<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NUMBER #0-11915
CONDUCTUS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0162388
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
969 W. Maude Ave., Sunnyvale, California 94086
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 523-9950
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common shares outstanding at November 10, 1998: 7,126,349
----------
Total pages: 17
Index to Exhibits to be found on page 17
<PAGE>
CONDUCTUS, INC.
Index
<TABLE>
<S> <C>
PART I : FINANCIAL INFORMATION...........................................................3
ITEM 1 : FINANCIAL STATEMENTS...................................................3
CONDENSED BALANCE SHEETS AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997............3
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997...................................................4
CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997.................................................................5
NOTES TO CONDENSED FINANCIAL STATEMENTS.........................................6
ITEM 2 : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................9
ITEM 3 : QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............14
PART II : OTHER INFORMATION.............................................................15
ITEM 1 : LEGAL PROCEEDINGS....................................................15
ITEM 2 : CHANGES IN SECURITIES................................................15
ITEM 3 : DEFAULTS UPON SENIOR SECURITIES......................................15
ITEM 4 : SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................15
ITEM 5 : OTHER INFORMATION....................................................15
ITEM 6 : EXHIBITS AND REPORTS ON FORM 8-K.....................................15
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
CONDUCTUS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,506,566 $2,111,560
Restricted cash - 500,000
Short-term investments - 556,633
Accounts receivable, net 1,315,444 2,055,255
Inventories, net 872,619 610,367
Prepaid and other assets 108,270 139,479
------- -------
Total current assets 6,802,899 5,973,294
--------- ---------
Property, plant and equipment, net 2,221,859 2,700,594
Other assets 82,266 87,762
------ ------
Total assets $9,107,024 $8,761,650
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $822,178 $1,539,590
Other accrued liabilities 865,194 1,063,721
Current portion of long-term debt 978,625 1,547,507
------- ---------
Total current liabilities 2,665,997 4,150,818
Long-term debt, net of current portion 1,559,626 309,681
--------- -------
Total liabilities 4,225,623 4,460,499
--------- ---------
Stockholders' equity:
Preferred Stock 6,374,511 0
Common stock 728 702
Additional paid-in capital 41,476,772 41,070,636
Accumulated deficit (42,970,610) (36,770,187)
------------ ------------
Total stockholders' equity 4,881,401 4,301,151
--------- ---------
Total liabilities and stockholders' equity $9,107,024 $8,761,650
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
3
<PAGE>
CONDUCTUS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- -------------------------------
1998 1997 1998 1997
------- ------- ------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Contract $ 1,078,270 $ 1,723,182 $ 2,808,395 $ 5,834,080
Product 186,312 148,560 623,675 1,662,605
------- ------- ------- ---------
Total revenues 1,264,582 1,871,742 3,432,070 7,496,685
OPERATING EXPENSES:
Cost of product 528,562 400,386 1,994,417 1,899,203
Research and development 1,266,399 2,021,099 4,468,949 7,679,545
Selling, general & administrative 812,565 1,026,167 2,777,036 3,172,178
Gain on product line disposals - (93,135) - (93,135)
Writedown of property, plant, & equipment - - - 100,000
- -------
Total operating expenses 2,607,526 3,354,517 9,240,402 12,757,791
--------- --------- --------- ----------
Loss from operations (1,342,944) (1,482,775) (5,808,332) (5,261,106)
Interest income 13,671 50,828 56,445 226,981
Other income (expense) - (37,835) - (63,228)
Interest expense (304,035) (20,728) (448,535) (145,787)
--------- -------- --------- ---------
Net loss $ (1,633,308) $ (1,490,510) $ (6,200,423) $ (5,243,140)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per basic and diluted common
share
$ (0.23) $ (0.22) $ (0.88) $ (0.77)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing per share
amounts
7,117,000 6,901,000 7,077,000 6,853,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
4
<PAGE>
CONDUCTUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,200,423) $ (5,243,140)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 684,570 601,298
Provision for excess and obsolete inventory 96,176 -
Compensation associated with warrant grants 146,575 -
Changes in:
Accounts receivable 739,811 1,713,686
Inventories (358,428) 679,594
Prepaid and other assets 36,705 123,729
Accounts payable and other accrued liabilities (915,939) (424,386)
--------- ---------
Net cash used in operating activities (5,770,953) (2,549,219)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments 556,633 20,625,154
Purchases of short-term investments - (17,455,532)
Acquisition of property and equipment (205,835) (652,910)
Net book value of assets sold - 168,734
------- ---------
Net cash provided by investing activities 350,798 2,685,446
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings 4,450,000 410,133
Net proceeds from issuance of preferred stock 6,374,511 -
Net proceeds from issuance of common stock 225,052 290,521
Principal payments on long-term debt (3,734,402) (879,895)
----------- ---------
Net cash provided by (used in) financing activities 7,315,161 (179,241)
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,895,006 (43,014)
Cash and cash equivalents at beginning of period 2,611,560 1,119,991
--------- ---------
Cash and cash equivalents at end of period $4,506,566 $1,076,977
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
5
<PAGE>
CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL INFORMATION:
The accompanying unaudited interim financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. The unaudited financial statements as of
September 30, 1998 and for the three and nine months ended September 30,
1998 and 1997 include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial information set forth herein. The results of operations for the
interim periods are not necessarily indicative of the results to be
expected for an entire year. The December 31, 1997 balance sheet was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
CASH, CASH EQUIVALENTS, AND INVESTMENTS:
At September 30, 1998, all of Conductus, Inc.'s (the "Company" or
"Conductus") highly liquid investments had original maturities of less than
ninety days, and accordingly are considered cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Appropriate consideration is given to
obsolescence, excessive levels and other factors in evaluating net
realizable value.
BASIC AND DILUTED LOSS PER SHARE:
In accordance with the disclosure requirements of Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share", a
reconciliation of the numerator and denominator of the basic and diluted
EPS is provided as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
-----------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator - basic and diluted EPS:
-----------------------------------------------------------------------------------------------------------------
Net loss $ (1,633,308) $ (1,490,510) $ (6,200,423) $ (5,243,140)
-----------------------------------------------------------------------------------------------------------------
Denominator - basic and diluted EPS:
-----------------------------------------------------------------------------------------------------------------
Common Stock outstanding 7,117,000 6,901,000 7,077,000 6,853,000
-----------------------------------------------------------------------------------------------------------------
Basic loss per share $(0.23) $(0.22) $(0.88) $(0.77)
------- ------- ------- -------
------- ------- ------- -------
-----------------------------------------------------------------------------------------------------------------
Diluted loss per share $(0.23) $(0.22) $(0.88) $(0.77)
------- ------- ------- -------
------- ------- ------- -------
-----------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
In the above computations, common equivalent shares are excluded from the
basic and diluted loss per share as their effect is anti-dilutive. Common
equivalent shares including options, warrants and convertible preferred
stock 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 anti-dilution were approximately 552,725 and
225,852 for the three months ended September 30, 1998 and 1997
respectively, and approximately 344,670 and 330,029 for the nine months
ended September 30, 1998 and 1997 respectively.
RECLASSIFICATIONS:
Certain amounts in the prior periods statements of operations have
been reclassified to conform to the September 30, 1998 presentation.
These reclassifications had no effect on previously reported results of
operations.
RECENT PRONOUNCEMENTS:
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. This statement requires the disclosure of comprehensive
income and its components in a full set of general-purpose financial
statements. Comprehensive income is defined as net income plus revenues,
expenses, gains and losses that, under generally accepted accounting
principles, are excluded from net loss. The component of comprehensive
loss, which is excluded from net loss, is not significant and therefore, no
separate statement of comprehensive income has been presented.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise" ("SFAS 14"). SFAS 131
changes current practice under SFAS 14 by establishing a new framework on
which to base segment reporting and also requires interim reporting of
segment information. This statement is effective for fiscal years beginning
after December 15, 1997. The statement's interim reporting disclosures are
not required until the first quarter immediately subsequent to the fiscal
year in which SFAS 131 is effective.
2. ACCOUNTS RECEIVABLE :
Accounts receivable, net, consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
U. S. government contracts:
Unbilled $ 358,925 $ 1,146,283
Billed 991,565 793,382
Commercial 257,589 363,822
Reserves (292,635) (248,232)
--------- ---------
$1,315,444 $2,055,255
---------- ----------
---------- ----------
</TABLE>
3. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials and purchased parts $ 441,459 $ 293,336
Work in process 315,940 366,550
7
<PAGE>
Finished goods 526,741 231,326
Reserves (411,521) (280,845)
--------- ---------
$ 872,619 $ 610,367
--------- ---------
--------- ---------
</TABLE>
4. LONG TERM DEBT:
At September 30, 1998, the Company's credit facilities consisted of a
note payable from a leasing company, two bank equipment term loans, a bank
line of credit, and a lease line of credit for new equipment purchases.
On April 23, 1998, the Company entered into a bridge loan credit
facility agreement with its bank. The facility provided for borrowings of
up to $2,000,000, with interest at the bank's prime rate plus 2%. The
amounts owed were paid in full on September 15, 1998, and this facility is
no longer available.
The note payable from a leasing company is collateralized by the
Company's property, plant and equipment. The effective interest rate is
13.98% and there are certain reporting and financial covenants which the
Company is required to satisfy. At September 30, 1998 the Company was in
compliance with these covenants, the balance outstanding was $ 2, 241,624,
and there were no further amounts available on this facility.
The two equipment term loans bear interest at the bank's prime rate
plus 2%, with principal and interest payments paid monthly. These term
loans mature on the later of maturity dates set forth in each of the
original term loan agreements or the date of completion of an equity
financing transaction; provided, however, that if the Company chooses to
collateralize the term loans with restricted cash deposits, then the
maturity dates for the term loans shall remain as December 31, 1998 and
December 31, 1999. At September 30, 1998, there was approximately $418,723
outstanding under these loans, and no further amounts were available.
The bank line of credit agreement provides for borrowings of up to the
lesser of $2,000,000 or 80% of eligible receivables. Borrowings under this
facility bear interest at the bank's prime rate plus 2.0% and will be
collateralized by accounts receivable, equipment and other assets of the
Company. At September 30, 1998, there were no amounts outstanding under
this facility.
The lease line of credit for new equipment purchases provides for
borrowings of up to $1,000,000, is collateralized by equipment purchases
under the line, and has an effective interest rate of 14.04%. The Company
also granted to the leasing company warrants to purchase up to 15,060
shares of the Company's stock at a price equal to $3.32. The fair value of
such warrants is approximately $35,000 and will be amortized over the three
year term of the lease payments. This line of credit expires on September
30, 1999.
All the credit facilities contain reporting and financial covenants.
In the event of default on any of these covenants, no further amounts would
be advanced to the Company under any facility, the entire amounts
outstanding could become due and payable immediately upon default, and
those assets that are collateral could be seized, unless such default is
waived by the lender.
5. 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 in which Sutro & Co., Ins.
and Davenport and Co. acted as placement agents. 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.
8
<PAGE>
ITEM 2 : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Conductus Inc.'s (the "Company" or
"Conductus") actual result's may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such
a difference include, but are not limited to, those discussed in "Risk
Factors" in Part 1 of the Company's Annual Report on Form 10-K/A as of and
for the year ended December 31, 1997. The following discussion should be
read in conjunction with the financial statements and notes thereto
appearing elsewhere in this report on Form 10-Q.
OVERVIEW
Conductus develops, manufactures and markets electronic components and
systems based on superconductors for applications in the worldwide
telecommunications markets. As of 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.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
The Company's total revenues decreased to $1,265,000 for the third
quarter of 1998, a 32% decrease from $1,872,000 for the same period in
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. Total revenue consists primarily of contract revenue
and, to a lesser extent, product sales. Revenues under U.S. government
research and development contracts were $1,078,000 for the third quarter of
1998, a decrease of 37% from $1,723,000 in the same period in the prior
year. 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.
Due to the expiration of several older contracts, the Company
anticipates that contract revenues for the fourth quarter of 1998 may be
less than contract revenues in the third quarter of 1998, although there
can be no assurance as to the level of contract revenue in any future
period. The recognition of revenue and receipt of payment pursuant to
these contracts and awards are subject to numerous risks.
