes senior
management positions at Therma-Wave, Inc., Nanometrics, Inc. and KLA Instruments
Corporation and various management positions at Hewlett-Packard. Mr. Simmons
holds a B.S. degree in Applied Physics from California Institute of Technology
and an M.B.A. from Harvard Business School.
MR. MOSTYN joined the Company in November 1996 as Vice President of
Engineering. From 1992 to 1996, he was the Director of RF and Analog Engineering
and later the Director of Engineering, Network Systems Division of MicroUnity,
Inc., a communications products start-up company. Prior to that, he spent 10
years with Harris Corporation in engineering management positions. Mr. Mostyn
holds a B.A. and M.A. in physics from Cambridge University, England.
DR. SIMON joined the Company in October 1990 as Senior Scientist and served
as Director of Research and Development from March 1991 to January 1993 and as
Vice President, Marketing and Development from January 1993 to November 1994 and
Vice President, Technology Programs and Investor Relations from November 1994 to
November 1995 and Vice President, Technology Programs since November 1995. From
January 1985 to October 1990, he held a variety of scientific and managerial
positions at TRW, where he headed TRW's Superconductivity Research Department's
high-temperature superconductivity program
39
<PAGE>
and managed TRW's internal research and development program on high-temperature
superconductive electronics. Dr. Simon holds a B.S. in Physics from Pomona
College and an M.S. and a Ph.D. in Physics from the University of California,
Los Angeles.
DR. SHOCH has served as Chairman of the Board of the Company since its
inception in 1987. As a founder of Conductus, Dr. Shoch served as President from
1987 to 1988. Since 1985, he has been a general partner of AMC Partners 84,
which is the general partner of Asset Management Associates 1984, a venture
capital investment fund and a principal stockholder of the Company. Dr. Shoch
holds a B.S. in political science and an M.S. and Ph.D. in computer science from
Stanford University.
MR. COOPER has served as director of the Company since January 1995. Since
1992, Mr. Cooper has served as Chairman and Chief Executive Officer of
ArrayComm, Inc., a company he co-founded that manufacturers intelligent antennas
for wireless applications. Previously he was co-founder, Chairman, Chief
Executive Officer and President of Cellular Business Systems, Inc., a provider
of management information software to the cellular industry that was purchased
by Cincinnati Bell in 1983. Mr. Cooper worked for 29 years at Motorola Inc.,
where he started out as a Senior Development Engineer in 1954 and advanced to
Corporate Director of Research and Development in 1983. Mr. Cooper earned a B.S.
and M.S. in Electrical Engineering from the Illinois Institute of Technology.
MR. JANOWIAK has served as Director of the Company since December 1996.
Since 1982, he has served as the Executive Director of the International
Engineering Consortium. Prior to that, he was President of Federal Signal
Corporation's Signal Group, a provider of public safety products and systems.
Mr. Janowiak also held positions with ITT Research and Rockwell, where he
advanced to Vice-President, General Manager of the Information Products
Division. Mr. Janowiak earned a B.S.E.E. from the University of Illinois, an
M.S.E.E. from Illinois Institute of Technology and an M.B.A. from the University
of Chicago.
MR. KAPLAN has served as Director of the Company since July 1996. Since
1997, Mr. Kaplan has served as an Executive Vice-President of Pacific Telesis
Group. Prior to that he was President--Network Services Group of Pacific Bell,
and its successor, Pacific Telesis, for 38 years in various senior management
positions. Mr. Kaplan earned a B.S. in engineering from California Institute of
Technology.
There are no family relationships among executive officers or directors of
the Company.
40
<PAGE>
EXECUTIVE COMPENSATION AND RELATED INFORMATION
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and each of its
other four most highly compensated executive officers whose earned compensation
was in excess of $100,000 for services rendered in all capacities to the Company
for the fiscal year ended December 31, 1998 (collectively, "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS
------------------------- -----------------------
SALARY SECURITIES
NAME AND PRINCIPAL POSITION YEAR ($)(1) BONUS ($) UNDERLYING OPTIONS(#)
- ------------------------------------------------------ --------- ------------ ----------- -----------------------
<S> <C> <C> <C> <C>
Charles E. Shalvoy.................................... 1998 $ 185,929 $ --(2) 275,000(3)
President and CEO 1997 197,088 11,000 --
1996 185,682 64,600 --
James J. Daley........................................ 1998 154,877 --(2) 80,000(4)
Vice President 1997 43,753(5) 8,000 --
1996 -- -- --
Ainslie Mayberry...................................... 1998 165,360 -- 8,479
Acting Chief Financial Officer 1997 3,995(6) -- --
1996 -- -- --
Graham Y. Mostyn...................................... 1998 130,152 --(2) 75,000(7)
Vice President 1997 140,004 18,000 60,000(8)
1996 15,616(9) 10,000 60,000
Randy W. Simon, Ph.D.................................. 1998 120,850 --(2) 30,000(10)
Vice President 1997 125,908 5,000 60,000(11)
1996 113,698 23,664 20,000
</TABLE>
- ------------------------
(1) Salary includes amounts deferred pursuant to the Company's 401(k) Plan.
(2) Bonuses for fiscal year 1998 have not been determined.
(3) Includes options granted for 225,000 shares in exchange for cancellation of
an equal number of shares under a repricing program.
(4) Includes options for 80,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
(5) Mr. Daley commenced employment in September 1997 and ceased employment in
November 1998.
(6) Ms. Mayberry commenced service in November 1997 and ceased service in
November 1998.
(7) Includes options for 60,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
(8) Includes options for 60,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
(9) Mr. Mostyn commenced employment in November 1996.
(10) Includes options for 20,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
(11) Includes options for 40,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
41
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the Named Officers for the fiscal year ended December 31, 1998.
No stock appreciation rights were granted for the fiscal year ended December 31,
1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------------
NAME GRANTED (#) FISCAL YEAR(2) ($/SH) DATE 0% ($/SH) 5% ($) 10% ($)
- ------------------------------------ ----------- --------------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy.................. 8,334 0.9% $ 3.63 10/24/06 -- $ 15,597 $ 37,914
41,666 4.4 3.63 10/24/06 -- 77,977 189,551
130,910(3) 13.9 3.63 06/06/04 -- 165,999 378,082
84,090(3) 8.9 3.63 06/06/04 -- 106,629 242,861
10,000(3) 1.1 3.63 06/06/04 -- 12,680 28,881
James J. Daley...................... 80,000(3) 8.5 3.63 09/15/07 -- 169,304 422,049
Ainslie Mayberry.................... 2,225 0.2 0 05/06/08 $ 4.00 14,498 23,084
1,429 0.2 0 06/10/08 3.06 7,130 11,353
930 0.1 0 08/14/08 3.06 4,640 7,389
1,197 0.1 0 10/01/08 2.25 4,387 6,986
2,698 0.3 0 11/25/08 1.56 6,869 10,938
Graham Y. Mostyn.................... 15,000 1.6 3.81 04/16/08 -- 35,965 91,142
60,000(3) 6.4 3.63 11/05/06 -- 112,818 274,497
Randy W. Simon, Ph.D................ 10,000 1.1 3.81 04/16/08 -- 23,977 60,761
20,000(3) 2.1 3.63 01/23/07 -- 38,775 94,917
</TABLE>
- ------------------------
(1) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the option term will be at the assumed 5% and 10% levels or at any other
defined level.
(2) Options covering 941,796 shares of the Company's Common Stock were granted
in fiscal year 1998.
(3) Each option was granted April 13, 1998 in exchange for an option previously
granted covering the same number of shares with the per share exercise price
of $5.50 for Mr. Shalvoy's options and $6.50 for Messrs. Mostyn's and
Simon's options (each, "Original Option"). Each option will be unvested
until April 13, 1999, whereupon each option will be vested to the extent
provided in the vesting schedule applicable to the Original Option, with the
original vesting commencement date.
42
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning option exercises and
option holdings at the end of the 1998 fiscal year with respect to the Named
Officers. No SARs were exercised during the 1998 fiscal year, nor were any SARs
outstanding at the end of such fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
VALUE OF UNEXERCISED
UNDERLYING
UNEXERCISED OPTIONS IN-THE- MONEY OPTIONS
SHARES AT FISCAL YEAR AT FISCAL YEAR END(2)
ACQUIRED VALUE END(1) (#) ($)
ON EXERCISE REALIZED -------------------- ----------------------
NAME (#) ($) VESTED UNVESTED VESTED UNVESTED
- ------------------------------------------------------ ------------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy.................................... -- -- 21,666 253,334 0 0
James J. Daley(3)..................................... -- -- 0 0 0 0
Ainslie Mayberry(3)................................... 8,479 $ 23,036 0 0 0 0
Graham Y. Mostyn...................................... -- -- 0 75,000 0 0
Randy W. Simon, Ph.D.................................. -- -- 60,244 40,256 $ 38,955 $ 188
</TABLE>
- ------------------------
(1) The options are immediately exercisable, but any shares purchased under the
options will be subject to vesting requirements and may be repurchased at
the original exercise price per share upon the optionee's cessation of
service prior to vesting in such shares.
(2) Calculated on the basis of the fair market value of the Common Stock on
December 31, 1998 of $1.56 per share, as reported on the Nasdaq National
Market, minus the exercise price.
(3) Mr. Daley and Ms. Mayberry ceased service in November 1998.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN
CONTROL AGREEMENTS
None of the Company's executive officers (other than Charles E. Shalvoy)
have employment agreements with the Company, and their employment may be
terminated at any time at the discretion of the Board. The Company entered into
an agreement with Mr. Shalvoy, the Company's President and Chief Executive
Officer, on May 3, 1994, which provides for accelerated vesting of his option
shares as if he remained employed for one additional year in the event that his
employment is terminated without cause following certain mergers, acquisitions
or sales of all or substantially all of the assets of the Company. Under the
1992 Stock Option/Stock Issuance Plan (the "Plan"), upon the occurrence of a
merger, reverse merger or sale of all or substantially all of the assets of the
Company, outstanding options held by the Chief Executive Officer and the
Company's other executive officers will automatically accelerate and may be
exercised as fully vested shares, unless such options are assumed by the
successor corporation. In addition, the Compensation Committee has the authority
as Plan Administrator of the Plan to provide for the accelerated vesting of the
shares of Common Stock subject to outstanding options held by the Chief
Executive Officer and the Company's other executive officers, whether granted
under the Plan or any predecessor plan, in the event that a Change in Control
(as hereinafter defined) occurs or in the event that their employment were to be
terminated (whether involuntarily or through a forced resignation) following a
Change in Control. A Change in Control is a hostile takeover of the Company
effected through a successful tender offer for more than 50% of the Company's
outstanding Common Stock or through a change in the majority of the Board as a
result of one or more contested elections for Board membership.
43
<PAGE>
TEN-YEAR OPTION/SAR REPRICINGS
On both April 29, 1997 and April 13, 1998, the Compensation Committee and
the Board of Directors established a program under which employees who had
elected to surrender those of their options that were above the closing price of
the Company's common stock on April 29, 1997 and April 13, 1998, respectively,
would receive in exchange new options with an exercise price at the closing
price on each such date. The new options would cover the same number of shares
as the surrendered options, would have the same status under the tax laws as the
surrendered options and would not be exercisable for one year following each
option exchange date, until April 29, 1998 and April 13, 1999, respectively,
after which they would become exercisable as provided in the original vesting
schedule. The repricings were undertaken to attract and retain employees while
maintaining relatively low cash compensation. Pursuant to the repricing program,
the following table sets forth information concerning repricing of options held
by any executive officer during the last ten completed fiscal years:
<TABLE>
<CAPTION>
EXERCISE
SECURITIES PRICE AT
UNDERLYING MARKET PRICE TIME OF LENGTH OF ORIGINAL
NUMBER OF OF STOCK AT REPRICING OPTION TERM
OPTIONS TIME OF OR NEW REMAINING AT DATE
REPRICED OR REPRICING OR AMENDMENT EXERCISE OF REPRICING OR
NAME DATE AMENDED (#) AMENDMENT ($) ($) PRICE ($) AMENDMENT (YRS)
- ------------------------------------------ --------- ------------ ------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy........................ 04/13/98 130,910 $ 3.63 $ 5.50 $ 3.63 6.2
04/13/98 84,090 3.63 5.50 3.63 6.2
04/13/98 10,000 3.63 5.50 3.63 6.2
James J. Daley............................ 04/13/98 80,000 3.63 5.38 3.63 9.4
Ainslie Mayberry.......................... -- -- -- -- -- --
Graham Y. Mostyn.......................... 04/13/98 60,000 3.63 6.50 3.63 8.7
04/29/97 60,000 6.50 8.00 6.50 9.5
Randy W. Simon, Ph.D...................... 04/13/98 20,000 3.63 6.50 3.63 8.8
04/29/97 20,000 6.50 11.50 6.50 8.9
04/29/97 20,000 6.50 8.38 6.50 9.8
</TABLE>
44
<PAGE>
CERTAIN TRANSACTIONS
In October 1988, Conductus entered into a five-year Coordinated Research
Program Agreement with Hewlett Packard ("H-P"). In June 1993, Conductus and H-P
modified this agreement by entering into a new five-year agreement (the "Current
H-P Agreement"). In addition, H-P has made a total equity investment of
$6,230,000 in Conductus and beneficially owns more than 5% of the Company's
Stock.