Product revenues increased to $186,000 in the third quarter of 1998, a
25% increase from $149,000 of product sales in same period in the prior
year. 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 increase in product revenues from the
third quarter of 1997 was due to a higher volume of wireless products,
offset by lower volumes of magnetic sensing products. The decrease in
product revenues for the nine month period resulted primarily from
decreased shipments of products from the
9
<PAGE>
Instrument and Systems division and the NMR product line, which the
Company disposed of during the third quarter of 1997, and lower volumes
of other magnetic sensing products, offset somewhat by increased volume
of government and commercial wireless communication products, as shown
in the table below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three months ended: Nine months ended:
- ---------------------------------------------------------------------------------------------------------------------
September September 30, Change September 30, September Change
30, 1998 1997 1998 30, 1997
(A) - (B) (C) - (D)
(A) (B) (C) (D)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wireless communication products $176,000 $-0- $176,000 $403,000 $-0- $403,000
- ---------------------------------------------------------------------------------------------------------------------
San Diego division products -0- -0- -0- -0- 596,000 (596,000)
- ---------------------------------------------------------------------------------------------------------------------
Other magnetic sensing products 10,000 149,000 (139,000) 220,000 1,067,000 (847,000)
------ ------- --------- ------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------
Total product sales $186,000 $149,000 $37,000 $623,000 $1,663,000 $(1,040,000)
-------- -------- ------- -------- ---------- ------------
-------- -------- ------- -------- ---------- ------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Cost of product sales increased to $529,000 for the third quarter
of 1998, a 32% increase from $400,000 over the same period in 1997,
primarily due to higher production unit costs on wireless products. 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. Gross margins decreased to -184% in the third quarter of 1998
from -170% in the same period in 1997, reflecting increased wireless
unit production costs and the change in product mix from higher margin
magnetic sensing products to lower margin wireless products. 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.
Research and development expenses decreased to $1,266,000 in the third
quarter of 1998, a 37% decrease from $2,021,000 for the same period in
1997. 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. Both decreases are 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 increases in
expenditures for telecommunications product development. The Company
expects to continue to incur significant research and development
expenses as it seeks to develop and market additional products.
10
<PAGE>
Selling, general and administrative expenses decreased to $ 813,000
for the third quarter of 1998, a 21% decrease from the same period in 1997
and 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 $2,608,000 for the third
quarter of 1998, a 22% decrease from $3,354,000 for the same period in
1997 and $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.
Net interest and other expense increased to $290,000 for the third
quarter of 1998, from $8000 for the same period in 1997. The increase in
net interest and other expense in the third quarter of 1998 reflected
lower cash balances throughout much of the quarter, higher debt levels,
and the fair value of the debt-related warrants granted. For the nine
month period ended September 30, 1998, net interest and other expense
increased substantially over the same period in 1997, again 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through $13,251,000 in net proceeds from its initial public offering of
Common Stock in August 1993, $9,892,000 in net proceeds from its follow-on
public offering of Common Stock in June 1996, $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. As of September 30, 1998, the
Company's aggregate cash and cash equivalents totaled $4,507,000.
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 Note 4 for a further
description of the financing arrangements put in place during the third
quarter.
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
11
<PAGE>
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. 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 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 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.
Conductus anticipates that its existing available cash, other sources
of liquidity and anticipated revenue, primarily from government contracts
and wireless products, should be adequate to fund the Company's operations
for at least the next nine months. There can be no assurance, however,
that changes in the Company's plans or other events affecting the Company
will not result in the expenditure of such resources before such time. The
Company continues to explore additional equity financing alternatives.
There can be no assurance that additional equity funding will be available
on acceptable terms or at all.
All of the Company's credit arrangements contain reporting and
financial covenants which the Company is required to satisfy. There can be
no assurance that the Company will satisfy all such covenants in the
future. There can be no assurance that if the Company defaults on any of
the covenants, waiver of such default could be obtained from the lender. In
the event of default on any of these covenants, no further amounts would be
advanced to the Company under any facility, the entire amounts outstanding
could become
12
<PAGE>
due and payable immediately upon default, and those assets that are
collateral could be seized, unless such default is waived by the lender.
The Company to date has received limited revenues from product sales.
The development of the Company's potential products will require a
commitment of substantial funds to conduct further research and development
and testing of its potential products, to establish commercial-scale
manufacturing and to market any resulting product. The actual amount of the
Company's future capital requirements will depend on many factors that
affects its business.
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 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
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 recent assessment of the Company's sales,
manufacturing and finance systems, the Company determined that it will
be required to replace these computer systems as they do not properly
utilize dates beyond December 31, 1999. The Company 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, and determining whether it has exposure to
contingencies related 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.
13
<PAGE>
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 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.
ITEM 3 : QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -- NOT
APPLICABLE.
14
<PAGE>
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS - NOT APPLICABLE.
ITEM 2: CHANGES IN SECURITIES
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 in which Sutro & Co., Inc. and Davenport and Co. acted as placement
agents. 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.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NOT APPLICABLE
ITEM 5: OTHER INFORMATION
On May 18, 1998 the Company was notified by the Nasdaq Stock Market
("Nasdaq") of Nasdaq's determination that the Company was not in compliance
with the tangible net assets requirement for continued listing of its common
stock on the Nasdaq National Market. The Company attended a Nasdaq hearing to
discuss these compliance issues. The Company has subsequently been notified
that its stock would be removed from the Nasdaq National Market and traded on
the Nasdaq SmallCap Market. Since November 10, 1998, the Company's common
stock has been traded on the Nasdaq SmallCap Market under its current trading
symbol , "CDTS". The Company has until November 18, 1998 to submit a listing
application to the Nasdaq Stock Market which must be approved for the Company
to continue listing on the Nasdaq SmallCap Market.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS - SEE BELOW.
(B) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on September 29, 1998 describing the
sale by the Company of shares of its Series B Preferred Stock to certain
investors of the Company.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to its report to be signed on its
behalf by the undersigned thereunto duly authorized.
CONDUCTUS, INC.
Registrant
Dated: March 2, 1999 /s/ Ronald Wilderink
-----------------------
Ronald Wilderink
Chief Financial Officer
and Duly Authorized Officer
/s/ Charles E. Shalvoy
-----------------------
Charles E. Shalvoy
President and Chief Executive Officer
and Duly Authorized Officer
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits
- --------
<C> <S>
3.01* Certificate of Designation of Series B Preferred Stock.
10.01+ Master Loan and Security Agreement between the Company and Transamerica
Business Credit Corporation dated June 26, 1998.
10.02* Stock Subscription Warrant Agreement between the Company and
Transamerica Business Credit Corporation dated June 26, 1998.
10.03* Master Lease Agreement between the Company and Leasing Technologies
International, Inc. dated June 15, 1998.
10.04+ Engagement Letter between the Company and Sutro and Co. Inc. dated
March 24, 1998.
10.05* Amendment to Engagement Letter between the Company and Sutro and Co.
Inc. dated September 2, 1998.
10.06* Engagement Letter between the Company and Davenport and Co. dated
September 02, 1998.
10.07* Form of Series B Preferred Stock and Warrant Purchase Agreement dated
September 11, 1998 and September 22, 1998 between the Company and
Series B Investors.
10.08* Form of Warrant to Purchase Common Stock between the Company and
Series B Investors.
27.01* Financial Data Schedule.
99.01* Text of Press Release dated November 10, 1998.
</TABLE>
(+) Confidential Treatment has been requested as to certain portions of these
documents.
* Previously Filed
<PAGE>
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of June 26, 1998, is made by Conductus, Inc
(the "Borrower"), a Delaware corporation having its principal place of business
and chief executive office at 969 West Maude Avenue, Sunnyvale, California,
94086 in favor of Transamerica Business Credit Corporation, a Delaware
corporation (the "Lender"), having its principal office at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018.
WHEREAS, the Borrower has requested that the Lender make Loans to it
from time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the Lender
to e xtend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following meanings,
and shall be equally applicable to both the singular and plural forms of the
terms defined:
AGREEMENT shall mean this Master Loan and Security Agreement together with all
schedules and exhibits hereto, as amended, supplemented, or otherwise modified
from time to time.
APPLICABLE LAW shall mean the laws of the State of Illinois (or any other
jurisdiction whose laws are mandatorily applicable notwithstanding the parties'
choice of Illinois law) or the laws of the United States of America, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
BUSINESS DAY shall mean any day other than a Saturday, Sunday, or public holiday
or the equivalent for banks in New York City.
CODE shall have the meaning specified in Section 8(d).
COLLATERAL shall have the meaning specified in Section 2.
COLLATERAL ACCESS AGREEMENT shall mean any landlord waiver, mortgagee waiver,
bailee letter, or similar acknowledgement of any warehouseman or processor in
possession of any Collateral.
EFFECTIVE DATE shall mean the date on which all of the conditions specified in
Section 3.3 shall have been satisfied.
EVENT OF DEFAULT shall mean any event specified in Section 7.
FINANCIAL STATEMENTS shall have the meaning specified in Section 6.1.
GAAP shall mean generally accepted accounting principles in the United States of
America, as in effect from time to time.
INTELLECTUAL PROPERTY SECURITY AGREEMENT shall mean an Intellectual Property
Security Agreement of even date herewith, in form and substance satisfactory to
Lender.
2
<PAGE>
LOANS shall mean the loans and financial accommodations made by the Lender to
the Borrower in accordance with the terms of this Agreement and the Notes.
LOAN DOCUMENTS shall mean, collectively, this Agreement, the Notes, the
Intellectual Property Security Agreement, and all other documents, agreements,
certificates, instruments, and opinions executed and delivered in connection
herewith and therewith, as the same may be modified, extended, restated, or
supplemented from time to time.
MATERIAL ADVERSE CHANGE shall mean, with respect to any Person, a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
MATERIAL ADVERSE EFFECT shall mean, with respect to any Person, a material
adverse effect on the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
NOTE shall mean each Promissory Note made by the Borrower in favor of the
Lender, as amended, supplemented, or otherwise modified from time to time.
OBLIGATIONS shall mean all indebtedness, obligations, and liabilities of the
Borrower under the Notes and under this Agreement, whether on account of
principal, interest, indemnities, fees (including, without limitation,
attorneys' fees, remarketing fees, origination fees, collection fees, and all
other professionals' fees), costs, expenses, taxes, or otherwise.
PERMITTED LIENS shall mean such of the following as to which no enforcement,
collection, execution, levy, or foreclosure proceeding shall have been
commenced: (a) liens for taxes, assessments, and other governmental charges or
levies or the claims or demands of landlords, carriers, warehousemen, mechanics,
laborers, materialmen, and other like Persons arising by operation of law in the
ordinary course of business for sums which are not yet due and payable, or liens
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP; (b) deposits or pledges to secure the payment of
worker's compensation, unemployment insurance, or other social security benefits
or obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business; (c) licenses, restrictions, or covenants for or on
the use of the Collateral which do not materially impair either the use of the
Collateral in the operation of the business of the Borrower or the value of the
Collateral; and (d) attachment or judgment liens that do not constitute an Event
of Default.
PERSON shall mean any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity, party,
or government (including any division, agency, or department thereof), and the
successors, heirs, and assigns of each.
SCHEDULE shall mean each Schedule in the form of Schedule A hereto delivered by
the Borrower to the Lender from time to time.
SOLVENT means, with respect to any Person, that as of the date as to which such
Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of the total amount
of its liabilities (including contingent liabilities as valued in accordance
with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able generally to meet its debts as they mature.
TAXES shall have the meaning specified in Section 5.5.
2
<PAGE>
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. Lender shall
have a first priority interest in fixed assets and a second priority interest in
other Collateral. The Borrower hereby assigns and grants to the Lender a
continuing general lien on, and security interest in, all the Borrower's right,
title, and interest in and to all of the following collateral (the "Collateral")
to secure the payment and performance of all the Obligations:
(a) All equipment in all of its forms, whether owned or leased
by the Borrower, wherever located, now or hereafter existing (including, without
limitation, all laboratory equipment, machinery, office equipment and supplies,
computers and related hardware, furnishings, fixtures, manufacturing implements,
trucks, trailers and motor vehicles and all equipment employed in the operation
of the business of the Borrower), and all parts thereof and all accessions and
attachments thereto and substitutions, repairs or improvements thereof;
(b) All inventory in all of its forms, wherever located, now or
hereafter existing;
(c) All accounts, contract rights, chattel paper, instruments,
general intangibles and other obligations of any kind, now or hereafter
existing, whether or not arising out of or in connection with the sale or lease
of goods or the rendering of services, and all rights now or hereafter existing
in and to all security agreements, leases, and other contracts securing or
otherwise relating to any such accounts, contract rights, chattel paper,
instruments, general intangibles or obligations;
(d) All other personal property in all of its forms, wherever
located and whether now owned or hereafter acquired; and
(e) All proceeds of any and all of the foregoing (including,
without limitation, proceeds which constitute property of the types described in
clauses (a), (b) and (c) of this Section 2 and, to the extent not otherwise
included, all payment under insurance (whether or not the Lender is a loss payee
thereof), and any indemnity, warranty or guaranty, payable by reason of loss or
damage to or otherwise in respect to any of the foregoing.
SECTION 3. THE CREDIT FACILITY.
SECTION 3.1. BORROWINGS. Each Loan shall be in an amount not
less than $50,000, and in no event shall the sum of the aggregate Loans made
exceed the amount of the Lender's written commitment to the Borrower in effect
from time to time. Notwithstanding anything herein to the contrary, the Lender
shall be obligated to make the initial Loan and each other Loan only after the
Lender, in its sole discretion, determines that the applicable conditions for
borrowing contained in Section 3.3 are satisfied. The timing and financial
scope of Lender's obligation to make Loans hereunder are limited as set forth in
a commitment letter executed by Lender and Borrower, dated as of April 22, 1998
and attached hereto as Exhibit A (the "Commitment Letter").
SECTION 3.2. APPLICATION OF PROCEEDS. The Borrower shall not
directly or indirectly use any proceeds of the Loans, or cause, assist, suffer,
or permit the use of any proceeds of the Loans, for any purpose other than for
the general working capital needs of the Borrower.
SECTION 3.3. CONDITIONS TO LENDING.
(a) The obligation of the Lender to make the Loans is subject to the
Lender's receipt of the following, each dated the date of the initial Loan or as
of an earlier date acceptable to the Lender, in form and substance satisfactory
to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing
all effective Uniform Commercial Code financing statements naming the
Borrower as debtor and all tax lien, judgment, and litigation searches
for the Borrower as the Lender shall deem necessary or desirable;
(ii) Uniform Commercial Code financing statements (Form UCC-1)
duly executed
3
<PAGE>
by the Borrower (naming the Lender as secured party and the Borrower
as debtor and in form acceptable for filing in all jurisdictions that
the Lender deems necessary or desirable to perfect the security
interests granted to it hereunder) and, if applicable, termination
statements or other releases duly filed in all jurisdictions that
the Lender deems necessary or desirable to perfect and protect the
priority of the security interests granted to it hereunder in the
Collateral;
(iii) a Note duly executed by the Borrower evidencing the
amount of such Loan;
(iv) a Collateral Access Agreement duly executed by the lessor
or mortgagee, as the case may be, of each premises where the
Collateral is located;
(v) certificates of insurance required under Section 5.4 of
this Agreement together with loss payee endorsements for all such
policies naming the Lender as lender loss payee and as an additional
insured;
(vi) a copy of the resolutions of the Board of Directors of
the Borrower (or a unanimous consent of directors in lieu thereof)
authorizing the execution, delivery, and performance of this
Agreement, the other Loan Documents, and the transactions contemplated
hereby and thereby, attached to which is a certificate of the
Secretary or an Assistant Secretary of the Borrower certifying
(A) that the copy of the resolutions is true, complete, and accurate,
that such resolutions have not been amended or modified since the date
of such certification and are in full force and effect and (B) the
incumbency, names, and true signatures of the officers of the Borrower
authorized to sign the Loan Documents to which it is a party;
(vii) an Intellectual Property Security Agreement duly executed
by the Borrower specifically identifying and granting to the Lender a
security interest in all of Borrower's intellectual property; and
(vii) such other agreements and instruments as the Lender deems
necessary in its sole and absolute discretion in connection with the
transactions contemplated hereby.
(b) There shall be no pending or, to the knowledge of the Borrower
after due inquiry, threatened litigation, proceeding, inquiry, or other action
(i) seeking an injunction or other restraining order, damages, or other relief
with respect to the transactions contemplated by this Agreement or the other
Loan Documents or thereby or (ii) which affects or could affect the business,
prospects, operations, assets, liabilities, or condition (financial or
otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not be expected to have a
Material Adverse Effect in the judgment of the Lender.
(c) The Borrower shall have paid all fees and expenses required to be
paid by it to the Lender as of such date.
(d) The security interests in the Collateral granted in favor of the
Lender under this Agreement shall have been duly perfected and shall constitute
first or second priority liens, as applicable.
SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES.
SECTION 4.1. GOOD STANDING; QUALIFIED TO DO BUSINESS. The
Borrower (a) is duly organized, validly existing, and in good standing under the
laws of the State of its organization, (b) has the power and authority to own
its properties and assets and to transact the businesses in which it is
presently, or proposes to be, engaged, and (c) is duly qualified and authorized
to do business and is in good standing in every jurisdiction in which the
failure to be so qualified could have a Material Adverse Effect on (i) the
Borrower, (ii) the Borrower's ability to perform its obligations under the Loan
Documents, or (iii) the rights of the Lender hereunder.
4
<PAGE>
SECTION 4.2. DUE EXECUTION, ETC. The execution, delivery, and
performance by the Borrower of each of the Loan Documents to which it is a party
are within the powers of the Borrower, do not contravene the organizational
documents, if any, of the Borrower, and do not (a) violate any law or
regulation, or any order or decree of any court or governmental authority,
(b) conflict with or result in a breach of, or constitute a default under, any
material indenture, mortgage, or deed of trust or any material lease, agreement,
or other instrument binding on the Borrower or any of its properties, or
(c) require the consent, authorization by, or approval of or notice to or filing
or registration with any governmental authority or other Person. This Agreement
is, and each of the other Loan Documents to which the Borrower is or will be a
party, when delivered hereunder or thereunder, will be, the legal, valid, and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, or similar laws affecting creditors' rights generally
and by general principles of equity.
SECTION 4.3. SOLVENCY; NO LIENS. The Borrower is Solvent and
will be Solvent upon the completion of all transactions contemplated to occur
hereunder (including, without limitation, the Loan to be made on the Effective
Date); the security interests granted herein constitute and shall at all times
constitute the first and only liens on the Collateral other than Permitted
Liens; and the Borrower is, or will be at the time additional Collateral is
acquired by it, the owner of the Collateral with full right to pledge, sell,
consign, transfer, and create a security interest therein, free and clear of any
and all claims or liens in favor of any other Person other than Permitted Liens.
Section 4.4. NO JUDGMENTS, LITIGATION. No judgments are
outstanding against the Borrower nor is there now pending or, to the best of the
Borrower's knowledge after diligent inquiry, threatened any litigation,
contested claim, or governmental proceeding by or against the Borrower except
judgments and pending or threatened litigation, contested claims, and
governmental proceedings which would not, in the aggregate, have a Material
Adverse Effect on the Borrower.
SECTION 4.5. NO DEFAULTS. The Borrower is not in default or
has not received a notice of default under any material contract, lease, or
commitment to which it is a party or by which it is bound. The Borrower knows
of no dispute regarding any contract, lease, or commitment which could have a
Material Adverse Effect on the Borrower.
SECTION 4.6. COLLATERAL LOCATIONS. On the date hereof, each
item of the Collateral is located at the place of business specified in the
applicable Schedule.
SECTION 4.7. NO EVENTS OF DEFAULT. No Event of Default has
occurred and is continuing nor has any event occurred which, with the giving of
notice or the passage of time, or both, would constitute an Event of Default.
SECTION 4.8. NO LIMITATION ON LENDER'S RIGHTS. Except as
permitted herein, none of the Collateral is subject to contractual obligations
that may restrict or inhibit the Lender's rights or abilities to sell or dispose
of the Collateral or any part thereof after the occurrence of an Event of
Default.
SECTION 4.9. PERFECTION AND PRIORITY OF SECURITY INTEREST.
This Agreement creates a valid and, upon completion of all required filings of
financing statements, perfected first priority and exclusive security interest
in the Collateral, securing the payment of all the Obligations.
SECTION 4.10. ACCURACY AND COMPLETENESS OF INFORMATION. All
data, reports, and information heretofore, contemporaneously, or hereafter
furnished by or on behalf of the Borrower in writing to the Lender or for
purposes of or in connection with this Agreement or any other Loan Document, or
any transaction contemplated hereby or thereby, are or will be true and accurate
in all material respects on the date as of which such data, reports, and
information are dated or certified and not incomplete by omitting to state any
material fact necessary to make such data, reports, and information not
misleading at such time. There are no facts now known to the Borrower which
individually or in the aggregate would reasonably be expected to have a Material
Adverse Effect and which have not been specified herein, in the Financial
Statements, or in any certificate, opinion, or other
5
<PAGE>
written statement previously furnished by the Borrower to the Lender.
SECTION 5. COVENANTS OF THE BORROWER.
SECTION 5.1. EXISTENCE, ETC. The Borrower shall: (a) retain
its existence and its current yearly accounting cycle, (b) maintain in full
force and effect all licenses, bonds, franchises, leases, trademarks, patents,
contracts, and other rights necessary to the profitable conduct of its business
unless the failure to do so could not reasonably be expected to have a Material
Adverse Effect on the Borrower, (c) continue in, and limit its operations to,
the same general lines of business as those presently conducted or proposed to
be conducted by it, and (d) comply with all applicable laws and regulations of
any federal, state, or local governmental authority, except for such laws and
regulations the violations of which would not, in the aggregate, have a Material
Adverse Effect on the Borrower.
SECTION 5.2. NOTICE TO THE LENDER. As soon as possible, and in
any event within five Business Days after the Borrower learns of the following,
the Borrower will give written notice to the Lender of (a) any proceeding
instituted or threatened to be instituted by or against the Borrower in any
federal, state, local, or foreign court or before any commission or other
regulatory body (federal, state, local, or foreign) involving a sum, together
with the sum involved in all other similar proceedings, in excess of $50,000 in
the aggregate, (b) any contract that is terminated or amended and which has had
or could reasonably be expected to have a Material Adverse Effect on the
Borrower, (c) the occurrence of any Material Adverse Change with respect to the
Borrower, and (d) the occurrence of any Event of Default or event or condition
which, with notice or lapse of time or both, would constitute an Event of
Default, together with a statement of the action which the Borrower has taken or
proposes to take with respect thereto.
SECTION 5.3. MAINTENANCE OF BOOKS AND RECORDS. The Borrower
will maintain books and records pertaining to the Collateral in such detail,
form, and scope as the Lender shall reasonably require in its commercially
reasonable judgment. The Borrower agrees that the Lender or its agents may
enter upon the Borrower's premises at any time and from time to time during
normal business hours, and at any time upon the occurrence and continuance of an
Event of Default, for the purpose of inspecting the Collateral and any and all
records pertaining thereto.
Section 5.4. INSURANCE. The Borrower will maintain insurance
on the Collateral under such policies of insurance, with such insurance
companies, in such amounts, and covering such risks as are at all times
satisfactory to the Lender. All such policies shall be made payable to the
Lender, in case of loss, under a standard non-contributory "lender" or "secured
party" clause and are to contain such other provisions as the Lender may
reasonably require to protect the Lender's interests in the Collateral and to
any payments to be made under such policies. Certificates of insurance policies
are to be delivered to the Lender, premium prepaid, with the loss payable
endorsement in the Lender's favor, and shall provide for not less than thirty
days' prior written notice to the Lender, of any alteration or cancellation of
coverage. If the Borrower fails to maintain such insurance, the Lender may
arrange for (at the Borrower's expense and without any responsibility on the
Lender's part for) obtaining the insurance. Unless the Lender shall otherwise
agree with the Borrower in writing, the Lender shall have the right, in the name
of the Lender or the Borrower, to file claims under any insurance policies, to
receive and give acquittance for any payments that may be payable thereunder,
and to execute any endorsements, receipts, releases, assignments, reassignments,
or other documents that may be necessary to effect the collection, compromise,
or settlement of any claims under any such insurance policies.