The Current H-P Agreement requires Conductus and H-P to exchange reviews and
assessments of Conductus' technical and applications developments, particularly
with respect to their potential application to H-P's product lines. H-P has the
right to appoint an H-P employee (the "H-P Member") as a member of the Company's
Scientific Advisory Board. H-P will jointly own with Conductus any invention by
the H-P Member acting pursuant to the Current H-P Agreement or using the
Company's confidential information.
The Company has entered into separate indemnification agreements with its
directors and officers. These agreements require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities
arising from actions not taken in good faith or in a manner the indemnitee
believed to be opposed to the best interest of the Company), to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified and to obtain directors' and officers' insurance if
available on reasonable terms.
In September 1998, the Company issued a total of 2,461,227 shares of Series
B Preferred Stock, and an equal number of Warrants to purchase shares of Series
B Preferred Stock, for a total of $6,645,312.90. Each share and corresponding
warrant was issued for $2.70 with $0.03 of said purchase price being allocated
to the warrant. Mr. Grimes, a holder of more than 5% of the Company's
outstanding capital stock, purchased 244,444 shares and an equal number of
warrants. Entities affiliated with Asset Management Associates 1984, a holder of
more than 5% of the Company's outstanding capital stock, purchased 1,296,300
shares and an equal number of warrants. John F. Shoch, Chairman of the Board, is
a general partner of AMC Partners 84, the general partner of Asset Management
Associates 1984.
45
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDERS
The following table sets forth, as of December 1, 1998, certain information
regarding beneficial ownership of the Company's Common Stock, as adjusted to
reflect the sale of Shares offered hereby by (i) each person who is known by the
Company to own beneficially more than five percent of either the Company's
Common Stock or the Company's Series B Preferred Stock, (ii) each of the
Company's directors, (iii) each of the Named Officers, (iv) all current officers
and directors as a group, and (v) each Selling Stockholder. The Shares are being
registered to permit public secondary trading of the Shares, and each of the
Selling Stockholders may offer the Shares for resale from time to time. See
"Plan of Distribution."
The Shares to be offered by the Selling Stockholders will be acquired
through exercise of their Warrants to purchase Common Stock and conversion of
their shares of Series B Preferred Stock into shares of Common Stock. The
Warrants and Series B Preferred Stock were issued in September 1998, under an
exemption from the registration requirements of the Securities Act. The Selling
Stockholders represented to the Company that they were acquiring such securities
for investment and with no present intention of distributing such securities.
The Company has filed with the Commission, under the Securities Act, a
Registration Statement on Form S-1, of which this Prospectus forms a part, with
respect to the resale of the Shares from time to time on the Nasdaq National
Market or in privately negotiated transactions. The Company has agreed to use
its best efforts to keep such Registration Statement effective until September
22, 2000, or, if earlier, the date that all Shares have been sold.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER THE OFFERING
(1) (1)
----------------------- ------------------------
NUMBER OF NUMBER OF SHARES NUMBER OF
NAME (AND ADDRESS OF SELLING STOCKHOLDER) SHARES PERCENT BEING OFFERED SHARES PERCENT
- -------------------------------------------------------------- ---------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Entities Affiliated with Asset Management Associates (2)...... 1,907,141 19.3% 1,555,560 351,581 3.6%
2275 East Bayshore Road, Suite 150
Palo Alto, CA 94303
Charles L. Grimes (3)......................................... 913,332 9.5 293,332 620,000 6.4
P.O. Box 136
Mendenhall, PA 19357-0136
Hewlett-Packard Company....................................... 558,212 5.8 0 558,212 5.8
3000 Hanover Street
Palo Alto, CA 94304
John F. Shoch (4)............................................. 1,722,731 17.5 1,333,338 389,393 3.9
2274 East Bayshore Road, Suite 150
Palo Alto, CA 94303
Martin Cooper (5)............................................. 24,000 * 0 24,000 *
Robert Janowiak (6)........................................... 21,000 * 0 21,000 *
Martin Kaplan (7)............................................. 26,500 * 0 26,500 *
Charles E. Shalvoy (8)........................................ 96,907 1.0 0 96,907 1.0
James J. Daley................................................ 0 -- 0 0 --
Ainslie Mayberry.............................................. 8,479 * 0 8,479 *
Graham Y. Mostyn (9).......................................... 15,000 * 0 15,000 *
Randy W. Simon (10)........................................... 84,751 * 0 84,751 *
2,134,368 20.9 1,333,338 801,030 7.8
All directors and executive officers as a group (9 persons)
(11)........................................................
Tony DiBona (12).............................................. 1,165,178 11.9 1,164,678 500 *
2275 East Bayshore Road, Suite 150
Palo Alto, CA 94303
Banner Partners Minaret, L.P. (13)............................ 152,400 1.6 152,400 0 --
c/o Bryan E. Edwards
150 Isabella Avenue
Atherton, CA 94027
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER THE OFFERING
(1) (1)
----------------------- ------------------------
NUMBER OF NUMBER OF SHARES NUMBER OF
NAME (AND ADDRESS OF SELLING STOCKHOLDER) SHARES PERCENT BEING OFFERED SHARES PERCENT
- -------------------------------------------------------------- ---------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
William H. Draper, III Revocable Trust (14)................... 13,200 * 13,200 0 --
William H. Draper
91 Tallwood Court
Atherton, CA 94027
Fred Gibbons (15)............................................. 26,400 * 26,400 0 --
11800 Murietta Lane
Los Altos Hills, CA 94022
Micro Cap Partners, L.P. (16)................................. 134,400 1.4 134,400 0 --
c/o Palo Alto Investors, Inc.
470 University Avenue
Palo Alto, CA 94301
TIFF Investment Program, Inc. (17)............................ 120,000 1.2 120,000 0 --
c/o Investors Bank & Trust
P.O. Box 9130
Boston, MA 02117
D&S Vending, Inc. (18)+....................................... 13,320 * 13,320 0 --
Eaglebrook School (19)+....................................... 22,200 * 22,200 0 --
Norman Miller, M.D. (19)+..................................... 22,200 * 22,200 0 --
Joe Antrium (20)+............................................. 11,160 * 11,160 0 --
Philip Klaus, Jr. (20)+....................................... 11,160 * 11,160 0 --
44,400 * 44,400 0 --
J. Read Branch, Jr. and Janet D. Branch (21)+.................
Elizabeth O. Dennis and O. D. Dennis, Jr. (22)+............... 55,560 * 55,560 0 --
Janet J. Dennis (20)+......................................... 11,160 * 11,160 0 --
Richard J. Clark 22,200 * 22,200 0 --
and Linda S. Clark (19)+....................................
Martin L. Brill (20)+......................................... 11,160 * 11,160 0 --
Anthony F. Markel August 1998 GRAT (20)+...................... 11,160 * 11,160 0 --
Robert F. Mizell (20)+........................................ 11,160 * 11,160 0 --
George A. Trivette and Janet H. Trivette (23)+................ 26,640 * 26,640 0 --
Coleman Wortham (24)+......................................... 60,000 * 60,000 0 --
E. Bryson Powell, III (19)+................................... 22,200 * 22,200 0 --
Grace Associates (20)+........................................ 44,400 * 44,400 0 --
David A. Wright and Carrie H. McAllister (25)+................ 15,600 * 15,600 0 --
Doris E. Wright (20)+......................................... 11,160 * 11,160 0 --
Robert C. Fitzwilson (26)#.................................... 80,855 * 55,555 25,300 *
Susan Jackson (26)#........................................... 111,555 1.2 55,555 56,000 *
Claude J. and Sandra P. Gaubert and affiliated trusts (27)#... 160,107 1.7 111,107 49,000 *
</TABLE>
- ------------------------
* Less than 1%
+ c/o Davenport & Company LLC
901 East Cary Street
Richmond, VA 23219
# c/o Portola Group
Suite 2-145
3000 Sand Hill Road
Menlo Park, CA 94025
(1) Based on 9,605,347 shares of Common Stock outstanding as of December 1, 1998
(assuming the conversion of all shares of Series B Preferred Stock into
Common Stock). Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission. Beneficial ownership
figures reflect the exercise of all warrants and the conversion of all
Series B Preferred Stock into Common Stock. In computing the number of
shares beneficially owned by a person and the
47
<PAGE>
percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable or
will become exercisable within 60 days after January 20, 1999 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percentage ownership of any other person. This Registration
Statement shall also cover any additional shares of Common Stock which
become issuable in connection with the shares registered for sale hereby by
reason of any stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration which results in
an increase in the number of the Company's outstanding shares of Common
Stock. Unless otherwise indicated in the table above, the address of each of
the individuals listed in the table is Conductus, Inc., 969 W. Maude Avenue,
Sunnyvale, California 94086. See "Description of Capital Stock."
(2) Includes 529,361 shares held by Asset Management Associates 1984, assuming
the conversion of 148,150 shares of Series B Preferred Stock to Common Stock
and the exercise of warrants to purchase 29,630 shares of Common Stock.
Includes 1,155,558 shares held by Asset Management Associates 1996, L.P.,
assuming the conversion of 962,965 shares of Series B Preferred Stock to
Common Stock and the exercise of warrants to purchase 192,593 shares of
Common Stock. Includes 222,222 shares held by Asset Management Partners,
assuming the conversion of 185,185 shares of Series B Preferred Stock to
Common Stock and the exercise of warrants to purchase 37,037 shares of
Common Stock. AMC Partners 1996, L.P., is the general partner of Asset
Management Associates 1996, L.P. Dr. Shoch, the Chairman of the Board, Craig
Taylor, Franklin P. Johnson, Jr. and W. Ferrell Sanders are the general
partners of AMC Partners 1996, L.P. and AMC Partners 1984. Douglas E. Kelley
and Tony DiBona are general partners of AMC Partners 1996, L.P. Franklin P.
Johnson, Jr., is the general partner of Asset Management Partners. Dr. Shoch
and Messrs. Sanders, Kelley, DiBona, Johnson and Taylor disclaim beneficial
ownership of any such shares except to the extent of their pecuniary
interests therein.
(3) Assumes the exercise of warrants to purchase 48,888 shares of Common Stock
and the conversion into Common Stock of 244,444 shares of Series B Preferred
Stock.
(4) Includes 31,812 shares held in the form of immediately exercisable options,
some of which are subject to a repurchase right in favor of the Company.
Includes 529,361 shares held by Asset Management Associates 1984, assuming
conversion of its Series B Preferred Stock into Common Stock and exercise of
its warrants to purchase Common Stock, and 1,155,558 shares held by Asset
Management Associates 1996, L.P., assuming conversion of its Series B
Preferred Stock into Common Stock and exercise of its warrants to purchase
Common Stock. Mr. Shoch disclaims beneficial ownership, except to the extent
of his pecuniary interests, in all shares held by Asset Management
Associates 1984 and Asset Management Associates 1996, L.P. See Note (2).
(5) Includes 24,000 shares held in the form of immediately exercisable options,
some of which are subject to a repurchase right in favor of the Company.
(6) Includes 21,000 shares held in the form of immediately exercisable options,
some of which are subject to a repurchase right in favor of the Company.
(7) Includes 24,000 shares held in the form of immediately exercisable options,
some of which are subject to a repurchase right in favor of the Company.