SECTION 5.5. TAXES. The Borrower will pay, when due, all
taxes, assessments, claims, and other charges ("Taxes") lawfully levied or
assessed against the Borrower or the Collateral other than taxes that are being
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by the
Borrower in accordance with GAAP. If any Taxes remain unpaid after the date
fixed for the payment thereof, or if any lien shall be claimed therefor, then,
without notice to the Borrower, but on the Borrower's behalf, the Lender may pay
such Taxes, and the amount thereof shall be included in the Obligations.
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SECTION 5.6. BORROWER TO DEFEND COLLATERAL AGAINST CLAIMS; FEES
ON COLLATERAL. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein.
The Borrower will not permit any notice creating or otherwise relating to liens
on the Collateral or any portion thereof to exist or be on file in any public
office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which may now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
SECTION 5.7. NO CHANGE OF LOCATION, STRUCTURE, OR IDENTITY.
The Borrower will not (a) change the location of its chief executive office or
establish any place of business other than those specified herein or (b) move or
permit the movement of any item of Collateral from the location specified in the
applicable Schedule, except that the Borrower may change its chief executive
office and keep Collateral at other locations within the United States provided
that the Borrower has delivered to the Lender (i) prior written notice thereof
and (ii) duly executed financing statements and other agreements and instruments
(all in form and substance satisfactory to the Lender) necessary or, in the
opinion of the Lender, desirable to perfect and maintain in favor of the Lender
a first or second priority security interest, as applicable, in the Collateral.
Notwithstanding anything to the contrary in the immediately preceding sentence,
the Borrower may keep any Collateral consisting of motor vehicles, notebook
computers, field testing equipment and mobile communications devices or rolling
stock at any location in the United States provided that the Lender's security
interest in any such Collateral is conspicuously marked on the certificate of
title thereof and the Borrower has complied with the provisions of Section 5.9.
SECTION 5.8. USE OF COLLATERAL; LICENSES; REPAIR. The
Collateral shall be operated by competent, qualified personnel in connection
with the Borrower's business purposes, for the purpose for which the Collateral
was designed and in accordance with applicable operating instructions, laws, and
government regulations, and the Borrower shall use every reasonable precaution
to prevent loss or damage to the Collateral from fire and other hazards. The
Borrower shall procure and maintain in effect all orders, licenses,
certificates, permits, approvals, and consents required by federal, state, or
local laws or by any governmental body, agency, or authority in connection with
the delivery, installation, use, and operation of the Collateral.
SECTION 5.9. FURTHER ASSURANCES. The Borrower will, promptly
upon request by the Lender, execute and deliver or use its best efforts to
obtain any document required by the Lender (including, without limitation,
warehouseman or processor disclaimers, mortgagee waivers, landlord disclaimers,
or subordination agreements with respect to the Obligations and the Collateral),
give any notices, execute and file any financing statements, mortgages, or other
documents (all in form and substance satisfactory to the Lender), mark any
chattel paper, deliver any chattel paper or instruments to the Lender, and take
any other actions that are necessary or, in the opinion of the Lender, desirable
to perfect or continue the perfection and the first priority of the Lender's
security interest in the Collateral, to protect the Collateral against the
rights, claims, or interests of any Persons, or to effect the purposes of this
Agreement. The Borrower hereby authorizes the Lender to file one or more
financing or continuation statements, and amendments thereto, relating to all or
any part of the Collateral without the signature of the Borrower where permitted
by law. A carbon, photographic, or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law. To the extent
required under this Agreement, the Borrower will pay all costs incurred in
connection with any of the foregoing.
SECTION 5.10. NO DISPOSITION OF COLLATERAL. The Borrower will
not in any way hypothecate or create or permit to exist any lien, security
interest, charge, or encumbrance on or other interest in any of the Collateral,
except for the lien and security interest granted hereby and Permitted Liens
which are junior to the lien and security interest of the Lender, and the
Borrower will not sell, transfer, assign, pledge, collaterally assign, exchange,
or otherwise dispose of any of the Collateral. In the event the Collateral, or
any part thereof, is sold, transferred, assigned, exchanged, or otherwise
disposed of in violation of these provisions, the security interest of the
Lender shall continue in such Collateral or part thereof notwithstanding such
sale, transfer, assignment,
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exchange, or other disposition, and the Borrower will hold the proceeds thereof
in a separate account for the benefit of the Lender. Following such a sale, the
Borrower will transfer such proceeds to the Lender in kind.
SECTION 5.11. NO LIMITATION ON LENDER'S RIGHTS. Except for
contracts in the ordinary course of business (including government contracts,
technology licensing agreements and joint venture agreements), the Borrower will
not enter into any contractual obligations which may restrict or inhibit the
Lender's rights or ability to sell or otherwise dispose of the Collateral or any
part thereof.
SECTION 5.12. PROTECTION OF COLLATERAL. Upon notice to the
Borrower (provided that if an Event of Default has occurred and is continuing
the Lender need not give any notice), the Lender shall have the right at any
time to make any payments and do any other acts the Lender may deem necessary to
protect its security interests in the Collateral, including, without limitation,
the rights to satisfy, purchase, contest, or compromise any encumbrance, charge,
or lien which, in the reasonable judgment of the Lender, appears to be prior to
or superior to the security interests granted hereunder, and appear in, and
defend any action or proceeding purporting to affect its security interests in,
or the value of, any of the Collateral. The Borrower hereby agrees to reimburse
the Lender for all payments made and expenses incurred under this Agreement
including fees, expenses, and disbursements of attorneys and paralegals
(including the allocated costs of in-house counsel) acting for the Lender,
including any of the foregoing payments under, or acts taken to protect its
security interests in, any of the Collateral, which amounts shall be secured
under this Agreement, and agrees it shall be bound by any payment made or act
taken by the Lender hereunder absent the Lender's gross negligence or willful
misconduct. Notwithstanding the foregoing, the Lender shall have no obligation
to make any of the foregoing payments or perform any of the foregoing acts or to
participate in or perform any act relating to any litigation involving
Borrower's Intellectual Property Collateral (as defined in the Intellectual
Property Agreement).
SECTION 5.13. DELIVERY OF ITEMS. The Borrower will (a) promptly
(but in no event later than one Business Day) after its receipt thereof, deliver
to the Lender any documents or certificates of title issued with respect to any
property included in the Collateral, and any promissory notes, letters of credit
or instruments related to or otherwise in connection with any property included
in the Collateral, which in any such case come into the possession of the
Borrower, or shall cause the issuer thereof to deliver any of the same directly
to the Lender, in each case with any necessary endorsements in favor of the
Lender and (b) deliver to the Lender as soon as available copies of any and all
press releases and other similar communications issued by the Borrower.
SECTION 5.14. SOLVENCY. The Borrower shall be and remain
Solvent at all times.
SECTION 5.15. FUNDAMENTAL CHANGES. The Borrower shall not
(a) amend or modify its name, unless the Borrower delivers to the Lender thirty
days prior to any such proposed amendment or modification written notice of such
amendment or modification and within ten days before such amendment or
modification delivers executed Uniform Commercial Code financing statements (in
form and substance satisfactory to the Lender) or (b) merge or consolidate with
any other entity or make any material change in its capital structure, in each
case without the Lender's prior written consent which shall not be unreasonably
withheld, provided, however, that nothing herein shall prevent Borrower from
entering into such a transaction without Lender's consent if Borrower fully
discharges all of its Obligations hereunder at or before the closing of such
transaction.
SECTION 5.16. ADDITIONAL REQUIREMENTS. The Borrower shall take
all such further actions and execute all such further documents and instruments
as the Lender may reasonably request.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction
in full of all Obligations, the Borrower shall deliver to the Lender the
following financial information:
SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. As soon as
available, but not later than 120 days after the end of each fiscal year of the
Borrower and its consolidated subsidiaries, the consolidated balance sheet,
income statement, and statements of cash flows and shareholders equity for the
Borrower and its consolidated subsidiaries (the "Financial Statements") for such
year, reported on by independent certified public accountants without an adverse
qualification; and
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SECTION 6.2. QUARTERLY FINANCIAL STATEMENTS. As soon as
available, but not later than 60 days after the end of each of the first three
fiscal quarters in any fiscal year of the Borrower and its consolidated
subsidiaries, the Financial Statements for such fiscal quarter, together with a
certification duly executed by a responsible officer of the Borrower that such
Financial Statements have been prepared in accordance with GAAP and are fairly
stated in all material respects (subject to normal year-end audit adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the
following events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within five Business Days
of when due any amount required to be paid by the Borrower under or in
connection with any Note and this Agreement;
(b) any representation or warranty made or deemed made by the
Borrower under or in connection with any Loan Document or any Financial
Statement shall prove to have been false or incorrect in any material respect
when made;
(c) the Borrower shall fail to perform or observe (i) any of
the terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14,
or 5.15 hereof or (ii) any other term, covenant, or agreement contained in any
Loan Document (other than the other Events of Default specified in this Section
7) and such failure remains unremedied for the earlier of fifteen Business Days
from (A) the date on which the Lender has given the Borrower written notice of
such failure and (B) the date on which the Borrower knew or should have known of
such failure;
(d) any provision of any Loan Document to which the Borrower
is a party shall for any reason cease to be valid and binding on the Borrower,
or the Borrower shall so state;
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a meeting of the Borrower's creditors
for purposes of compromising any of the Borrower's debts;
(f) the commencement by or against the Borrower of any
bankruptcy, insolvency, arrangement, reorganization, receivership, or similar
proceedings under any federal or state law and, in the case of any such
involuntary proceeding, such proceeding remains undismissed or unstayed for
forty-five days following the commencement thereof, or any action by the
Borrower is taken authorizing any such proceedings;
(g) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver, or similar official for the Borrower or for any substantial
property of the Borrower, or any action by the Borrower authorizing any such
proceeding;
(h) the Borrower shall default in (i) the payment of
principal or interest on any indebtedness in in an aggregate amount of at least
$250,000 (other than the Obligations) beyond the period of grace, if any,
provided in the instrument or agreement under which such indebtedness was
created; or (ii) the observance or performance of any other agreement or
condition relating to any such indebtedness or contained in any instrument or
agreement relating thereto, or any other event shall occur or condition exist,
the effect of which default or other event or condition is to cause, or to
permit the holder or holders of such indebtedness to cause, with the giving of
notice if required, such indebtedness to become due prior to its stated
maturity; or (iii) any loan or other agreement under which the Borrower has
received financing from Transamerica Corporation or any of its affiliates;
(i) any tax lien, other than a Permitted Lien, is filed of
record against the Borrower and is not bonded or discharged within five Business
Days;
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(j) any judgment which has had or could reasonably be
expected to have a Material Adverse Effect on the Borrower in an aggregate
amount of at least $250,000 and such judgment shall not be stayed, vacated,
bonded, or discharged within sixty days;
(k) any material covenant, agreement, or obligation, as
determined in the good faith business judgment of the Lender, made by the
Borrower and contained in or evidenced by any of the Loan Documents shall cease
to be enforceable, or shall be determined to be unenforceable, in accordance
with its terms; the Borrower shall deny or disaffirm the Obligations under any
of the Loan Documents or any liens granted in connection therewith; or any liens
granted on any of the Collateral in favor of the Lender shall be determined to
be void, voidable, or invalid, or shall not be given the priority contemplated
by this Agreement; or
(l) there is a change in more than 35% of the ownership of
any equity interests of the Borrower on the date hereof or more than 35% of such
interests become subject to any contractual, judicial, or statutory lien,
charge, security interest, or encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have occurred
and be continuing:
(a) The Lender may, without prejudice to any of its other
rights under any Loan Document or Applicable Law, declare all Obligations to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 7(f) hereof, in which case all Obligations shall automatically
become immediately due and payable without necessity of any declaration) without
presentment, representation, demand of payment, or protest, which are hereby
expressly waived.
(b) The Lender may take possession of the Collateral and, for
that purpose may enter, with the aid and assistance of any person or persons,
any premises where the Collateral or any part hereof is, or may be placed, and
remove the same.
(c) The obligation of the Lender, if any, to make additional
Loans or financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein (or in any Loan
Document) or otherwise available to it, all the rights and remedies of a secured
party under the applicable Uniform Commercial Code (the "Code") whether or not
the Code applies to the affected Collateral and also may (i) require the
Borrower to, and the Borrower hereby agrees that it will at its expense and upon
request of the Lender forthwith, assemble all or part of the Collateral as
directed by the Lender and make it available to the Lender at a place to be
designated by the Lender that is reasonably convenient to both parties and
(ii) without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any of the Lender's
offices or elsewhere, for cash, on credit, or for future delivery, and upon such
other terms as the Lender may deem commercially reasonable. The Borrower agrees
that, to the extent notice of sale shall be required by law, at least ten days'
notice to the Borrower of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. The Lender shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. The Lender may adjourn any
public or private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.