(8) Includes 40,307 shares held in the Shalvoy Family Trust, 6,600 shares held
in trust for minor children and 50,000 shares held in the form of
immediately exercisable options, some of which are subject to a repurchase
right in favor of the Company.
(9) Includes 15,000 shares held in the form of immediately exercisable options,
all of which are subject to a repurchase right in favor of the Company that
will lapse in a series of installments so long as Mr. Mostyn remains in the
service of the Company.
(10) Includes 79,546 shares held in the form of immediately exercisable options,
some of which are subject to a repurchase right in favor of the Company.
(11) Includes 374,358 shares in the form of immediately exercisable options,
some of which are subject to a right of repurchase in the Company. See Notes
(4), (5), (6), (7), (8), (9) and (10).
48
<PAGE>
(12) Includes 1,155,558 shares held by Asset Management Associates 1996, L.P.,
assuming the conversion of 962,965 shares of Series B Preferred Stock to
Common Stock and the exercise of warrants to purchase 192,593 shares of
Common Stock. Mr. DiBona disclaims beneficial ownership in such shares
except to the extent of his pecuniary interest therein. See Note (2).
(13) Assumes the conversion of 127,000 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 25,400 shares of
Common Stock.
(14) Assumes the conversion of 11,000 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 2,200 shares of Common
Stock.
(15) Assumes the conversion of 22,000 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 4,400 shares of Common
Stock.
(16) Assumes the conversion of 112,000 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 22,400 shares of
Common Stock.
(17) Assumes the conversion of 100,000 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 20,000 shares of
Common Stock.
(18) Assumes the conversion of 11,100 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 2,220 shares of Common
Stock.
(19) Assumes the conversion of 18,500 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 3,700 shares of Common
Stock.
(20) Assumes the conversion of 9,300 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 1,860 shares of Common
Stock.
(21) Assumes the conversion of 37,000 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 7,400 shares of Common
Stock.
(22) Assumes the conversion of 46,300 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 9,260 shares of Common
Stock.
(23) Assumes the conversion of 22,200 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 4,440 shares of Common
Stock.
(24) Assumes the conversion of 50,000 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 10,000 shares of
Common Stock.
(25) Assumes the conversion of 13,000 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 2,600 shares of Common
Stock.
(26) Assumes the conversion of 46,296 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 9,259 shares of Common
Stock.
(27) Assumes the conversion of 92,591 shares of Series B Preferred Stock into
Common Stock and the exercise of warrants to purchase 18,516 shares of
Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John F. Shoch, who became a member of the Compensation Committee of the
Board of Directors in May 1993, is a general partner of AMC Partners 84, which
is the general partner of Asset Management Associates 1984, the beneficial owner
of more than five percent of the Company's Common Stock. Mr. Shoch is also a
general partner of Asset Management Partners 1996, L.P., which is the general
partner of Asset Management Associates 1996, L.P., the beneficial owner of more
than five percent of the Company's Common Stock. Dr. Shoch served as Chief
Executive Officer of the Company from September 1987 until October 1988.
1992 STOCK OPTION/STOCK ISSUANCE PLAN
Under the Company's 1992 Stock Option/Stock Issuance Plan (the "Plan"), as
amended, a total of 2,080,000 shares of common stock are authorized for issuance
under the Plan. If any options granted under the Plan are forfeited or terminate
for any other reason without having been exercised in full, then the unpurchased
shares subject to those options will become available for additional grants
under the Plan. If shares granted or purchased under the Plan are forfeited,
then those shares will also become available for additional grants under the
Plan.
49
<PAGE>
The Plan is divided into three separate components:
- The discretionary option grant program;
- The automatic option plan program; and
- The stock issuance program.
The maximum number of option shares and direct stock issuances that may be
granted to a single person in a calendar year is 750,000 shares.
Under the discretionary option grant program, eligible individuals,
including officers and non-employee Board Members, may be granted incentive
options or nonstatutory options. The exercise price of incentive stock options
granted under the Plan must be at least equal to the fair market value of the
common stock of the Company on date of grant. The exercise price of nonstatutory
options granted under the Plan must be at least equal to 85% of the fair market
value of the common stock on date of grant.
Under the automatic option grant program, non-employee Board members
automatically receive nonstatutory options to purchase shares of the Company's
common stock. At the time that each non-employee Board member first becomes a
non-employee Board member, he or she is automatically granted at the time of
such initial election or appointment an option to purchase 15,000 shares of
common stock. The options are immediately exercisable, subject to the Company's
repurchase right which lapses with respect to 20% of the option shares upon
completion of 12 months of Board service from the date of grant, and the
remainder of the option shares in 48 equal monthly installments. Additionally,
at each annual stockholders meeting, non-employee Board members who have served
at least 90 days will receive an option to purchase 3,000 shares of Common
Stock. This annual grant vests as to 1/3 of the option shares upon completion of
12 months of service and the remainder of the option shares in two equal annual
installments.
Under the stock issuance program eligible individuals are allowed to
purchase shares of the Company's common stock at fair market value or for such
consideration as the Compensation Committee deems advisable. Options granted
under the Plan may be immediately exercisable for all the option shares, on
either a vested or unvested basis, or may become exercisable for fully vested
shares in one or more installments over the participant's period of service.
Shares issued under the stock issuance program may either be vested upon
issuance or subject to a vesting schedule tied to the participant's period of
future service or to the attainment of designated performance goals.
No option may be granted with a term exceeding ten years. However, each such
option may be subject to earlier termination within a designated period
following the optionee's cessation of service with the Company. In 1992, the
Company issued options at below fair market value, resulting in a compensation
charge of $295,000, which is being amortized to the statement of operations over
the vesting period of the related options. As of September 30, 1998, this entire
balance had been amortized to the Statement Of Operations.
Upon the occurrence of a merger, reverse merger or sale of all or
substantially all of the assets of the Company, outstanding options will
automatically accelerate and may be exercised as fully vested shares, unless
such options are assumed by the successor corporation. In addition, the
Compensation Committee has the authority as Plan Administrator of the Plan to
provide for the accelerated vesting of the shares of Common Stock subject to
outstanding options, whether granted under the Plan or any predecessor plan, in
the event that a Change in Control (as hereinafter defined) occurs or in the
event that their employment were to be terminated (whether involuntarily or
through a forced resignation) following a Change in Control. A Change in Control
is a hostile takeover of the Company effected through a successful tender offer
for more than 50% of the Company's outstanding Common Stock or through a change
in the majority of the Board as a result of one or more contested elections for
Board membership.
Options granted under the automatic option grant program will fully
accelerate upon the occurrence of a Change in Control, merger, reverse merger or
sale of all or substantially all of the assets of the Company.
50
<PAGE>
A summary of the status of the Company's stock option plans as of September
30, 1998 and December 31, 1997 and 1996 and changes during the years ending on
these dates is presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------------------------------
AVAILABLE FOR
GRANT UNDER WEIGHTED AVG.
OPTION PLAN SHARES PRICE PER SHARE EXERCISE PRICE
------------- ---------- ------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........................... 279,038 1,022,308 $ 0.16 - 7.25 $ 4.04
Additional shares authorized......................... 300,000 -
Granted.............................................. (528,000) 528,000 6.50 - 15.25 9.57
Exercised............................................ (57,311) 0.16 - 7.25 2.08
Canceled............................................. 107,815 (107,815) 0.45 - 11.50 6.09
------------- ---------- --------------- -----
Balance, December 31, 1996........................... 158,853 1,385,182 $ 0.16 - 15.25 $ 6.07
Additional shares authorized......................... 200,000 -
Granted.............................................. (644,000) 644,000 3.44 - 8.38 6.31
Exercised............................................ (137,000) 0.16 - 6.38 2.79
Canceled............................................. 806,495 (806,495) 0.45 - 15.25 7.98
------------- ---------- --------------- -----
Balance December 31, 1997............................ 521,348 1,085,687 $ 0.45 - 13.00 $ 4.68
Additional shares authorized......................... 0
Granted.............................................. (776,901) 776,901 $ 0.00 - 4.25 4.26
Exercised............................................ (96,707) $ 0.00 - 0.88 0.61
Canceled............................................. 666,722 (666,722) $ 0.88 - 13.00 5.87
------------- ---------- --------------- -----
Balance, September 30, 1998.......................... 411,169 1,099,159 $ 0.00 - 13.00 $ 3.50
------------- ---------- --------------- -----
------------- ---------- --------------- -----
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In July 1994, the Employee Stock Purchase Plan (the "ESPP") was adopted by
the Company's Board of Directors. A total of 350,000 shares of common stock are
authorized for issuance under the ESPP as of December 31, 1998. The ESPP, which
is intended to qualify under Section 423 of the Internal Revenue Code, has been
implemented through a series of offering periods, each with a maximum duration
of twelve months, commencing on August 1, 1994, with purchases generally
occurring at six-month intervals. The ESPP is administered by the Compensation
Committee of the Board. Employees are eligible to participate if they are
employed by the Company for at least 20 hours per week for more than 5 months
per calendar year and have been employed by the Company for at least ninety
days. The ESPP permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's compensation, nor
more than 2,500 shares per participant on any purchase date. The price of stock
purchased under the ESPP will be 85% of the lower of the fair market value of
the Common Stock at the beginning of the offering or on the semi-annual purchase
date. Employees may end their participation in the offering at any time during
the purchase period, and participation ends automatically on termination of
employment with the Company. Each outstanding purchase right will be exercised
immediately prior to a merger or consolidation unless assumed by the acquiring
corporation. The Board may amend or terminate the ESPP immediately after the
close of any purchase period. However, the Board may not, without stockholder
approval, materially increase the number of shares of Common Stock available for
issuance or materially modify the eligibility requirements for participation or
the benefits available to participants. During 1998 and 1997 employees purchased
16,538 and 50,686 shares for a total of approximately $50,959 and $381,606,
respectively. At September 30, 1998, 123,138 shares were available for future
grants under the ESPP.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $0.0001 par value,
and 5,000,000 shares of Preferred Stock, no par value.
COMMON STOCK
As of December 1, 1998, there were 7,144,120 shares of Common Stock
outstanding that were held of record by approximately 77 stockholders. There
will be 10,213,363 shares of Common Stock outstanding (assuming no exercise
after December 1, 1998 of outstanding options) after giving effect to the sale
of the shares of Common Stock to the public offered hereby and the conversion of
the Company's Preferred Stock into Common Stock at a one-to-one ratio.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution, or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon conversion of the outstanding Preferred
Stock will be fully paid and nonassessable.
PREFERRED STOCK
Conductus' Certificate of Incorporation authorizes 5,000,000 shares of
Preferred Stock. The Board of Directors has the authority to cause Conductus to
issue the Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of Conductus without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. In
connection with the Rights Agreement, Conductus has authorized a series of
50,000 shares of Preferred Stock designated Series A Junior Participating
Preferred Stock. At present, Conductus has no plans to issue any of the Series A
Junior Participating Preferred Stock. See "--Anti-Takeover Effects of Provisions
of the Certificate of Incorporation, Bylaws and Delaware Law-- Preferred Stock
Rights Plan."
As of December 1, 1998, there were 4,500,000 shares of Series B Preferred
Stock authorized and 2,461,227 shares of Series B Preferred Stock outstanding
that were held of record by approximately 35 stockholders. All outstanding
shares of Series B Preferred Stock are fully paid and nonassessable.
DIVIDENDS. The holders of the Series B Preferred Stock shall be entitled to
receive cumulative dividends on each March 31, June 30, September 30, and
December 31 following the date of issuance of such Series B Preferred Stock at
the rate of $0.162 PER ANNUM. Cumulative dividends shall be paid upon conversion
of the Series B Preferred Stock or upon the liquidation or dissolution of the
Company including deemed liquidations as set forth below.
52
<PAGE>
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of the Company the holders of each share of Series B Preferred Stock
shall be entitled to receive prior and in preference to the holders of the
Common Stock, a per share amount equal to two dollars seventy cents ($2.70).
After the payment o the Preferred Liquidation Preferences to the holders of the
Series B Preferred Stock, the remaining assets shall be distributed ratably to
the holders of the Common Stock pro rata based on the number of shares of Common
Stock held by each. A merger, acquisition, sale of voting control or sale of
substantially all of the assets of the Company in which the stockholders of the
Company do not own a majority of the outstanding shares of the surviving
corporation shall be deemed a liquidation.
CONVERSION. Holders of Series B Preferred Stock will have the right
beginning in March 1999 to convert such shares into shares of Common Stock,
subject to anti-dilution adjustments described more fully below. Each share of
Preferred Stock shall automatically be converted into Common Stock, at the then
applicable conversion price at the election of holders of two-thirds of such
Series B Preferred Stock.
ANTI-DILUTION ADJUSTMENTS. Each share of Series B Preferred Stock shall
initially be convertible into one share of Common Stock. The number of shares of
Common Stock into which shares of a given series of Preferred Stock is
convertible will be subject to adjustment in the following circumstances: (i)
any issuance of additional stock for consideration per share less that the
conversion price for such series of Preferred Stock, (ii) any subdivision or
combination of the outstanding shares of Common Stock, (iii) any distribution by
the Company of (A) a Common Stock dividend, (B) other distribution payable in
Common Stock, or (C) a distribution payable in securities of the Company other
than shares of Common Stock, or (iv) any adjustment of the Common Stock issuable
upon the conversion of the Preferred Stock, whether by recapitalization,
reclassification or otherwise.
VOTING. The Series B Preferred Stock will vote together with the Common
Stock and not as a separate class, except as specifically required by law or by
the Company's Certificate of Incorporation. Each share of Series B Preferred
Stock shall have the number of votes equal to the number of shares of Common
Stock then issuable upon conversion of such shares of Series B Preferred Stock.
PROTECTIVE PROVISIONS. The prior consent or approval of the holders of at
least two-thirds of the Preferred Stock, voting together as a single class,
shall be required for the Company to take specified actions affecting the rights
of such holders.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
PREFERRED STOCK RIGHTS PLAN
On January 29, 1998, the Board of Directors of Conductus declared a dividend
of one preferred share purchase right (a "Right") for each share of Common Stock
outstanding on February 16, 1998 (the "Record Date") to the stockholders of
record on that date. Each Right entitles the registered holder to purchase from
Conductus one one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $0.0001 per share (the "Preferred Shares"), of
Conductus, at a price of $29.00 per one one-thousandth of a Preferred Share (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between
Conductus and Boston EquiServe L.P., as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the outstanding
Common Shares or (ii) 10 business days (or such later date as may be determined
by action of the Board of Directors prior to such time as any Person becomes an
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of such
outstanding Common Shares (the earlier of such dates being called the
"Distribution Date"), the
53
<PAGE>
Rights will be evidenced, with respect to any of the Common Share certificates
outstanding as of the Record Date, by such Common Share certificate with a copy
of this Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Until the Distribution
Date (or earlier redemption or expiration of the Rights), new Common Stock
certificates issued after the Record Date or upon transfer or new issuance of
Common Stock will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Stock
outstanding as of the Record Date, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Stock represented by such certificate. As
soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Common Stock as of the close of business on the Distribution Date and
such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on January 28, 2008 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed by
Conductus, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-thousandths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in shares of Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a quarterly dividend
payment of 1000 times the dividend declared per share of Common Stock. In the
event of liquidation, the holders of the Preferred Shares will be entitled to an
aggregate payment of 1000 times the aggregate payment made per share of Common
Stock. Each Preferred Share will have 1000 votes, voting together with the
Common Stock. In the event of any merger, consolidation or other transaction in
which Common Stock is exchanged, each Preferred Share will be entitled to
receive 1000 times the amount received per share of Common Stock. These rights
are protected by customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-thousandth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
share of Common Stock.
From and after the occurrence of an event described in Section 11(a)(ii) of
the Rights Agreement, if the Rights evidenced by this Right Certificate are or
were at any time on or after the earlier of (x) the date of such event and (y)
the Distribution Date (as such term is defined in the Rights Agreement) acquired
or beneficially owned by an Acquiring Person or an Associate or Affiliate of an
Acquiring Person (as such terms are defined in the Rights Agreement), such
Rights shall become void, and any holder of such Rights shall thereafter have no
right to exercise such Rights.
54
<PAGE>
In the event that, at any time after an entity becomes an Acquiring Person,
Conductus is acquired in a merger or other business combination transaction or
50% or more of its consolidated assets or earning power are sold, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. In the event that any entity becomes an Acquiring
Person, proper provision shall be made so that each holder of a Right, other
than Rights beneficially owned by the Acquiring Person and its Affiliates and
Associates (which will thereafter be void), will thereafter have the right to
receive upon exercise that number of shares of Common Stock having a market
value of two times the exercise price of the Right. If Conductus does not have a
sufficient number of shares of Common Stock to satisfy such obligation to issue
Common Stock, or if the Board of Directors so elects, Conductus shall deliver
upon payment of the exercise price of a Right an amount of cash or securities
equivalent in value to the Common Stock issuable upon exercise of a Right;
provided that, if Conductus fails to meet such obligation within 30 days
following the later of (x) the first occurrence of an event triggering the right
to purchase Common Stock and (y) the date on which Conductus, right to redeem
the Rights expires, Conductus must deliver, upon exercise of a Right but without
requiring payment of the exercise price then in effect, Common Stock (to the
extent available) and cash equal in value to the difference between the value of
the Common Stock otherwise issuable upon the exercise of a Right and the
exercise price then in effect. The Board of Directors may extend the 30-day
period described above for up to an additional 60 days to permit the taking of
action that may be necessary to authorize sufficient additional shares of Common
Stock to permit the issuance of Common Stock upon the exercise in full of the
Rights.
At any time after any entity becomes an Acquiring Person and prior to the
acquisition by any person or group of a majority of the outstanding shares of
Common Stock, the Board of Directors of Conductus may exchange the Rights (other
than Rights owned by such person or group which have become void), in whole or
in part, at an exchange ratio of one share of Common Stock per Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of Conductus, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the time any entity becomes an Acquiring Person, the
Board of Directors of Conductus may redeem the Rights in whole, but not in part,
at a price of $0.01 per Right (the "Redemption Price"). The redemption of the
Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of
Conductus without the consent of the holders of the Rights, except that from and
after such time as any person becomes an Acquiring Person no such amendment may
adversely affect the interests of the holders of the Rights (other than the
Acquiring Person and its Affiliates and Associates).
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of Conductus, including, without limitation, the right to vote
or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Conductus
without conditioning the offer on the Rights being redeemed. However, the Rights
should not interfere with any tender offer or merger approved by Conductus
because the Rights may be redeemed by the Board of Directors at any time prior
to such time as any entity becomes an Acquiring Person.
55
<PAGE>
CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate of Incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. This provision of the Certificate of
Incorporation could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. This provision is intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. This provision is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provision also is intended to discourage certain tactics that may be used in
proxy fights. However, such provision could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
it also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provision also
may have the effect of preventing changes in the management of the Company. See
"Risk Factors--Anti-Takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law."
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Boston EquiServe
L.P., and its telephone number is (617) 575-2000.
56
<PAGE>
LEGAL MATTERS
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
will pass upon the validity of the Common Stock offered hereby for the Company.
EXPERTS
The balance sheets as of December 31, 1996 and 1997, and the statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997 included in this Prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect to
the Company and such Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete; reference is made in each instance to the copy of such contract or
document filed as an exhibit to the Registration Statement. Each such statement
is qualified by such reference to such exhibit.
The Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-900-SEC-0330. You
may obtain copies of all or any part of the Registration Statement from the
Commission after paying the prescribed fees. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at
http://www.sec.gov.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Financial Statements:
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Conductus, Inc.:
We have audited the accompanying balance sheets of Conductus, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Conductus, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 9, 1998,
except for Notes 1 and 17, as to which the date is April 27, 1998, the Company,
as discussed in Note 18, has continued to experience operating losses that have
adversely affected the Company's reported results of operations for the nine
months ended September 30, 1998. Note 1 describes management's plans to address
these issues.
PricewaterhouseCoopers LLP
San Jose, California
February 9, 1998, except for Notes
1 and 17, as to which the date is
April 27, 1998 and Note 18, as to
which the date is January 4, 1999
F-2
<PAGE>
CONDUCTUS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------
<S> <C> <C> <C>
1996 1997 1998
-------------- -------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,119,991 $ 2,111,560 4,506,566
Restricted cash equivalent...................................... -- 500,000 --
Short-term investments.......................................... 6,516,401 556,633 --
Accounts receivable (net of allowance for doubtful accounts of
$50,000, $248,232 and $292,635 for 1996, 1997 and 1998)....... 3,756,586 2,055,255 1,315,444
Inventories..................................................... 1,220,873 610,367 872,619
Prepaid expenses and other current assets....................... 397,556 139,479 108,270
-------------- -------------- -------------
Total current assets.......................................... 13,011,407 5,973,294 6,802,899
Property and equipment, net..................................... 2,941,685 2,700,594 2,221,859
Other assets.................................................... 127,763 87,762 82,266
-------------- -------------- -------------
Total assets.................................................. $ 16,080,855 $ 8,761,650 9,107,024
-------------- -------------- -------------
-------------- -------------- -------------
LIABILITIES
Current liabilities:
Current portion of long-term debt............................... $ 1,119,330 $ 1,547,507 978,625
Accounts payable................................................ 1,710,762 1,539,590 822,178
Other accrued liabilities....................................... 1,045,916 1,063,721 865,194
-------------- -------------- -------------
Total current liabilities..................................... 3,876,008 4,150,818 2,665,997
Long-term debt, net of current portion.......................... 1,021,781 309,681 1,559,626
-------------- -------------- -------------
Total liabilities............................................. 4,897,789 4,460,499 4,225,623
-------------- -------------- -------------
Commitments (Note 10)
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value:
Authorized: 5,000,000 shares
None issued or outstanding in 1996 or 1997
Series B, $0.0001 par value; Authorized: 4,500,000; Issued and
outstanding: 2,461,227 in 1998 (Liquidation value:
$6,645,321)..................................................... -- -- 6,374,511
Common stock, $0.0001 par value:
Authorized: 20,000,000 shares;
Issued: 6,988,517, 7,013,062 and 7,117,340 in 1996, 1997 and
1998
Outstanding: 6,816,143, 7,004,095 and 7,117,340 in 1996, 1997
and 1998...................................................... 683 702 728
Additional paid-in capital...................................... 40,405,381 41,070,636 41,476,772
Unrealized gain on investments, net............................. 3,808 -- --
Accumulated deficit............................................... (29,226,806) (36,770,187) (42,970,610)
-------------- -------------- -------------
Total stockholders' equity.................................... 11,183,066 4,301,151 4,881,401
-------------- -------------- -------------
Total liabilities and stockholders' equity........................ $ 16,080,855 $ 8,761,650 9,107,024
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract............................ $ 8,148,189 $ 9,690,989 $ 7,266,157 $ 5,834,080 $ 2,808,395
Product sales....................... 2,433,496 2,851,682 2,187,383 1,662,605 623,675
------------- ------------- ------------- ------------- -------------
Total revenues.................... 10,581,685 12,542,671 9,453,540 7,496,685 3,432,070
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of product sales............... 1,429,516 1,823,622 1,845,413 1,899,203 1,994,417
Research and development............ 9,819,416 11,773,587 10,626,133 7,679,545 4,468,949
Selling, general and
administrative.................... 3,755,653 4,054,303 4,329,739 3,172,178 2,777,036
Write-off of property, plan, and
equipment......................... -- -- 100,000 100,000 --
Loss on asset sale.................. -- -- 51,741 -- --
Gain on product line disposals...... -- -- -- (93,135) --
------------- ------------- ------------- ------------- -------------
Total costs and expenses.......... 15,004,585 17,651,512 16,953,026 12,757,791 9,240,402
------------- ------------- ------------- ------------- -------------
Loss from operations.................. (4,422,900) (5,108,841) (7,499,486) (5,261,106) (5,808,332)