(e) All cash proceeds received by the Lender in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Lender, be held by the Lender as
collateral for, or then or at any time thereafter applied in whole or in part by
the Lender against, all or any part of the Obligations in such order as the
Lender shall elect. Any surplus of such cash or cash proceeds held by the
Lender and remaining after the full and final payment of all the Obligations
shall be paid over to the Borrower or to such other Person to which the Lender
may be required under applicable law, or directed by a court of competent
jurisdiction, to make payment of such surplus.
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SECTION 9. MISCELLANEOUS PROVISIONS.
SECTION 9.1. NOTICES. Except as otherwise provided herein, all
notices, approvals, consents, correspondence, or other communications required
or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mail,
postage prepaid, if to the Lender, then to Transamerica Technology Finance
Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention:
Assistant Vice President, Lease Administration, with a copy to the Lender at
Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018, Attention: Legal Department, and if to the Borrower, then to Conductus,
Inc., 969 West Maude Avenue, , Sunnyvale, California 94086, Attention: Chief
Financial Officer or such other address as shall be designated by the Borrower
or the Lender to the other party in accordance herewith. All such notices and
correspondence shall be effective when received.
SECTION 9.2. HEADINGS. The headings in this Agreement are for
purposes of reference only and shall not affect the meaning or construction of
any provision of this Agreement.
SECTION 9.3. ASSIGNMENTS. The Borrower shall not have the
right to assign any Note or this Agreement or any interest therein unless the
Lender shall have given the Borrower prior written consent and the Borrower and
its assignee shall have delivered assignment documentation in form and substance
satisfactory to the Lender in its sole discretion. The Lender may assign its
rights and delegate its obligations under any Note or this Agreement.
SECTION 9.4. AMENDMENTS, WAIVERS, AND CONSENTS. Any amendment
or waiver of any provision of this Agreement and any consent to any departure by
the Borrower from any provision of this Agreement shall be effective only by a
writing signed by the Lender and shall bind and benefit the Borrower and the
Lender and their respective successors and assigns, subject, in the case of the
Borrower, to the first sentence of Section 9.3.
SECTION 9.5. INTERPRETATION OF AGREEMENT. Time is of the
essence in each provision of this Agreement of which time is an element. All
terms not defined herein or in a Note shall have the meaning set forth in the
applicable Code, except where the context otherwise requires. To the extent a
term or provision of this Agreement conflicts with any Note, or any term or
provision thereof, and is not dealt with herein with more specificity, this
Agreement shall control with respect to the subject matter of such term or
provision. Acceptance of or acquiescence in a course of performance rendered
under this Agreement shall not be relevant in determining the meaning of this
Agreement even though the accepting or acquiescing party had knowledge of the
nature of the performance and opportunity for objection.
SECTION 9.6. CONTINUING SECURITY INTEREST. This Agreement
shall create a continuing security interest in the Collateral and shall
(i) remain in full force and effect until the indefeasible payment in full of
the Obligations, (ii) be binding upon the Borrower and its successors and
assigns and (iii) inure, together with the rights and remedies of the Lender
hereunder, to the benefit of the Lender and its successors, transferees, and
assigns.
Section 9.7. REINSTATEMENT. To the extent permitted by law,
this Agreement and the rights and powers granted to the Lender hereunder and
under the Loan Documents shall continue to be effective or be reinstated if at
any time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization of the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8. SURVIVAL OF PROVISIONS. All representations,
warranties, and covenants of the Borrower contained herein shall survive the
execution and delivery of this Agreement, and shall terminate only upon the full
and final payment and performance by the Borrower of the Obligations secured
hereby.
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SECTION 9.9. INDEMNIFICATION. The Borrower agrees to indemnify
and hold harmless the Lender and its directors, officers, agents, employees, and
counsel from and against any and all costs, expenses, claims, or liability
incurred by the Lender or such Person hereunder and under any other Loan
Document or in connection herewith or therewith, unless such claim or liability
shall be due to willful misconduct or gross negligence on the part of the Lender
or such Person.
SECTION 9.10. COUNTERPARTS; TELECOPIED SIGNATURES. This
Agreement may be executed in counterparts, each of which when so executed and
delivered shall be an original, but both of which shall together constitute one
and the same instrument. This Agreement and each of the other Loan Documents
and any notices given in connection herewith or therewith may be executed and
delivered by telecopier or other facsimile transmission all with the same force
and effect as if the same was a fully executed and delivered original manual
counterpart.
SECTION 9.11. SEVERABILITY. In case any provision in or
obligation under this Agreement or any Note or any other Loan Document shall be
invalid, illegal, or unenforceable in any jurisdiction, the validity, legality,
and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
SECTION 9.12. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or
omission of the Lender to exercise any right or remedy hereunder, whether before
or after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by the Lender of any right or remedy shall
preclude any other or further exercise thereof, or preclude any other right or
remedy.
SECTION 9.13. ENTIRE AGREEMENT. The Borrower and the Lender
agree that this Agreement, the Schedule hereto, and the Commitment Letter are
the complete and exclusive statement and agreement between the parties with
respect to the subject matter hereof, superseding all proposals and prior
agreements, oral or written, and all other communications between the parties
with respect to the subject matter hereof. Should there exist any inconsistency
between the terms of the Commitment Letter and this Agreement, the terms of this
Agreement shall prevail.
SECTION 9.14. SETOFF. In addition to and not in limitation of
all rights of offset that the Lender may have under Applicable Law, and whether
or not the Lender has made any demand or the Obligations of the Borrower have
matured, the Lender shall have the right to appropriate and apply to the payment
of the Obligations of the Borrower all deposits and other obligations then or
thereafter owing by the Lender to or for the credit or the account of the
Borrower.
SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.16. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
SECTION 9.17. VENUE; SERVICE OF PROCESS. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF
THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE
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AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION WITH
ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT LIMITATION,
ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION
OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO INTERPOSE
ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS
FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT
OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY
OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH
RESPECT TO RIGHTS AND REMEDIES.
IN WITNESS WHEREOF, the undersigned Borrower has caused this
Agreement to be duly executed and delivered by its proper and duly authorized
officer as of the date first set forth above.
CONDUCTUS, INC.
By: /s/ Charles E. Shalvoy
--------------------------------------------------
Name: Charles E. Shalvoy
Title: President & CEO
Federal Tax ID: 77-0162388
Accepted as of the
____ day of June, 1998
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Gary P. Moro
------------------------------------
Name: Gary P. Moro
Title: Vice President
Form16
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INTELLECTUAL PROPERTY SECURITY AGREEMENT
THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT is made and entered into
as of this 26th day of June, 1998 (this "Agreement"), between CONDUCTUS,
INC., a Delaware corporation (the "Debtor"), with and in favor of
TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation (the
"Secured Party").
WHEREAS, the Debtor is entering into a Master Loan and Security
Agreement dated as of even date herewith (as amended, supplemented or
otherwise modified from time to time, the "Master Agreement"; terms which
are capitalized herein and not otherwise defined shall have the meanings
given to them in the Master Agreement) with the Secured Party, pursuant to
which the Debtor is obligated to make certain payments to the Secured Party;
and
WHEREAS, in connection with the Master Agreement, the Debtor is
required to grant to the Secured Party a security interest in and lien on
substantially all of its assets; and
WHEREAS, it is a condition precedent to the effectiveness of the
Master Agreement that the Debtor shall have executed and delivered this
Agreement and granted a security interest in all of the Debtor's right, title
and interest in and to all of the Intellectual Property Collateral (as
hereinafter defined) in favor of the Secured Party, as contemplated hereby.
NOW, THEREFORE, in consideration of the premises hereof and to induce
the Secured Party to enter into the Master Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. SECURITY FOR OBLIGATIONS.
(a) SECURITY INTEREST IN PATENTS. To secure the full and prompt
payment and performance when due (whether at stated maturity, by acceleration
or otherwise) of all of the Obligations, the Debtor hereby grants and conveys
to the Secured Party a second and valid security interest in, with a power of
sale to the extent permitted by law, all of its right, title and interest in
the United States and throughout the world, in and to all of its now owned
and hereafter acquired United States and foreign patents and all patent and
design patent applications, and all issues, reissues, re-examinations,
continuations, continuations-in-part or divisions thereof, and all proceeds
thereof (hereinafter collectively referred to as the "Patents"). All
unexpired patents and all currently pending patent applications owned or
licensed (to the extent permitted by the applicable license) by the Debtor
are listed on Schedule A attached hereto and made a part hereof. Subject to
the provisions of Section 2(n), the Debtor hereby further grants, assigns and
conveys to the Secured Party a second and valid security interest, having
priority over all other security interests and with power of sale at any
time, in all of the right, title and interest of the Debtor in and to all
products, proceeds, income, royalties, damages and payments now or hereafter
due and payable under or in respect of all Patents and, subject to the
provisions of Section 2(n), in and to all rights during the term of this
Agreement to sue, collect and retain for the Secured Party's benefit damages
and payments for past or future infringements of the Patents.
(b) SECURITY INTEREST IN TRADEMARKS. To secure the payment and
performance of all of the Obligations, the Debtor hereby grants and conveys
to the Secured Party a first and valid security interest in, with a power of
sale to the extent permitted by applicable law, all of its right, title and
interest, in the United States and throughout the world, in and to all of its
now owned and hereafter acquired trademarks, service marks and trade names,
and all variants thereof (whether or not such name is the subject of a
registration or an application therefor), and all registrations and
applications to register the same, and all renewals thereof, and the goodwill
of the business relating thereto, and all proceeds thereof (hereinafter
collectively referred to as the "Trademarks"). All United States trademark
registrations and all currently pending trademark applications owned or
licensed (to the extent permitted by the applicable license) by the Debtor
and all foreign trademark registrations and all currently pending trademark
applications in which the Debtor has an interest, are listed on Schedule B
attached hereto and made a part hereof. Subject to the provisions of Section
2(n), the Debtor hereby further grants to the Secured Party a second and
valid security interest in all of its right, title and interest in and to (i)
all products, proceeds, income, royalties,
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damages and payments now and hereafter due and payable under or in respect of
all Trademarks, (ii) subject to the provisions of Section 2(n), all rights
during the term of this Agreement to sue, collect and retain for the Secured
Party's benefit damages and payments for past or future infringements of the
Trademarks and (iii) all rights under or interest in any trademark license
agreements or service mark license agreements with any other party, whether
the Debtor is a licensee or licensor under any such license agreement, and the
right to prepare for sale and sell any and all assets now or hereafter owned
by the Debtor and now or hereafter covered by such licenses.
(c) SECURITY INTEREST IN COPYRIGHTS. To secure the payment and
performance of all of the Obligations, the Debtor hereby grants to the
Secured Party a first and valid security interest in all of its right, title
and interest, in the United States and throughout the world, in and to all of
its now owned and hereafter acquired copyrights, and all registrations and
applications to register the same, all renewals thereof, any written
agreement, naming the Debtor as licensor or licensee, granting any right
under any copyright, any work which is or may be subject to copyright
protection pursuant to Title 17 of the U.S. Code, and all physical things
embodying such works (including, without limitation, copies thereof) created
or otherwise used in the business of the Debtor, and all proceeds thereof
(hereinafter collectively referred to as the "Copyrights"). All copyright
registrations and all currently pending copyright applications owned or
licensed (to the extent permitted by the applicable license) by the Debtor
are listed on Schedule C attached hereto and made a part hereof. Subject to
the provisions of Section 2(n), the Debtor hereby further grants to the
Secured Party a second and valid security interest in all of its right, title
and interest in and to all products, proceeds, income, royalties, damages and
payments now and hereafter due and payable under or in respect of all
Copyrights and, subject to the provisions of Section 2(n), in and to all
rights during the term of this Agreement to sue, collect and retain for the
Secured Party's benefit damages and payments for past or future infringements
of the Copyrights.
(d) SECURITY INTEREST IN PROPRIETARY INFORMATION. To secure the
payment and performance of all of the Obligations, the Debtor hereby grants
to the Secured Party a second and valid security interest in all of its
right, title and interest, in the United States and throughout the world, in
and to all of its now owned and hereafter acquired inventions, discoveries,
trade secrets, improvements, processes, methods, formulae, applications,
ideas, know-how, customer lists, corporate and other business records, license
rights, advertising materials, operating manuals, sales literature, drawings,
specifications, descriptions, name plates, catalogues, dealer contracts,
supplier contracts, distributor agreements, confidential information,
consulting agreements, engineering contracts, proprietary information, and
goodwill (and all other assets which uniquely reflect such goodwill), and to
all income, royalties, damages and payments now and hereafter due or payable
therefor or in respect thereof (collectively, the "Proprietary Information"
and, together with the Patents, the Trademarks and the Copyrights, the
"Intellectual Property Collateral").
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE DEBTOR.
(a) The Debtor is and will continue to be the owner of all of the
Intellectual Property Collateral, free from any adverse claim, security
interest, lien or encumbrance in favor of any Person except for the security
interest granted to the Secured Party and except for (i) the prior lien of
Silicon Valley Bank and (ii) Permitted Liens.
(b) None of the Intellectual Property Collateral is or shall
become subject to any Lien in favor of any Person other than the Secured
Party and except for any Permitted Liens, and the Debtor agrees that it shall
not license, transfer, convey or encumber any interest in or to the
Intellectual Property Collateral. Notwithstanding the foregoing, the Debtor
shall be permitted to license any of the Intellectual Property Collateral in
the ordinary course of business on commercially reasonable terms and
conditions. Any license of the Intellectual Property Collateral granted by
the Debtor (each, a "License") shall be in writing and shall reserve all
rights in the Debtor except those reasonably necessary in the ordinary course
of business to fulfill the permitted purposes herein. The Debtor shall cause
a copy of each License to be delivered to the Secured Party within thirty (30)
days of execution by all parties thereto.
(c) Except as disclosed in Schedule D hereto, the Debtor has made
no previous assignment, transfer or agreement materially in conflict herewith
or constituting a present or future assignment, transfer, or encumbrance of
any of the Intellectual Property Collateral.
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(d) Except as disclosed in Schedule D hereto, there is no
financing statement or other document or instrument now signed or on file in
any public office granting a security interest in or otherwise encumbering
any part of the Intellectual Property Collateral, except those showing the
Secured Party as secured party. So long as any Obligations remain
outstanding, the Debtor will not execute, and there will not be on file in any
public office, any such financing statement or other document or instruments,
except financing statements filed or to be filed in favor of the Secured
Party or pursuant to a transaction permitted by the second sentence of
Section 2(b).
(e) Subject to any limitation stated therein or in connection
therewith, all information furnished to the Secured Party concerning the
Intellectual Property Collateral and proceeds thereof is and will be accurate
and correct in all material respects.
(f) Except as disclosed in Schedule D hereto, all Intellectual
Property Collateral consisting of applications for Patents and for
registrations of Trademarks and Copyrights has been duly and properly filed
and all Intellectual Property Collateral consisting of issued or granted
Patents and of registrations of Trademarks and Copyrights (including,
without limitation, any and all renewals, reissues, continuations or divisions
thereof, as the case may be) has been duly and properly maintained.
(g) Promptly, but not more frequently than quarterly, upon the
receipt of an official filing receipt indicating that a patent application or
an application for registration of a trademark has been received by the U.S.
Patent and Trademark Office or an application for registration of a copyright
has been received by the U.S. Copyright Office and upon the issuance of any
patent or of any trademark or copyright registration, the Debtor agrees to
notify the Secured Party in writing, which notice shall identify such patent,
trademark or copyright application or patent, trademark or copyright
registration, and the Debtor shall execute all documents necessary to perfect
a security interest in such patent, trademark or copyright application or
such patent or trademark or copyright registration, and the Debtor shall
annually, or more frequently as the Secured Party shall request, cause an
instrument sufficient to perfect, protect or establish any Lien hereunder to
be recorded in the U.S. Patent and Trademark Office with respect to all
United States patent applications filed by it or patents issued to it during
the prior calendar year and with respect to all trademark applications filed
by it or trademark registrations issued to it during the prior calendar year,
and the Debtor shall annually, or more frequently as the Secured Party shall
request, cause an instrument sufficient to perfect, protect or establish any
Lien hereunder to be recorded in the U.S. Copyright Office with respect to
United States copyright applications filed by it or copyright registrations
issued to it during the prior calendar year.
(h) The Debtor shall not take any action, or permit any action to
be taken by others subject to the Debtor's control, including licensees, or
fail to take any action, or permit others subject to the Debtor's control,
including licensees, to fail to take any action, subject to the provisions of
Section 2(g), which would, in the case of any such actions or failures to act
taken singly or together, materially adversely affect the validity, grant and
enforceability of the security interest granted to the Secured Party
hereunder. Notwithstanding the foregoing, the Debtor shall be permitted to
abandon any of the Trademarks in accordance with the terms of Section 2(l).
(i) The Debtor shall promptly notify the Secured Party, in
writing, of any suit, action, proceeding, claim or counterclaim brought
against the Debtor that would reasonably be expected to have a Material
Adverse Effect on the Intellectual Property Collateral, and shall, on
request, deliver to the Secured Party a copy of all pleadings, papers, orders
or decrees theretofore and thereafter filed in any such suit, action or
proceeding, and shall keep the Secured Party duly advised in writing of the
progress of any such suit.
(j) To the best knowledge and belief of the Debtor, except as
disclosed in Schedule D, no infringement or unauthorized use presently is
being made of any Intellectual Property Collateral. In the event of any
material infringement of the Intellectual Property Collateral by others or in
the event of any other conduct detrimental to the Intellectual Property
Collateral by others known or brought to the attention of the Debtor, the
Debtor shall promptly notify the Secured Party in writing at its address set
forth in Section 5(a) of such infringement or other conduct and the full
nature, extent, evidence and facts of such infringement or other conduct
known to the Debtor.
(k) If reasonably requested by the Secured Party, the Debtor shall
provide the Secured Party a complete status report of all Intellectual
Property Collateral. Upon request by the Secured Party, the Debtor shall
deliver to counsel for the Secured Party copies of any such Intellectual
Property Collateral and other
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documents concerning or related to the prosecution, protection, maintenance,
enforcement and issuance of the Intellectual Property Collateral.
(l) The Debtor shall notify the Secured Party in writing at the
address set forth in Section 5(a) at least thirty (30) days prior to any
proposed voluntary abandonment of any Intellectual Property Collateral (other
than items of Intellectual Property Collateral that are not useful or
beneficial to the business and operations of the Debtor) and obtain the prior
written consent of the Secured Party to such abandonment.
(m) During the term of this Agreement, the Debtor agrees:
(i) whenever any of the registered Trademarks are used by or
on behalf of the Debtor, if reasonably practicable, to affix or cause to
be affixed a notice that the mark is a registered trademark or service
mark, which notice shall be in a form accepted or required by the
trademark marking laws of each country in which the mark is so used and
registered; and
(ii) whenever any of the underlying works covered by registered
Copyrights are used by or on behalf of the Debtor, if reasonably
practicable, to affix or cause to be affixed a notice that said
underlying works are so covered, which notice shall be in a form accepted
or required by the copyright laws of such country in which said
underlying works are so used and registered.
(n) Subject to the provisions of Section 4(g), during the term of
this Agreement, all income, royalties, payments and damages due and payable
to the Debtor under or in respect of the Intellectual Property Collateral
shall be paid to the Debtor.
(o) The Debtor agrees, upon the reasonable request by the Secured
Party, during the term of this Agreement;
(i) to execute, acknowledge and deliver all additional
instruments and documents necessary or desirable to effect the purposes
and intents of this Agreement, in a form reasonably acceptable to
counsel the the Secured Party; and
(ii) to do all such other acts as may be necessary or
appropriate to carry out the purposes and intents of this Agreement,
and to create, evidence, perfect and continue the security interest of
the Secured Party in the Intellectual Property Collateral.
SECTION 3. INDEMNITY. The Debtor agrees to indemnify the Secured Party
from and against any and all claims, losses and liabilities arising out of
or resulting from this Agreement (including, without limitation, enforcement
of this Agreement and any actions taken pursuant to Section 4 or any failure
to act thereunder).
SECTION 4. RIGHTS AND REMEDIES UPON AN EVENT OF DEFAULT.
(a) If any Event of Default shall have occurred and be
continuing, then and in every such case, subject to any mandatory
Requirements of Law, the Secured Party, in addition to other rights and
remedies provided for herein and any rights now or hereafter existing under
applicable law, shall have all rights and remedies as a secured creditor
under the Uniform Commercial Code in all relevant jurisdictions and may:
(i) personally, or by agents or attorneys, immediately take
possession of the Intellectual Property Collateral or any part thereof,
from the Debtor or any other Person who then has possession of any part
thereof, with or without notice or process of law, and for that purpose
may enter upon the Debtor's premises where any of the Intellectual
Property Collateral is located and remove the same and use in
connection with such removal any and all services, supplies, aids and
other facilities of the Debtor; and
(ii) sell, assign or otherwise liquidate, or direct the
Debtor to sell, assign or otherwise liquidate, any or all of the
Intellectual Property Collateral or any part thereof, and take
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possession of the proceeds of any such sale or liquidation;
(b) Any collateral repossessed by the Secured Party under or
pursuant to Section 4(a) and any other intellectual Property Collateral
whether or not so repossessed by the Secured party, may be sold, assigned,
leased or otherwise disposed of under one or more contracts or as an
entirety, and without the necessity of gathering at the place of sale the
property to be sold, and in general in such manner, at such time or times, at
such place or places and on such terms as the Secured Party may, in
compliance with any Requirements of Law, determine to be commercially
reasonable. Any such disposition which shall be a private sale or other
private proceedings permitted by such requirements shall be made upon not
less than 10 days' written notice to the Debtor specifying the time at which
such disposition is to be made and the intended sale price or other
consideration therefor, and shall be subject, for the 10 days after the
giving of such notice, to the right of the Debtor or any nominee of the
Debtor to acquire the Intellectual Property Collateral involved at a price or
for such other consideration at least equal to the intended sale price or
other consideration so specified. Any such disposition which shall be a
public sale permitted by such requirements shall be made upon not less than
10 days' written notice to the Debtor specifying the time and place
of such sale and, in the absence of applicable Requirements of Law, shall be
by public auction (which may, at the option of the Secured Party, be subject
to reserve), after publication of notice of such auction not less than 10
days prior thereto in two newspapers of general circulation in the
jurisdiction in which such auction is to be held. To the extent permitted by
any such Requirements of Law, the Secured Party may bid for and become the
purchaser of the Intellectual Property Collateral or any item thereof,
offered for sale in accordance with this Section without accountability to
the Debtor (except to the extent of surplus money received). If, under
mandatory Requirements of Law, the Secured Party shall be required to make
disposition of the Intellectual Property Collateral within a period of time
which does not permit the giving of notice to the Debtor as hereinabove
specified, the Secured Party need give the Debtor only such notice of
disposition as shall be reasonably practicable in view of such mandatory
Requirements of Law. The Secured Party shall not be obligated to make any
sale of Intellectual Property Collateral regardless of notice of sale having
been given. The Secured Party may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it
was so adjourned.
(c) Upon the occurrence and continuance of an Event of Default,
the Secured Party shall have the right at any time to make any payments and
do any other acts the Secured Party may deem necessary to protect its
security interests in the Intellectual Property Collateral, including, without
limitation, the rights to pay, purchase, contest or compromise any Lien
which, in the reasonable judgment of the Secured Party, appears to be prior
to or superior to the security interests granted hereunder, and appear in and
defend any action or proceeding purporting to affect its security interest
in, or the value of, the Intellectual Property Collateral. The Debtor hereby
agrees to reimburse the Secured Party for all payments made and expenses
incurred under this Agreement including reasonable fees, expenses and
disbursements of attorneys and paralegals acting for the Secured Party,
including any of the foregoing payments under, or acts taken to protect its
security interests in, the Intellectual Property Collateral, which amounts
shall be secured under this Agreement, and agrees it shall be bound by any
payment made or act taken by the Secured Party hereunder absent the Secured
party's gross negligence or willful misconduct. The Secured Party shall have
no obligation to make any of the foregoing payments or perform any of the
foregoing acts.