Interest income....................... 249,371 262,965 267,492 226,981 56,445
Other income (expense)................ (92,608) 25,042 (108,992) (63,228) --
Interest expense...................... (155,515) (183,138) (202,395) (145,787) (448,536)
------------- ------------- ------------- ------------- -------------
Net loss............................ $ (4,421,652) $ (5,003,972) $ (7,543,381) $ (5,243,140) $ (6,200,423)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic and diluted loss per share...... $ (0.80) $ (0.80) $ (1.09) $ (0.77) $ (0.88)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used in per share
calculation......................... 5,543,073 6,263,446 6,896,649 6,853,000 7,077,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL SERIES B UNREALIZED
COMMON PAID-IN PREFERRED GAIN (LOSS) ON ACCUMULATED
STOCK CAPITAL STOCK INVESTMENTS DEFICIT TOTAL
----------- -------------- --------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995................ $ 537 $ 29,414,318 -- (84,762) ($19,801,182) $9,528,911
Issuance of 224,762 shares of common
stock to employees..................... 23 133,386 133,409
Compensation associated with stock
options granted........................ 34,528 34,528
Issuance of 101,790 shares of common
stock to employees under the employee
stock purchase plan.................... 10 453,216 453,226
Repurchase of 8,967 shares of common
stock.................................. (90) (90)
Unrealized gain on investments, net...... 85,388 85,388
Net loss................................. (4,421,652) (4,421,652)
----- -------------- --------- --------------- ------------ ----------
Balances, December 31, 1995.............. 570 30,035,358 -- 626 (24,222,834) 5,813,720
Issuance of 69,037 shares of common stock
to employees........................... 7 110,318 110,325
Issuance of 1,000,000 shares of common
stock through secondary offering, net
of issuance costs...................... 100 9,892,107 9,892,207
Issuance of 57,848 shares of common stock
to employees under the employee stock
purchase plan.......................... 6 340,597 340,603
Compensation associated with stock
options granted........................ 27,001 27,001
Unrealized gain on investments, net...... 3,182 3,182
Net loss................................. (5,003,972) (5,003,972)
----- -------------- --------- --------------- ------------ ----------
Balances, December 31, 1996.............. 683 40,405,381 -- 3,808 (29,226,806) 11,183,066
Issuance of 137,000 shares of common
stock to employees..................... 14 381,592 381,606
Issuance of 50,686 shares of common stock
to employees under the employee stock
purchase plan.......................... 5 247,662 247,667
Compensation associated with stock
options granted........................ 36,001 36,001
Unrealized loss on investments, net...... (3,808) (3,808)
Net loss................................. (7,543,381) (7,543,381)
----- -------------- --------- --------------- ------------ ----------
Balances, December 31, 1997.............. 702 41,070,636 -- -- (36,770,187) 4,301,151
Issuance of 2,461,230 shares of preferred
stock.................................. 6,374,511 6,374,511
Issuance of warrants..................... 268,671 268,671
Issuance of 113,245 shares of common
stock to employees under the employee
stock purchase plan.................... 11 109,866 109,877
Compensation associated with stock
options granted........................ 27,000 27,000
Treasury stock........................... 15 599 614
Net loss................................. (6,200,423) (6,200,423)
----- -------------- --------- --------------- ------------ ----------
Balance, September 30, 1998
(unaudited)............................ $ 728 $ 41,476,772 $6,374,511 -- ($42,970,610) $4,881,401
----- -------------- --------- --------------- ------------ ----------
----- -------------- --------- --------------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (4,421,652) $ (5,003,972) $ (7,543,381) $ (5,243,140) $ (6,200,423)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization...................... 901,340 925,718 827,071 601,298 684,570
Compensation associated with stock options
granted.......................................... 34,528 27,001 36,001 -- 146,575
Provision for excess and obsolete inventories...... 20,000 -- 199,845 -- 96,176
(Gain) loss on disposal of equipment............... -- (22,922) 51,741 -- --
Provision for allowance for doubtful accounts...... -- -- 198,232 -- --
(Increase) decrease in:
Accounts receivable................................ (910,573) (505,439) 1,603,099 1,713,686 739,811
Inventories........................................ (290,845) (455,449) (219,017) 679,594 (358,428)
Prepaid expenses and other current assets.......... (122,994) (112,152) 258,077 123,729 (463,295)
Other assets....................................... (1,099) (63,580) 40,001 -- 500,000
Increase, (decrease) in:
Accounts payable and accrued liabilities........... 166,025 314,024 (153,367) (424,386) (915,939)
------------- ------------- ------------- ------------- ------------
Net cash used in operating activities.......... (4,625,270) (4,896,771) (4,701,698) (2,549,219) (5,770,953)
------------- ------------- ------------- ------------- ------------
Cash flows from investing activities:
Proceeds from sales of short-term investments...... 40,473,743 44,266,602 39,401,345 20,625,154 556,633
Purchases of short-term investments................ (36,235,256) (47,899,357) (33,445,385) (17,455,532) --
Acquisition of property and equipment.............. (1,568,033) (1,264,478) (689,286) (652,910) (205,835)
Net proceeds from sales of assets.................. -- 29,196 581,243 168,734 --
------------- ------------- ------------- ------------- ------------
Net cash (used in) provided by investing
activities................................... 2,670,454 (4,868,037) 5,847,917 2,685,446 350,798
------------- ------------- ------------- ------------- ------------
Cash flows from financing activities:
Proceeds from borrowings........................... 1,432,944 1,229,019 910,132 410,133 4,450,000
Net proceeds from issuance of common stock......... 586,635 10,343,135 629,273 290,521 225,052
Repurchase of common stock......................... (90) -- -- -- --
Net proceeds from issuance of preferred stock...... -- -- -- -- 6,374,511
Principal payments under capital lease
obligations...................................... (143,340) (37,894) -- -- --
Principals payments on long-term debt.............. (153,686) (921,871) (1,194,055) (879,895) (3,734,402)
------------- ------------- ------------- ------------- ------------
Net cash provided by (used in) financing
activities................................... 1,722,463 10,612,389 345,350 (179,241) 7,315,161
------------- ------------- ------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... (232,353) 847,581 1,491,569 (43,014) 1,895,006
Cash and cash equivalents at beginning of period..... 504,763 272,410 1,119,991 1,119,991 2,611,560
------------- ------------- ------------- ------------- ------------
Cash and cash equivalents at end of period........... $ 272,410 $ 1,119,991 $ 2,611,560 $ 1,076,977 $ 4,506,566
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. FORMATION AND BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION:
The Company was formed to develop, manufacture and market superconductive
electronic devices, circuits and systems for sensor, communications, test and
instrumentation, and digital electronics applications. On September 30, 1997,
the Company discontinued operation of the Company's Instrument and Systems
Division.
SUBSTANTIAL FUTURE CAPITAL NEEDS:
The Company to date has received limited revenues from product sales and as
of March 23, 1998, had cash reserves of approximately $540,000. On March 30,
1998, the Company entered into an agreement to expand its existing bank working
capital line of credit from $1,000,000 to $2,000,000, subject to receivables
eligibility requirements and certain other restrictions.
On April 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 2.00%. The facility
matures in 120 days, but may be paid off sooner at the Company's option. The
agreement grants to the bank a warrant to purchase 15,000 shares at $3.625 per
share, the closing price for the Company's shares on April 13, 1998.
The agreement provides for additional warrants to be granted based on the
length of time the loan is outstanding, as follows:
if the loan is outstanding after May 31, 1998, a warrant for an
additional 10,000 shares at the May 31, 1998 closing price will be
granted.
if the loan is outstanding after June 30, 1998, a warrant for an
additional 25,000 shares at the June 30, 1998 closing price will
be granted.
Borrowings under this facility are collateralized by a first priority
security interest in all of the Company's property, including intellectual
property rights.
On April 22, 1998, the Company entered into a lease line of credit
commitment with a leasing company. Under the terms of this commitment, the
Company will sell certain of its assets to the leasing company and lease the
assets back from the leasing company. The amount available under this facility
is $2,000,000 with another $500,000 available contingent upon the Company
achieving certain financial requirements in the future. The facility grants to
the leasing company warrants to purchase up to $125,000 of the Company's stock
at a price equal to the average closing bid price for the five days immediately
preceding and including April 22, 1998. The effective interest rate would be
13.98%, and there are certain reporting and financial covenants which the
company is required to satisfy.
On April 17, 1998, the Company received a commitment letter from a current
stockholder stating that the stockholder is prepared, if necessary, to
participate in future financing efforts in the amount of at least $1,500,000.
This commitment expires March 31, 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Risk Factors-- Substantial Future Capital Needs," and Note 17 of
Conductus, Inc. Notes to Financial Statements, "Subsequent Events."
F-7
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. FORMATION AND BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION: (CONTINUED)
The Company anticipates that existing sources of liquidity and anticipated
revenue, primarily from government contracts, will satisfy the Company's
projected working capital and other cash requirements through at least December
1998. There can be no assurance, however, that changes in the Company's plans or
other events affecting the Company will not result in the expenditure of such
resources before such time.
There can be no assurance that additional financing will be available on
acceptable terms or at all.
The Company has adopted a plan consisting of the following additional steps
to conserve cash and improve its liquidity. The Company has implemented a cost
reduction program which will result in immediate headcount reductions of 11
employees and reduced levels of operating expenses, working capital requirements
and capital expenditures over the next several quarters. The Company continues
to explore and evaluate equity and debt financing alternatives. There can be no
assurance that any or all of the measures taken by the Company will provide
sufficient liquidity.
The development of the Company's planned products will require a commitment
of substantial additional funds. There can be no assurance that additional
financing will be available on acceptable terms or at all. Unless the Company is
able to raise significant additional funds, through debt or equity issuances,
asset sales or otherwise, the Company will be required to delay, scale-back or
eliminate one or more of its research and development programs or obtain funds
through arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies or potential
products that the Company would not otherwise relinquish. The Company's future
capital requirements will depend on many factors, including continued progress
in its research and development programs, the magnitude of these programs, the
time and cost involved in obtaining any required regulatory approvals, the costs
involved in preparing, filing, prosecuting, maintaining and enforcing patents,
successful completion of technological, manufacturing and market requirements,
changes in existing research relationships, the availability of funding under
government contracts, the ability of the Company to establish collaborative
arrangements and the cost of manufacturing scale-up and the amount and timing of
future revenues. See "Risk Factors--Substantial Future Capital Needs."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR:
Prior to January 1998, the Company used a 52-53 week fiscal year ending on
the last Friday of the month. For convenience of presentation, the accompanying
financial statements have been shown as ending on December 31 of each applicable
period. In January 1998, the Company changed to a 52 week fiscal year ending on
the last day of the month.
UNAUDITED INTERIM FINANCIAL INFORMATION:
The accompanying financial statements at September 30, 1998 and for the nine
months ended September 30, 1998 and 1997, together with the related notes, are
unaudited but include all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation, in all material respects, of the financial position and the
operating results and cash flows
F-8
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
for the interim date and periods presented. Results for the interim period ended
September 30, 1998 are not necessarily indicative of results for the entire
fiscal year or future periods.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CERTAIN RISKS AND CONCENTRATIONS:
The Company's superconducting products are concentrated in the electronic
component industry which is highly competitive and rapidly changing. Revenues
for the Company's products are concentrated with a relatively limited number of
customers and suppliers for certain components are concentrated among a few
providers. In addition, approximately 77% of the Company's total revenues for
each of the fiscal years 1995, 1996, and 1997 were for government-related
contracts. The development of new technologies or commercialization of
superconductive products by any competitor could affect operating results
adversely.
CASH, CASH EQUIVALENTS AND INVESTMENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Investments,
which consist primarily of foreign debt, corporate and preferred bonds and
commercial paper, are stated at fair market value. Management believes that the
financial institutions in which it maintains such deposits are financially sound
and, accordingly, minimal credit risk exists with respect to these deposits.
Additionally, cash and cash equivalents are held by two major U.S. banks.
Other financial instruments, principally accounts receivable, leases payable
and other borrowings are considered to approximate fair value based upon
comparable market information available at respective balance sheet dates.
Investments are deemed by management to be available-for-sale and are
reported at fair market value with net unrealized gains or losses reported as a
separate component of stockholders' equity. Available-for-sale marketable
securities with maturities less than one year from the balance sheet date are
classified as short-term and those with maturities greater than one year from
the balance sheet date are classified as long term.
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Appropriate consideration is given to obsolescence,
excessive levels, deterioration and other factors in evaluating net realizable
value.
F-9
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciated on the
straight-line method over estimated useful lives of four to six years.