(d) The Debtor hereby irrevocably authorizes and appoints the
Secured Party, or any Person or agent the Secured Party may designate, as the
Debtor's attorney-in-fact, with full authority in the place and stead of the
Debtor and in the name of the Debtor or otherwise, at the Debtor's cost and
expense, in the Secured Party's discretion, to take any action and to
execute any instrument that the Secured Party may deem necessary or
advisable to accomplish the purposes and intents of this Agreement and to
exercise all of the following powers upon and at any time after the
occurrence and during the continuance of an Event of Default, which powers,
being coupled with an interest, shall be irrevocable until all of the
Obligations shall have been paid and satisfied in full:
(i) ask for, demand, collect, bring suit, recover,
compromise, administer, accelerate or extend the time of payment,
issue credits, compromise, receive and give acquittance and receipts for
moneys due and to become due under or in respect of any of the
Intellectual Property Collateral; the
(ii) receive, take, endorse, negotiate, sign, assign and
deliver and collect any checks, notes, drafts or other instruments,
documents and chattel paper, in connection with clause (i)
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above;
(iii) receive, open and dispose of all mail addressed to the
Debtor and notify postal authorities to change the address for delivery
thereof to such address as the Secured Party may designate;
(iv) give customers indebted on the Intellectual Property
Collateral notice of the Secured Party's interest therein, or to instruct
such customers to make payment directly to the Secured Party for the
Debtor's account or to request, at any time from customers indebted on
the Intellectual Property Collateral, verification of information
concerning the Intellectual Property Collateral and the amounts owing
thereon;
(v) convey any item of Intellectual Property Collateral to
any purchaser thereof;
(vi) record any instruments under Section 2(g) hereof;
(vii) make any payments or take any acts under Section 4(c)
hereof; and
(viii) file any claims or take any action or institute any
proceedings that the Secured Party may reasonably deem necessary or
desirable for the collection of any of the Intellectual Property
Collateral or otherwise to enforce the rights of the Secured Party with
respect to any of the Intellectual Property Collateral.
The Secured Party's authority under this Section 4(d) shall include, without
limitation, the authority to execute and give receipt for any certificate of
ownership or any document, transfer title to any item of Intellectual
Property Collateral, sign the Debtor's name on all financing statements or
any other documents deemed necessary or appropriate to preserve, protect or
perfect the security interest in the Intellectual Property Collateral and to
file the same, prepare, file and sign the Debtor's name on any notice of
Lien, assignment or satisfaction of Lien or similar document in connection
with any Intellectual Property Collateral and prepare, file and sign the
Debtor's name on a proof of claim in bankruptcy or similar document against
any customer of the Debtor, and to take any other actions arising from or
incident to the rights, powers and remedies granted to the Secured Party in
this Agreement. This power of attorney is coupled with an interest and is
irrevocable by the Debtor.
(e) All cash proceeds received by the Secured Party in respect of any
sale of, collection from, or other realization upon all or any part of the
Intellectual Property Collateral shall be applied by the Secured Party
against the Obligations in such order as the Secured Party may determine.
(f) The Secured Party shall have the right of setoff with respect to
the Intellectual Property Collateral as provided Section 9.14 of the Master
Agreement.
(g) Upon the occurrence and during the continuance of an Event of
Default, all income, royalties, payments and damages under or in respect of
the Intellectual Property Collateral, if any, received thereafter shall be
held by the Debtor in trust for the benefit of the Secured Party, separate
from the Debtor's own property or funds and immediately turned over to the
Secured Party with proper assignments or endorsements. Upon the occurrence
and during the continuance of an Event of Default, the Secured Party shall
have the right to notify payors of income, royalties, payments and damages
under or in respect of the Intellectual Property Collateral to make payment
directly to the Secured Party.
(h) Each and every right, power and remedy hereby specifically given
to the Secured Party shall be in addition to every other right, power and
remedy specifically given under this Agreement or under the other Lease
Documents or now or hereafter existing at law or in equity, or by statute,
and each and every right, power and remedy whether specifically herein given
or otherwise existing may be exercised from time to time or simultaneously
and as often and in such order as may be deemed expedient by the Secured
Party. All such rights, powers and remedies shall be cumulative and the
exercise or the beginning of exercise of one shall not be deemed a waiver of
the right to exercise of any other or others. No delay or omission of the
Secured Party in the exercise of any such right, power or remedy and no
renewal or extension of any of the Obligations shall impair any such right,
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power or remedy or shall be construed to be a waiver of any Default or Event
of Default or any acquiescence therein.
SECTION 5. GENERAL PROVISIONS.
(a) NOTICES. All notices, approvals, consents or other
communications required or desired to be given hereunder shall be in writing
and sent by certified or registered mail, return receipt requested, by
overnight delivery service, with all charges prepaid, or by telecopier
followed by a hard copy sent by regular mail, if to the Secured Party, then
to Transamerica Business Credit Corporation, 76 Batterson Road, Farmington,
Connecticut 06032, Telecopy: (860) 677-6766, Attn.: Gregory Clark, Esq., and
if to the Debtor, then to Conductus, Inc. 969 West Maude Avenue, Sunnyvale,
California, 94086, Telecopy: (408) 523-9999, Attn.: Chief Financial Officer.
All such notices and correspondence shall be deemed given (i) if sent by
certified or registered mail, three Business Days after being postmarked,
(ii) if sent by overnight delivery service, when received at the above stated
address or when delivery is refused and (iii) if sent by telecopier
transmission, when receipt of such transmission is acknowledged.
(b) HEADINGS. The headings in this Agreement are for purposes of
reference only and shall not affect the meaning or construction of any
provision of this Agreement.
(c) SEVERABILITY. The provisions of this Agreement are severable,
and if any clause or provision shall be held invalid or unenforceable in
whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect, in that jurisdiction only, such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Agreement in any jurisdiction.
(d) AMENDMENTS, WAIVERS AND CONSENTS. Any amendment or waiver of any
provision of this Agreement and any consent to any departure by the Debtor
from any provision of this Agreement shall not be effective unless the same
shall be in writing and signed by the Debtor and the Secured Party and then
such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
(e) INTERPRETATION. Time is of the essence in each provision of this
Agreement of which time is an element. All terms not defined herein or in the
Master Agreement shall have the meaning set forth in the Code, except where
the context otherwise requires. To the extent a term or provision of this
Agreement conflicts with the Master Agreement and is not dealt with herein
with more specificity, the Master Agreement shall control with respect to the
subject matter of such term or provision. Acceptance of or acquiescence in a
course of performance rendered under this Agreement shall not be relevant in
determining the meaning of this Agreement even though the accepting or
acquiescing party had knowledge of the nature of the performance and
opportunity for objection.
(f) CONTINUING SECURITY INTEREST. This Agreement shall create a
continuing security interest in the Intellectual Property Collateral and
shall (i) remain in full force and effect until the payment in full in cash
of the Obligations and the termination of the Master Agreement, (ii) be
binding upon the Debtor and its successors and assigns and (iii) inure,
together with the rights and remedies of the Secured Party, to the Secured
Party's successors, transferees and assigns. Without limited the generality
of the foregoing clause (iii), the Secured Party may, in accordance with the
terms of the Master Agreement, assign or otherwise transfer all or any
portion of its rights and obligations under the Lease Documents (including,
without limitation, all or any portion of any Leases or any Notes held by it)
to any other Person, and such other Person shall thereupon become vested with
all the benefits in respect thereof granted to the Secured Party herein or
otherwise, in each case as provided in the Master Agreement.
(g) REINSTATEMENT. To the extent permitted by law, this Agreement
shall continue to be effective or be reinstated if at any time any amount
received by the Secured Party in respect of the Obligations is rescinded or
must otherwise be restored or returned by the Secured Party because the
Debtor is the subject of an Insolvency Event, all as though such payments had
not been made.
(h) SURVIVAL OF PROVISIONS. All representations, warranties and
covenants of the Debt or
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contained herein shall survive the execution and delivery of this Agreement,
and shall terminate only upon the full and final payment and performance by
the Debtor of the Obligations secured hereby and termination of the Master
Agreement and the other Lease Documents.
(i) SECURED PARTY MAY PERFORM. If the Debtor fails to perform any
agreement contained herein, the Secured Party may itself perform, or cause
performance of, such agreement, and the expenses of the Secured Party
incurred in connection therewith shall be payable by the Debtor and shall
constitute Obligations secured by this Agreement.
(j) NO DUTY ON SECURED PARTY. The powers conferred on the Secured
Party hereunder are solely to protect the interest of the Lenders in the
Intellectual Property Collateral and shall not impose any duty upon the
Secured Party to exercise any such powers. Except for the safe custody of any
Intellectual Property Collateral in its possession and the accounting for
money actually received by it hereunder, the Secured Party shall have no
duty as to Intellectual Property Collateral, as to ascertaining or taking
action with respect to calls, conversions, exchanges, maturities, tenders or
other matters related to any Intellectual Property Collateral, whether or not
the Secured Party has or is deemed to have knowledge of such matters, or as
to the taking of any necessary steps to preserve rights against any Person or
any other rights pertaining to any Intellectual Property Collateral. The
Secured Party shall be deemed to have exercised reasonable care in the
custody and preservation of any Intellectual Property Collateral in its
possession if such Intellectual Property Collateral is accorded treatment
substantially equal to that which the Secured Party accords its own property.
To the extent the Intellectual Property Collateral is held by a custodian,
the Secured Party shall be deemed to have exercised reasonable case if it has
selected the custodian with reasonable care.
(k) DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or omission of the
Secured Party to exercise any right or remedy hereunder, whether before or
after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of
Default. No single or partial exercise by the Secured Party of any right or
remedy shall preclude any other or further exercise thereof, or preclude any
other right or remedy.
(l) RELEASE; TERMINATION OF AGREEMENT. Subject to the provisions of
subsection (g) hereof, upon the payment in full in cash of the Obligations
and the termination of the Master Agreement, this Agreement shall terminate
and all rights in the Intellectual Property Collateral shall revert to the
Debtor. At such time, the Secured Party shall, upon the request and at the
expense of the Debtor, (A) execute and deliver to the Debtor such documents
as the Debtor shall reasonably request to evidence such termination and (B)
reassign and redeliver to the Debtor all of the Intellectual Property
Collateral hereunder which has not been sold, disposed of, retained or
applied by the Secured Party in accordance with the terms hereof. Such
reassignment and redelivery shall be without warranty by or recourse to the
Secured Party, except as to the absence of any prior assignments by the
Secured Party of its interest in the Intellectual Property Collateral.
(m) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but both of which
shall together constitute one and the same agreement.
(n) GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS,
WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES, EXCEPT TO THE EXTENT THAT
FEDERAL LAW IS APPLICABLE.
(o) SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE DEBTOR AND
THE SECURED PARTY, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE,
SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO,
ILLINOIS AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED,
HOWEVER, THAT THE SECURED PARTY SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED
BY APPLICABLE LAW, TO PROCEED AGAINST THE DEBTOR OR ITS PROPERTY IN ANY
LOCATION REASONABLY SELECTED BY THE SECURED PARTY IN GOOD FAITH TO ENABLE THE
SECURED PARTY TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF THE SECURED PARTY. THE DEBTOR AGREES THAT IT WILL NOT
ASSERT ANY
8
<PAGE>
PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT
BY THE SECURED PARTY. THE DEBTOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE
LOCATION OF THE COURT IN WHICH THE SECURED PARTY HAS COMMENCED A PROCEEDING,
INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED
ON FORUM NON CONVENIENS.
(p) JURY TRIAL. THE DEBTOR AND THE SECURED PARTY EACH HEREBY WAIVES
TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
causing this Agreement to be signed by their respective duly authorized
officers on the day and year first above written.
CONDUCTUS, INC.