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the useful life of the assets or the related lease
term. When assets are disposed of, the cost and related accumulated depreciation
are removed from the accounts and the resulting gains and losses are included in
results of operations.
REVENUE RECOGNITION:
Product revenues are generally recognized at the time of shipment. Income
from other revenue and royalty agreements is recognized at such time as the
earnings process is complete and once collectibility is considered probable.
Appropriate allowance is made for product returns and potential warranty claims
at the time of shipment.
RESEARCH AND DEVELOPMENT CONTRACTS:
The Company has entered into contracts to perform research and development
for the U.S. government. Revenues from these contracts are recognized utilizing
the percentage-of-completion method measured by the relationship of costs
incurred to total contract costs. Cost of contract revenues for the years ended
December 31, 1995, 1996, and 1997 was $9,176,000, $13,178,000, and $9,814,000,
respectively. Costs include direct engineering and development costs and
applicable overhead.
RESEARCH AND DEVELOPMENT:
Internally funded research and development expenditures are charged to
operations as incurred.
INCOME TAXES:
The Company utilizes the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under the liability method, deferred taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123) "Accounting for Stock-Based Compensation", the Company accounts for grants
of equity instruments to employees using the intrinsic value method described in
Accounting Principles Board Opinion No. 25 (APBO 25). All other grants are
accounted for using the fair value method described in SFAS 123 with appropriate
compensation expense recognition in the statement of operations, where
significant.
F-10
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
BASIC AND DILUTED LOSS PER SHARE:
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings Per Share", a reconciliation
of the numerator and denominator of the basic and diluted EPS is provided as
follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--basic and diluted EPS:
Net loss................................. $ (4,421,652) $ (5,003,972) $ (7,543,381) $ (5,243,140) (6,200,423)
Denominator--basic and diluted EPS:
Common Stock outstanding................. 5,543,073 6,263,446 6,896,649 6,853,000 7,077,000
Basic loss per share..................... $ (0.80) $ (0.80) $ (1.09) $ (0.77) $ (0.88)
Diluted loss per share................... $ (0.80) $ (0.80) $ (1.09) $ (0.77) $ (0.88)
</TABLE>
In the 1995, 1996, 1997, and 1998 computations, common equivalent shares are
excluded from the basic and diluted loss per share as their effect is
antidilutive. Common equivalent shares that could potentially dilute basic
earnings per share in the future and that were not included in the computations
of diluted loss per share because of antidilution were approximately 505,000,
591,000, 268,000, 330,029 and 344,670 for the years ended 1995, 1996, 1997 and
for the nine months ended September 30, 1997 and 1998, respectively.
RECLASSIFICATIONS:
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
RECENT PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 (SFAS 130) "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. SFAS 130 will become effective for the Company's 1998 fiscal year.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 (SFAS 131) "Disclosures about Segments of an Enterprise and Other
Information." SFAS 131 requires publicly-held companies to report financial and
other information about key revenue-producing segments of the entity for which
such information is available and is utilized by the chief operation decision
makers. Specific information to be reported for individual segments includes
profit and loss, certain revenue and expense items and total assets. A
reconciliation of segment financial information to amounts reported in the
financial statements would be provided. SFAS 131 will become effective for the
Company's 1998 fiscal year.
F-11
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company is currently studying the implications of these statements and
has not yet determined the impact of their adoption.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest..................................... $ 147,605 $ 191,050 $ 173,571
---------- ---------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FUNDING ACTIVITIES:
Unrealized gain (loss) on investments, net................................. $ 85,388 $ 3,182 $ 3,808
---------- ---------- ----------
OTHER NONCASH EXPENSES:
Compensation associated with stock options granted......................... $ 34,528 $ 27,001 $ 36,001
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
4. INVESTMENTS:
Investments, all of which are classified as available-for-sale, are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------- ------------------------
<S> <C> <C> <C> <C>
COST MARKET VALUE COST MARKET VALUE
------------ ------------ ---------- ------------
Debt securities:
Corporate bonds......................................... $ 2,356,259 $2,359,453
Preferred bonds......................................... 2,000,000 2,000,000
Foreign debt............................................ $ 289,829 $ 289,829
Commercial paper...................................... 2,078,596 2,079,210 247,702 247,702
Other................................................. 18,545 18,545 4,587 4,587
Accrued interest...................................... 59,193 59,193 14,515 14,515
------------ ------------ ---------- ------------
Subtotal............................................ 6,512,593 6,516,401 556,633 556,633
Unrealized gain, net...................................... 3,808 -- -- --
------------ ------------ ---------- ------------
Total................................................... $ 6,516,401 $6,516,401 $ 556,633 $ 556,633
------------ ------------ ---------- ------------
------------ ------------ ---------- ------------
</TABLE>
At December 31, 1997, all scheduled maturities of investments are within one
year. Investments consisted primarily of foreign debt and commercial paper
bearing interest between 5.00% to 6.16% per annum are due to mature between
January 1998 and April 1998.
For the years ended December 31, 1995, 1996, and 1997 gross realized gains
and losses on sales of available-for-sale securities were not material, the cost
of securities sold is based on the specific identification method.
F-12
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
5. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
U.S. government contracts:
Unbilled.............................................................
Recoverable costs and accrued profit on progress completed--not
billed........................................................... $ 466,509 $ 796,283 $ 358,925
Unrecovered costs and estimated profits subject to future
negotiation-- not billed......................................... -- 350,000 -0-
Billed............................................................... 2,842,285 793,382 991,565
Commercial............................................................. 497,792 363,822 257,589
Reserves............................................................... (50,000) (248,232) (292,635)
------------ ------------ -------------
$ 3,756,586 $ 2,055,255 $ 1,315,444
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Recoverable costs and accrued profit and unrecovered costs and estimated
profits not billed are comprised principally of amounts of revenue recognized on
contracts for which billings had not been presented to the contract owners
because the amounts were not billable at the balance sheet date. It is
anticipated such unbilled amounts receivable from the U. S. Government at
December 31, 1997 will be billed over the next 120 days as incremental increases
to the contract are funded by the contract administrator or as final billing
rates related to fiscal years 1994 through 1996 are approved by the DCAA.
6. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1996 1997 1998
------------ ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials....................................... $ 604,070 $ 293,336 $ 441,459
Work in process..................................... 521,997 366,550 315,940
Finished goods...................................... 175,806 231,326 526,741
Reserves............................................ (81,000) (280,845) (411,521)
------------ ---------- -------------
$ 1,220,873 $ 610,367 $ 872,619
------------ ---------- -------------
------------ ---------- -------------
</TABLE>
F-13
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
7. PROPERTY AND EQUIPMENT:
Property and equipment, including equipment acquired under capital leases,
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1997
------------ ------------
Equipment......................................................... $ 6,403,590 $ 6,859,265
Leasehold improvements............................................ 1,586,350 1,590,605
Furniture and fixtures............................................ 449,574 424,824
Construction in process........................................... 318,003 307,386
------------ ------------
8,757,517 9,182,080
Accumulated depreciation and amortization......................... (5,815,832) (6,481,486)
------------ ------------
$ 2,941,685 $ 2,700,594
------------ ------------
------------ ------------
</TABLE>
8. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1997
------------ ------------
Accrued consulting and professional............................... $ 171,300 $ 138,155
Accrued compensation.............................................. 727,299 704,676
Other accrued liabilities......................................... 147,317 220,890
------------ ------------
$ 1,045,916 $ 1,063,721
------------ ------------
------------ ------------
</TABLE>
9. LONG-TERM DEBT AND OTHER BORROWINGS:
At December 31, 1997, the Company had three term loan obligations with
annual maturities as follows:
<TABLE>
<S> <C>
1998............................ $1,547,507
1999............................ 288,416
2000............................ 21,265
---------
$1,857,188
---------
---------
</TABLE>
In December 1997, the Company modified its bank line of credit facility
which expires February 28, 1998. See Note 17. The agreement provides for
borrowings up to the lesser of $500,000 or 75% of eligible receivables.
Borrowings under the agreement bear interest at the bank's prime rate plus 1.00%
(a total of 9.50% at December 31, 1997) and are collateralized by a $500,000
certificate of deposit, accounts receivable, equipment and other assets of the
Company. At December 31, 1997, the Company had borrowed $500,000 under the
agreement. In connection with a prior line of credit modification, on March 8,
1996, the Company issued the lender warrants to acquire 15,000 shares of the
Company's
F-14
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
9. LONG-TERM DEBT AND OTHER BORROWINGS: (CONTINUED)
common stock at a price of $11.25 per share. These warrants may be exercised by
the holder at any time until the expiration date, March 8, 2001.
The three equipment credit facilities and line of credit facility require
that the Company provide financial information to the lender, obtain approval of
the lender for any material disposition of the collateral except in the ordinary
course of business and meet certain financial ratios, minimum tangible net
worth, minimum cash and investments and other covenants.
All borrowings under these credit facilities are at the bank's prime rate
plus 1.00% (a total of 9.50% at December 31, 1997) with interest paid monthly,
and are collateralized by the related equipment. At December 31, 1997, there
were no amounts available under these credit facilities.
The Company received a waiver in March 1998 from the institution with
respect to default that occurred in the fourth quarter of fiscal 1997 on certain
financial covenants.
10. COMMITMENTS:
The Company leases its administrative, sales, marketing, manufacturing,
research and development facilities under noncancelable operating leases
expiring in February 1998, August 2000 and August 2001. Under the terms of the
leases, the Company is responsible for certain expenses and taxes.
Future minimum payments under these noncancelable leases are as follows:
<TABLE>
<S> <C>
1998............................ $ 338,810
1999............................ 327,114
2000............................ 279,114
2001............................ 122,076
---------
$1,067,114
---------
---------
</TABLE>
Rent expense was $470,379, $438,531, $385,432, $299,078 and $234,803 for the
years ending December 31, 1995, 1996, and 1997, and for the nine months ended
September 30, 1997 and 1998, respectively.
11. RESEARCH AND DEVELOPMENT ARRANGEMENTS:
The Company is party to a number of research and development contracts,
generally short-term in nature, which are substantially all with various
agencies of the United States government. Credit risk related to accounts
receivable arising from such contracts is considered minimal.
The following describes some of the major programs underway:
COORDINATED RESEARCH PROGRAM:
In May 1993, the Company and Hewlett-Packard Company (H-P) modified a
previous Coordinated Research Program (CRP) agreement by entering into a new
five-year agreement. In connection with the modifying agreement, the Company
received $1,000,000 in cash and $230,000 in equipment from H-P in exchange for
issuing 439,286 shares of its Series B preferred stock, which automatically
converted into 137,276 shares of common stock upon the close of the Company's
initial public offering in August 1993.
F-15
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
11. RESEARCH AND DEVELOPMENT ARRANGEMENTS: (CONTINUED)
This agreement requires the Company and H-P to exchange reviews and
assessments of the Company's technical and applications developments,
particularly with respect to their potential application to H-P's products.
ADVANCED TECHNOLOGY PROGRAM:
In August 1992, the Company, acting as administrator for and on behalf of a
joint venture formed to conduct research to develop a prototype hybrid
superconductor/semiconductor computer under the Department of Commerce Advanced
Technology Program, entered into a cost-sharing cooperative agreement with the
U.S. government. Under the terms of the five year agreement, the U.S. government
agreed to share costs of the joint venture's research effort up to an aggregate
of $7,450,000, including subcontractor costs. Revenue of $1,920,000, $1,613,000
and $714,000 was recognized under this contract for 1995, 1996, and 1997,
respectively.
FOCUSED RESEARCH INITIATIVE:
In September 1995, the Company entered into a contract with the Naval
Research Laboratory for the development of HTS receiver coils for pulse magnetic
resonance imaging (MRI) prototype for screening of breast cancer. Revenue of
$185,000, $1,473,000, and $920,000 was recognized under the contract for 1995,
1996, and 1997, respectively.
LUCENT JOINT DEVELOPMENT AGREEMENT:
In April 1996, the Company entered into a joint development and licensing
agreement with Lucent Technologies, Inc., to develop a superconductive
transceiver filter subsystem for the PCS market. Both Conductus and Lucent
provide technical support to the program. Each party will retain rights to the
intellectual property it develops under the program, subject to certain
nonexclusive licensing rights of the other party, and jointly developed
intellectual property will be jointly owned. Revenue of $428,000 and $1,080,000
was recognized under the agreement for 1996 and 1997, respectively.
DARPA CRYOPACKAGING PROGRAM:
In August 1996, the Company entered into a contract with the Naval Research
Laboratory to solve technical problems associated with the support and
utilization of cryoelectronic components in advanced electronic systems with
particular emphasis on microwave communications. Revenue of $616,000 and
$847,000 was recognized under this contract for 1996 and 1997, respectively.
12. STOCKHOLDERS' EQUITY
CAPITAL STOCK:
Under the terms of the Company's Articles of Incorporation, the Board of
Directors may determine the rights, preferences and terms of the Company's
authorized but unissued preferred stock. In connection with obtaining the lease
lines of credit, the Company issued to the leasing companies warrants
exercisable for the Company's preferred stock, which converted to warrants for
32,894 and 9,664 shares of common stock, at a price per share of $6.08 and
$8.96, respectively. As of December 31, 1997, warrants for 16,447
F-16
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
and 2,087 shares of Common Stock remain exercisable, respectively, The warrants,
which are immediately exercisable, expire August 5, 1998. Also see Note 17,
"Subsequent Events."
1992 STOCK OPTION/STOCK ISSUANCE PLAN:
Under the Company's stock option/stock issuance plan (the Plan), as amended,
a total of 2,080,000 shares of common stock are authorized for issuance under
the Plan as of December 31, 1997.
Additionally each year the non-employee Board members receive a 3,000 share
grant that vests over three years.
The Plan is divided into three separate components: the discretionary option
grant program, the automatic option plan program and the stock issuance program.
Under the discretionary option grant program, eligible individuals may be
granted incentive options or nonstatutory options. The exercise price of
incentive stock options granted under the Plan must be at least equal to the
fair market value of the common stock of the Company on date of grant. The
exercise price of nonstatutory options granted under the Plan must be not less
than 85% of the fair market value of the common stock on date of grant. Under
the automatic option grant program, non-employee Board members automatically
receive non-statutory options to purchase shares of the Company's common stock.
Each non-employee Board member who first becomes a non-employee Board member at
any time on or after January 23, 1995 is automatically granted at the time of
such initial election or appointment an option to purchase 15,000 shares of
common stock. The options are immediately exercisable, subject to the Company's
repurchase right which lapses with respect to twenty percent (20%) of the
optioned shares upon completion of twelve (12) months of Board service from the
date of grant, and the remainder of the optioned shares in forty-eight (48)
equal monthly installments. Under the stock issuance program eligible
individuals are allowed to purchase shares of the Company's common stock at fair
market value or for such consideration as the Compensation Committee deems
advisable.
Options granted under the Plan may be immediately exercisable for all the
option shares, on either a vested or unvested basis, or may become exercisable
for fully vested shares in one or more installments over the participant's
period of service. Shares issued under the stock issuance program may either be
vested upon issuance or subject to a vesting schedule tied to the participant's
period of future service or to the attainment of designated performance goals.
No option may be granted with a term exceeding ten years. However, each such
option may be subject to earlier termination within a designated period
following the optionee's cessation of service with the Company.
In 1992, the Company issued options at below fair market value, resulting in
a compensation charge of $295,000, which is being amortized to the statement of
operations over the vesting period of the related options. As of September 30,
1998, this entire balance had been amortized to the Statement of Operations.
F-17
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock option plans as of December
31, 1995, 1996, 1997 and September 30, 1998 and changes during the periods
ending on these dates is presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE
FOR
GRANT UNDER
OPTION PLAN SHARES PRICE PER SHARE
------------ ---------- -------------------------------
Balance, January 1, 1995.................................. 133,642 1,150,591 $ .16 -- 5.75
Additional shares authorized.............................. 300,000 -- --
Granted................................................... (309,163) 309,163 $ 4.94 -- 7.25
Exercised................................................. -- (224,762) $ .16 -- 6.31
Canceled.................................................. 154,559 (212,684) $ .45 -- 6.88
------------ ---------- --------- ---------
Balance, December 31, 1995................................ 279,038 1,022,308 $ .16 -- 7.25
Additional shares authorized.............................. 300,000 -- --
Granted................................................... (528,000) 528,000 $ 6.50 -- 15.25
Exercised................................................. -- (57,311) $ .16 -- 7.25
Canceled.................................................. 107,815 (107,815) $ .45 -- 11.50
------------ ---------- --------- ---------
Balance, December 31, 1996................................ 158,853 1,385,182 $ .16 -- 15.25
Additional shares authorized.............................. 200,000 -- --
Granted................................................... (644,000) 644,000 $ 3.44 -- 8.38
Exercised................................................. (137,000) $ .16 -- 6.38
Canceled.................................................. 806,495 (806,495) $ .45 -- 15.25
------------ ---------- --------- ---------
Balance December 31, 1997................................. 521,348 1,085,687 $ .45 -- 13.00
Additional shares authorized.............................. -- -- --
Granted................................................... (776,901) 776,901 $ .00 -- 4.25
Exercised................................................. -- (96,707) $ 0.00 -- 0.88
Canceled.................................................. 666,722 (666,722) $ 0.88 -- 13.00
------------ ---------- --------- ---------
Balance, September 30, 1998 (Unaudited)................... 411,169 1,099,159 $ 0.00 -- 13.00
------------ ---------- --------- ---------
------------ ---------- --------- ---------
<CAPTION>
<S> <C>
WEIGHTED AVG.
EXERCISE
PRICE
---------------
Balance, January 1, 1995.................................. $ 2.76
Additional shares authorized.............................. --
Granted................................................... 5.61
Exercised................................................. .58
Canceled.................................................. 3.08
-----
Balance, December 31, 1995................................ $ 4.04
Additional shares authorized.............................. --
Granted................................................... 9.57
Exercised................................................. 2.08
Canceled.................................................. 6.09
-----
Balance, December 31, 1996................................ $ 6.07
Additional shares authorized.............................. --
Granted................................................... 6.31
Exercised................................................. 2.79
Canceled.................................................. 7.98
-----
Balance December 31, 1997................................. $ 4.68
Additional shares authorized.............................. --
Granted................................................... 4.26
Exercised................................................. 0.61
Canceled.................................................. 5.87
-----
Balance, September 30, 1998 (Unaudited)................... $ 3.50
-----
-----
</TABLE>
At December 31, 1996, and 1997, vested options to purchase 477,522 and
797,925 were unexercised. The weighted average prices for the vested options
were $3.21 and $4.68.
REPRICING OF STOCK OPTIONS:
On April 29, 1997, the Plan Administrator of the 1992 Stock Option/Stock
Issuance Plan adopted a plan for repricing of stock options under which each
employee-holder of outstanding options with an exercise price above the closing
price of the Company's stock on April 29, 1997, was permitted to elect to
exchange the existing options for new options, subject to the same terms as the
corresponding original stock options being surrendered, except that the exercise
price was equal to the closing price of the Company's common stock on April 29,
1997, and all shares were to be unvested until April 29, 1998, after which they
would be subject to the original vesting schedule.
F-18
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN:
In July 1994, the Employee Stock Purchase Plan (the ESPP) was adopted by the
Company's Board of Directors. A total of 350,000 shares of common stock are
authorized for issuance under the ESPP as of December 31, 1997. The purpose of
the ESPP is to provide eligible employees of the Company with a means of
acquiring common stock of the Company through payroll deductions. The purchase
price of such stock under the ESPP cannot be less than 85% of the lower of the
fair market values on the specified purchase date and the beginning of the
offering period. During 1996 and 1997 employees purchased 57,848 and 50,686
shares for a total of approximately $340,603 and $381,606, respectively. At
December 31, 1997, 139,676 shares were available for future grants under the
Plan.
STOCKHOLDER RIGHTS PLAN:
On January 22, 1998, the Board of Directors of Conductus, Inc. (the
"Company") declared a dividend of one preferred share purchase right (a "Right")
for each outstanding share of common stock, par value $0.0001 per share (the
"Common Shares") outstanding on February 16, 1998 (the "Record Date") to the
stockholders of record on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock, par value $0.0001 per share (the "Preferred
Shares"), of the Company, at a price of $29.00 per one one-thousandth of a
Preferred Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement.
COMMON STOCK RESERVED:
At December 31, 1997, the Company had reserved the following shares of
Common Stock:
<TABLE>
<S> <C>
Employee Stock Purchase Plan..... 139,676
Warrants......................... 33,534
Option Plan...................... 1,607,035
---------
1,780,245
---------
---------
</TABLE>
F-19
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK BASED COMPENSATION PLANS--VALUATION:
The following table summarized information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTION EXERCISABLE
-------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE NUMBER
NUMBER REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL AVERAGE AT AVERAGE
PRICES AT 12/31/97 LIFE (YEARS) EXERCISE PRICE 12/31/97 EXERCISE PRICE
- ----------------------- ----------- ------------- --------------- ------------- ---------------
$ 0.45-$ 0.88 163,091 $ 4.66 $ 0.63 163,091 $ 0.63
$ 3.44-$ 5.25 104,666 7.79 $ 4.79 104,666 $ 4.79
$ 5.38-$ 6.50 740,252 7.91 $ 5.96 452,490 $ 5.61
$ 6.56-$13.00 77,678 8.79 $ 7.66 77,678 $ 7.66
------------ ----------- ----- ----- ------------- -----
0.45$-$13.00........ 1,085,687 7.47 $ 5.17 797,925 $ 4.68
------------ ----------- ----- ----- ------------- -----
------------ ----------- ----- ----- ------------- -----
</TABLE>
The following information concerning the Company's stock issuance plans (see
Employee Stock Purchase Plan) is provided in accordance with SFAS 123. The
Company however continues to apply APBO 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plan.
The fair value of each option grant and purchase right has been estimated on
the date of grant using the Black-Scholes option pricing and valuation model
with the following weighted average assumptions used for grants and purchase
rights in 1995, 1996 and 1997.
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
GROUP A GROUP B GROUP A GROUP B GROUP A GROUP B
---------- ----------- ---------- ----------- ---------- -----------
Risk-free Interest Rates....................... 6.38% 5.60% 6.13% 5.50% 6.23% 5.50%
Expected Life.................................. 4.9 years 6 months 4.9 years 6 months 4.4 years 6 months
Volatility..................................... 0.76 0.76 0.76 0.76 0.83 0.83
Dividend Yield................................. -- -- -- -- -- --
</TABLE>
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents all employees, Officers, and
Directors. Group B represents the employees with purchase rights under the
Employee Stock Purchase Plan.
The weighted average fair value of those options granted in 1995, 1996, and
1997 was $3.64, $6.19, and $4.10. The weighted average fair value of those
purchase rights granted in 1995, 1996, and 1997 was $2.21, $3.47, and $2.71.
F-20
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost for these plans been determined based on fair value of
the options at that grant date in 1995, 1996, and 1997 consistent with the
provisions of SFAS 123, the Company's net loss and net loss per share would have
been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net Loss --As reported............................................... $ (4,422,000) $ (5,004,000) $ (7,543,000)
--Proforma................................................... $ (4,917,000) $ (6,057,000) $ (8,746,000)
Basic and diluted loss per share --As reported....................... $ (0.80) $ (0.80) $ (1.09)
--Proforma............................... $ (0.89) $ (0.97) $ (1.27)
</TABLE>
The above proforma effect may not be representative of the effects on
reported net income for future years as the proforma numbers presented do not
take into account the effect of equity grants made prior to 1995 or additional
future grants.
On March 8, 1996 the Company issued warrants to acquire 15,000 shares of
common stock at a price of $11.25 per share.
13. 401(K) PROFIT SHARING PLAN:
The Company has a 401(k) Profit Sharing Plan which covers substantially all
employees. Under the plan, employees are permitted to contribute up to 15% of
gross compensation not to exceed the annual 402(g) limitation for any plan year.
Discretionary contributions may be made by the Company irrespective of whether
it has net profits. No contributions were made by the Company during the years
1994 through 1997.
14. ASSET DISPOSALS:
During the third quarter of 1997, the company disposed of the net assets of
its Systems and Instrumentation division, and its NMR product line. The
following table summarizes the financial impact of the transactions:
<TABLE>
<S> <C>
Proceeds from the sale of product lines
and related assets.................... $1,128,093
Net book value of assets sold:
Fixed assets.......................... (3,306)
Inventories........................... (629,678)
Costs related to asset disposal......... (546,850)
---------
Net loss................................ $ (51,741)
---------
---------
</TABLE>
F-21
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
15. INCOME TAXES:
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
Property and equipment, principally due to differences in
depreciation................................................. $ 327,000 $ 198,000
Accrued liabilities and other.................................. 519,000 248,000
Tax credit carryforwards....................................... -- 1,191,000
Capitalized research and development expense................... 882,000 76,000
Net operating loss carryforward................................ 9,190,000 13,028,000
Valuation allowance............................................ (10,918,000) (14,741,000)
------------- -------------
Net deferred tax asset......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax
assets in future tax years, the Company has placed a valuation allowance against
its otherwise recognizable net deferred tax assets.
At December 31, 1997, the Company had approximately $36,231,000 and
$12,150,000 in net operating loss carry forwards for federal and state income
purposes, respectively. These expire in the years 1998 through 2012. The
utilization of the Company's net operating loss carry forwards may be subject to
certain limitations upon certain changes in ownership, as defined.
16. BUSINESS SEGMENT AND MAJOR CUSTOMERS:
The Company was formed to operate in a single industry segment encompassing
the development, manufacture, and marketing of electronic components and systems
based on superconductors.
Commercial sales to one customer as a percentage of revenues were 11%
($1,172,000), 12% ($1,560,000) and 9% ($896,000), in 1995, 1996 and 1997,
respectively. Amounts receivable from this customer were $381,000 and $183,000
at December 31, 1996 and 1997, respectively.
The Company's export revenues are all denominated in U.S. dollars and are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Japan............................................... $ 1,172,000 $ 1,560,000 $ 896,000
Rest of the world................................... 256,000 433,000 240,000
------------ ------------ ------------
$ 1,428,000 $ 1,993,000 $ 1,136,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
17. SUBSEQUENT EVENTS:
RE-NEGOTIATED CREDIT FACILITIES:
On March 30, the Company renegotiated the terms of its bank line of credit
and its three equipment term loan facilities. The bank line of credit facility
provides for borrowings of up to the lesser of $2,000,000 or 80% of eligible
receivables. Borrowings under the agreement bear interest at the bank's prime
rate plus 2.0%, and are collateralized by the accounts receivable, equipment and
the assets of the Company.
F-22
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
17. SUBSEQUENT EVENTS: (CONTINUED)
The three equipment term loan facilities will continue to be amortized using
the same amortization periods in effect under the previous agreement. However,
the interest rate on these loans is changed to the bank's prime rate plus 2.0%
and amounts owing under these facilities will be collateralized by certificates
of deposit or other restricted cash accounts. This requirement will be in effect
after July 28, 1998.
The Company is required to provide financial information to the lender,
obtain approval of the lender for any material disposition of the collateral,
except in the ordinary course of business, and meet certain minimum tangible net
worth covenants.
NEW "BRIDGE" LOAN FACILITY
On April 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 2.00%. The facility
matures in 120 days, but may be paid off sooner at the Company's option. The
agreement grants to the bank a warrant to purchase 15,000 shares at $3.625 per
share, the closing price for the Company's shares on April 13, 1998.
The agreement provides for additional warrants to be granted based on the
length of time the loan is outstanding, as follows:
if the loan is outstanding after May 31, 1998, a warrant for an
additional 10,000 shares at the May 31, 1998 closing price will be
granted.
if the loan is outstanding after June 30, 1998, a warrant for an
additional 25,000 shares at the June 30, 1998 closing price will
be granted.
Borrowings under this facility are collateralized by a first priority
security interest in all of the Company's property, including intellectual
property rights.
LEASING FACILITY COMMITMENT
On April 22, 1998, the Company entered into a lease line of credit
commitment with a leasing company. Under the terms of this commitment, the
Company will sell certain of its assets to the leasing company and lease the
assets back from the leasing company. The amount available under this facility
is $2,000,000 with another $500,000 available contingent upon the Company
achieving certain financial requirements in the future. The facility grants to
the leasing company warrants to purchase up to $125,000 of the Company's stock
at a price equal to the average closing bid price for the five days immediately
preceding and including April 22, 1998. The effective interest rate would be
13.98%, and there are certain reporting and financial covenants which the
company is required to satisfy.
STOCKHOLDER FINANCING PARTICIPATION COMMITMENT
On April 17, 1998, the Company received a commitment letter from a current
stockholder stating that the stockholder is prepared, if necessary, to
participate in future financing efforts in the amount of at least $1,500,000.
This commitment expires March 31, 1999.
F-23
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
17. SUBSEQUENT EVENTS: (CONTINUED)
SERIES B PREFERRED STOCK
On September 11, 1998 and September 22, 1998, the Company sold and issued an
aggregate of 2,461,227 shares of its Series B Preferred Stock at a price per
share of $2.70 and issued warrants to purchase 492,242 shares of Common Stock at
an exercise price of $2.70 per share in a private placement of its equity
securities. The offering was not underwritten and raised net proceeds of
$6,375,000. Certain affiliates of the Company and other institutional and
accredited individual investors purchased shares of Series B Preferred Stock and
warrants in such offering, which sales were exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to
Rule 506 of Regulation D under the Act.
The shares of Series B Preferred Stock are convertible on a 1-to-1 basis
into Common Stock subject to anti-dilution protections. In addition, the shares
of Series B Preferred Stock have a cumulative stock dividend of 6% and certain
liquidation preferences over the shares of Common Stock as set forth in the
Certificate of Designation of Series B Preferred Stock.
18. RECENT DEVELOPMENTS:
During 1998, the Company continued to incur operating losses ($6.2 million
through September 30, 1998). The Company has raised debt and equity capital to
fund these losses. Management discusses its plans to address continued losses in
Note 1 "Substantial Future Capital Needs."
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Conductus, Inc.:
Our report on the financial statements of Conductus Inc., is included on
page F-2 of this Form S-1. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in the index on page II-3 of this Form S-1.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P
San Jose, California
February 9, 1998
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Price Range of Common Stock............................................... 14
Plan of Distribution...................................................... 14
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 17
Business.................................................................. 24
Management................................................................ 39
Certain Transactions...................................................... 45
Principal Stockholders and Selling Stockholders........................... 46
Description of Capital Stock.............................................. 52
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 57
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,069,243 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the Company
in connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee.
<TABLE>
<S> <C>
SEC Registration fee............................................ $1,400.00
Printing and engraving expenses................................. 20,000.00
Legal fees and expenses......................................... 25,000.00
Accounting fees and expenses.................................... 15,000.00
Blue sky fees and expenses...................................... 10,000.00
Transfer agent fees............................................. 4,000.00
Miscellaneous fees and expenses................................. 4,600.00
---------
Total..................................................... $80,000.00
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its officers and directors, a form of which is
incorporated herein by reference. The Indemnification Agreements provide the
Registrant's officers and directors with further indemnification to the maximum
extent permitted by the Delaware General Corporation Law."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In March 1996, the Company issued a warrant to purchase 15,000 shares of
Common Stock at an exercise price of $11.25 per share to Silicon Valley Bank.
In April 1998, the Company issued a warrant to purchase 30,414 shares of
Common Stock at an exercise price of $4.11 per share to Transamerica Business
Credit Corporation.
In May 1998, the Company issued a warrant to purchase 15,000 shares of
Common Stock at an exercise price of $3.625 per share to Silicon Valley Bank.
In June 1998, the Company issued a warrant to purchase 10,000 shares of
Common Stock at an exercise price of $3.625 per share to Silicon Valley Bank.
II-1
<PAGE>
In July 1998, the Company issued a warrant to purchase 25,000 shares of
Common Stock at an exercise price of $3.625 per share to Silicon Valley Bank.
In July 1998, the Company issued a warrant to purchase 15,060 shares of
Common Stock at an exercise price of $3.32 per share to Leasing Technologies
International, Inc.
In September 1998, the Company issued to certain investors of the Company
2,461,227 shares of Series B Preferred Stock at $2.70 per share. Such investors
also received a warrant to purchase one share of Common Stock for every five
shares of Series B Preferred Stock purchased. In total, warrants to purchase
492,242 shares of Common Stock were issued at an exercise price of $2.70 per
share.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
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.
5.1 Opinion of Counsel.
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 Series B Investors.
10.7(4) Form of Warrant to Purchase Common Stock between the Company and 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
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.
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.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (See Page II-7).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(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.
II-4
<PAGE>
(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
+ Confidential treatment granted or requested as to certain portions of these
exhibits.
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN B
------------ COLUMN C COLUMN E
COLUMN A BALANCE AT -------------------------------- COLUMN D --------------
- -------------------------------------------------- BEGINNING OF CHARGED TO COST CHARGE TO OTHER ----------- BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------------------------------- ------------ --------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts................... $ 50,000 $ -- $ -- $ -- $ 50,000
Allowance for excess and obsolete inventory....... $ 61,000 $ 20,000 $ -- $ -- $ 81,000
Year ended December 31, 1996:
Allowance for doubtful accounts................... $ 50,000 $ -- $ -- $ -- $ 50,000
Allowance for excess and obsolete inventory....... $ 81,000 $ -- $ -- $ -- $ 81,000
Year ended December 31, 1997:
Allowance for doubtful accounts................... $ 50,000 273,232 $ -- (75,000) $ 248,232
Allowance for excess and obsolete inventory....... $ 81,000 249,845 $ -- (50,000) $ 280,845
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, PROVIDED, that
the registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or Rule 3-19
of this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Form F-3.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,
State of California, on this 8th day of January, 1999.
CONDUCTUS, INC.
BY: /S/ CHARLES E. SHALVOY
-----------------------------------------
Charles E. Shalvoy
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Charles E. Shalvoy, Ronald Wilderink, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ CHARLES E. SHALVOY Officer (Principal
- ------------------------------ Executive Officer) and January 8, 1999
Charles E. Shalvoy Director
/s/ RONALD WILDERINK Chief Financial Officer
- ------------------------------ (Principal Financial and January 8, 1999
Ronald Wilderink Accounting Officer)
/s/ JOHN F. SHOCH, PH.D. Chairman of the Board
- ------------------------------ January 8, 1999
John F. Shoch, Ph.d.
/s/ MARTIN COOPER Director
- ------------------------------ January 8, 1999
Martin Cooper
Director
- ------------------------------
Robert M. Janowiak
Director
- ------------------------------
Martin J. Kaplan
II-7
<PAGE>
EXHIBIT 5.1
January 8, 1999
Conductus, Inc.
969 W. Maude Avenue
Sunnyvale, California 94086
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 originally filed by
Conductus, Inc. (the "Company") with the Securities and Exchange Commission (the
"Commission") on January 8, 1999, as thereafter amended or supplemented (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of up to 3,069,243 shares of the Company's
Common Stock for the benefit of certain stockholders of the Company (the
"Shares"). As your counsel in connection with this transaction, we have examined
the proceedings taken and are familiar with the proceedings proposed to be taken
by you in connection with the sale and issuance of the Shares.
It is our opinion that the Shares are legally and validly issued, fully paid
and non-assessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement, and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. ) of our report, which includes an emphasis-of-a-matter paragraph
related to the continued losses of Conductus, Inc., dated February 9, 1998
except for Notes 1 and 17 as to which the date is April 27, 1998 and Note 18, as
to which the date is January 4, 1999, on our audit of the financial statements
and the financial statement schedule of Conductus, Inc. We also consent to the
reference to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
San Jose, California
January 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,506,566
<SECURITIES> 0
<RECEIVABLES> 1,315,444
<ALLOWANCES> 0
<INVENTORY> 872,619
<CURRENT-ASSETS> 6,802,899
<PP&E> 9,387,914
<DEPRECIATION> (7,166,055)
<TOTAL-ASSETS> 9,107,024
<CURRENT-LIABILITIES> 2,665,997
<BONDS> 0
0
0
<COMMON> 728
<OTHER-SE> 47,851,283
<TOTAL-LIABILITY-AND-EQUITY> 9,107,024
<SALES> 0
<TOTAL-REVENUES> 3,432,070
<CGS> 0
<TOTAL-COSTS> 9,240,402
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 448,536
<INCOME-PRETAX> (6,200,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,200,423)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