By: /s/ Charles E. Shalvoy
-----------------------------
Name: Charles E. Shalvoy
Title: President & CEO
Accepted and Agreed as of the
date first above written:
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Gary P. Moro
----------------------
Name: Gary P. Moro
Title: Vice President
9
<PAGE>
SCHEDULE A
PATENT PORTFOLIO
<TABLE>
<CAPTION>
ISSUED U.S. PATENTS
- ----------------------------------------------------------------------------------------------------------------------------------
Patent Number Inventor(s) Title Issue Date Ownership/licenses
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
5,090,819 Kapitulnik, A. Superconducting Bolometer 2/25/92 [*]
Construction
- ----------------------------------------------------------------------------------------------------------------------------------
5,126,533 Newman, N., Char, K. Substrate Heater Utilizing Protective 06/30/92
Heat Sinking Means
- ----------------------------------------------------------------------------------------------------------------------------------
5,130,294 Char, K. High Temperature Superconductor- 07/14/92
Calcium Titanate Structures
- ----------------------------------------------------------------------------------------------------------------------------------
5,132,282 Newman, N. et al. High Temperature Superconductor- 07/21/92
Strontium Titanate Sapphire Structures
- ----------------------------------------------------------------------------------------------------------------------------------
5,157,466 Char, K. et al. Grain Boundary Junctions in HTS Films 10/20/92
- ----------------------------------------------------------------------------------------------------------------------------------
5,207,884 Char, K. et al. Superconductor Deposition System 05/04/93
- ----------------------------------------------------------------------------------------------------------------------------------
5,219,826 Kapitulnik, A. Superconducting Junctions and Method 06/15/93
of Making Same
- ----------------------------------------------------------------------------------------------------------------------------------
5,233,500 Liang, G-C. et al. Package for Cascaded Microwave 08/03/93
Devices
- ----------------------------------------------------------------------------------------------------------------------------------
5,241,828 Kapitulnik, A. Cryogenic Thermoelectric Cooler 09/07/93
- ----------------------------------------------------------------------------------------------------------------------------------
5,276,398 Withers, R.S. et al. Superconducting Magnetic Resonance 01/04/94
Probe Coil
- ----------------------------------------------------------------------------------------------------------------------------------
5,280,013 Newman, N et al. Method of Preparing HTS Films on Opposite 1/18/94
Sides of a Substrate
- ----------------------------------------------------------------------------------------------------------------------------------
5,351,007 Withers, R.S. et al. Superconducting Magnetic Resonance Probe Coil 09/27/94
- ----------------------------------------------------------------------------------------------------------------------------------
Confidential Page 1 5/20/98
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Patent Number Inventor(s) Title Issue Date Ownership/licenses
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
5,366,953 Char, K. et al. Method of Forming Grain Boundary 11/22/94 [*]
Junctions in HTS Films
- ----------------------------------------------------------------------------------------------------------------------------------
5,455,594 Blasing, R.R. et al. Internal Thermal Isolation Layer For 10/03/95
Array Antenna
- ----------------------------------------------------------------------------------------------------------------------------------
5,532,592 Colclough, M.S. SQUID Control Apparatus with Non- 7/2/96
Cryogenic Flux-Locked Loop Disposed
in Closed Proximity to the SQUID (as
amended)
- ----------------------------------------------------------------------------------------------------------------------------------
5,696,392 Char, K. et al. Improved Barrier Layers for Oxide 12/9/97
Superconductor Devices and Circuits
- ----------------------------------------------------------------------------------------------------------------------------------
5,432,151 Russo, R.E. et al. Process for Ion-Assisted Laser 7/11/95
Deposition of Biaxially Textured
Intermediate Layer for Forming Superconducting
Thin Film on Substrate
- ----------------------------------------------------------------------------------------------------------------------------------
5,600,243 Colclough, M.S. Improved SQUID Coupling Structure 2/4/97
- ----------------------------------------------------------------------------------------------------------------------------------
5,449,659 Garrison, S. et al. Method of Bonding Multilayer 09/12/95
Structures of Crystalline Materials
- ----------------------------------------------------------------------------------------------------------------------------------
5,656,937 Cantor, R. Low-Noise Symmetric DC SQUID 8/12/97
System
- ----------------------------------------------------------------------------------------------------------------------------------
5,651,016 Yu, R-C. et al. Ultrahigh Speed Laser 7/22/97
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PENDING U.S. PATENTS
- ----------------------------------------------------------------------------------------------------------------------------------
Serial No. Inventor(s) Title Issue Date
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
08/041,737 Burns, M.J. et al. Monolithically Integrated 04/01/93
Superconductor/Semiconductor
Structures
- ----------------------------------------------------------------------------------------------------------------------------------
08/393,131 Cantor, R.H. et al. Multiple SQUID Direct Signal Injection 2/21/95
Magnetometer
- ----------------------------------------------------------------------------------------------------------------------------------
08/616,551 Berkowitz, S. Three-Terminal Devices with Wide 3/15/96
Josephson Junctions and Asymmetric
Control Lines
- ----------------------------------------------------------------------------------------------------------------------------------
Confidential Page 2 5/20/98
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Serial No. Inventor(s) Title Issue Date Ownership/Licenses
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
08/706,974 Zhang, D. et al. Frequency Transformation Apparatus 9/3/96 [*]
and Method in Narrow-band Filter
Designs
- ----------------------------------------------------------------------------------------------------------------------------------
08/837,571 Sochor, J.R. Tuning Element for Microwave Filters 4/21/97
and Method of Making Same
- ----------------------------------------------------------------------------------------------------------------------------------
06/047,555 Moeckly, B.H. et al. Interface-Engineered High-Te 5/22/97
Josephson Junctions
- ----------------------------------------------------------------------------------------------------------------------------------
08/841,730 Kaplounenko, V. et al. Digital Optical Receiver With 8/21/97
Instantaneous Josephson Clock
Recovery Circuit
- ----------------------------------------------------------------------------------------------------------------------------------
08/995,766 Withers, R.S. et al. Superconducting Resonant Circuit 12/22/97
- ----------------------------------------------------------------------------------------------------------------------------------
09/054,912 Zhang, D. Microstrip Cross-Coupling Control 4/3/98
Apparatus and Method
- ----------------------------------------------------------------------------------------------------------------------------------
Zhang, D. Narrow Band-Reject Filter 4/1/98
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ISSUED FOREIGN PATENTS
- ----------------------------------------------------------------------------------------------------------------------------------
Country Serial No. Inventor(s) Title Issue Date
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
Australia 651,463 Char, K. et al. Grain Boundary Junctions in HTS 11/9/94
Films
- ----------------------------------------------------------------------------------------------------------------------------------
Australia 677590 Withers, R.S. et al. Superconducting Magnetic Resonance 8/21/97
Probe Coil
- ----------------------------------------------------------------------------------------------------------------------------------
Korea 122283 Char, K. et al. Grain Boundary Junctions in HTS 9/3/97
Films
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PENDING FOREIGN APPLICATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Country Serial No. Inventor(s) Title Issue Date
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
Canada 2,137,079 Withers, R.S., Superconducting Magnetic Resonance 05/28/93
- ----------------------------------------------------------------------------------------------------------------------------------
Confidential Page 3 5/20/98
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Country Serial No. Inventor(s) Title Issue Date Ownership/Licenses
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C>
Ligng, G-C. Probe Coil [*]
- ----------------------------------------------------------------------------------------------------------------------------------
China 95199566.2 Zhang, D. et al. Frequency Transformation Apparatus 10/12/95
and Method in Narrow-Band Filter
Designs
- ----------------------------------------------------------------------------------------------------------------------------------
Europe 94907958.6 Colclough, M.S. SQUID Control Apparatus
- ----------------------------------------------------------------------------------------------------------------------------------
Europe 93914293.1 Withers, R.S. et al. Superconducting Magnetic Resonance 05/28/93
Probe Coil
- ----------------------------------------------------------------------------------------------------------------------------------
Europe 95935705.4 Zhang, D. et al. Frequency Transformation Apparatus 7/30/97
and Method in Narrow-Band Filter
Designs
- ----------------------------------------------------------------------------------------------------------------------------------
Japan 222,828/1992 Newman, N. et al. Method of Preparing Hign Temperature 8/21/92
Superconducting Films on Opposite
Sides of a Substrate
- ----------------------------------------------------------------------------------------------------------------------------------
Japan 6-50035 Withers, R.S. et al. Superconducting Magnetic Resonance 05/28/93
Probe Coil
- ----------------------------------------------------------------------------------------------------------------------------------
Japan 6-506586 Lee, L.P. et al. Freestanding Structures of Perovskite- 8/24/93
Type Oxide Materials
- ----------------------------------------------------------------------------------------------------------------------------------
Japan 6-518199 Colclough, M.S. SQUID Control Apparatus 03/02/95
- ----------------------------------------------------------------------------------------------------------------------------------
Japan HEI 08-513274 Zhang, D. et al. Frequency Transformation Apparatus 10/12/95
and Method in Narrow-Band Filter
Designs
- ----------------------------------------------------------------------------------------------------------------------------------
Korea 94-704386 Withers, R.S. et al. Superconducting Magnetic Resonance 05/28/93
Probe Coil
- ----------------------------------------------------------------------------------------------------------------------------------
Korea 97-707601 Zhang, D., Liang, Frequency Transformation Apparatus 10/12/95
G-C., Shih, C-F and Method in Narrow-Band Filter
Designs
- ----------------------------------------------------------------------------------------------------------------------------------
KS 97-702448 Zhang, D. et al. Frequency Transformation Apparatus 10/12/95
and Method in Narrow-Band Filter
Designs
- ----------------------------------------------------------------------------------------------------------------------------------
Norway 944607 Withers, R.S., Liang, Superconducting Magnetic Resonance 05/28/93
G-C. Probe Coil
- ----------------------------------------------------------------------------------------------------------------------------------
Confidential Page 4 5/20/98
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Country Serial No. Inventor(s) Title Issue Date Ownership/Licenses
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C>
WO PCT/US95/12680 Zhang, D., Liang, Frequency Transformation Apparatus 10/12/95
G-C, Shih, C-F. and Method in Narrow-Band Filter
Designs
- ----------------------------------------------------------------------------------------------------------------------------------
WO 08/616,551 Berkowitz, S. Three-Terminal Devices with Wide 3/15/96
Josephson Junctions and Asymmetric
Control Lines
- ----------------------------------------------------------------------------------------------------------------------------------
WO PCT/US97/14748 Kaplounenko, V., Digital Optical Receiver With 8/21/97
Dubash, N.B., Zhang, Instantaneous Josephson Clock
Y-M., Goshal, U. Recovery Circuit
- ----------------------------------------------------------------------------------------------------------------------------------
Confidential Page 5 5/20/98
</TABLE>
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE B
- ----------------------------------------------------------------------------------------------------------------------------------
TRADEMARK NUMBER DATE COUNTRY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONDUCTUS 1,746,909 1/19/93 US
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS and design 1,742,131 12/22/92 US
- ----------------------------------------------------------------------------------------------------------------------------------
MR. SQUID 1,812,785 12/21/93 US
- ----------------------------------------------------------------------------------------------------------------------------------
TOO GOOD TO RESIST 1,753,065 2/16/93 US
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS B533,237 2/17/93 Australia
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 134 199 1/17/91 Austria
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 482,967 4/2/91 Benelux
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 414,967 7/9/93 Canada
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 1592354 5/16/90 France
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 11177397 1/31/91 Germany
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 401727 C/90 12/31/92 Italy
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS (cl. 9) 66274/1990 2/26/93 Japan
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS (cl. 10) 2451964 9/30/92 Japan
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS (cl. 11) 2703995 2/28/95 Japan
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 233430 3/2/92 S. Korea
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 383,556 7/1/91 Switzerland
- ----------------------------------------------------------------------------------------------------------------------------------
CONDUCTUS 00531974 8/16/91 Taiwan
- ----------------------------------------------------------------------------------------------------------------------------------
CLEARSITE Pending Japan, Europe, US, Canada
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE C
REGISTERED COPYRIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
REG. NO. REG. DATE COPYRIGHT
- --------------------------------------------------------------------------------
<C> <C> <S>
- --------------------------------------------------------------------------------
SU TX 4-449-856 3/7/97 Squid Control Instrumentation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SU TX 4-606-423 6/2/97 PC Squid Configuration
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE D
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
[LETTERHEAD]
CONFIDENTIAL
------------
March 24, 1998
Conductus, Inc.
969 West Maude Avenue
Sunnyvale, California 94086
Attention: Mr. Charles E. Shalvoy, President and Chief Executive Officer
-------------------------------------------------------------
Dear Charlie:
This letter agreement sets forth the terms and conditions under which
Conductus, Inc. ("Conductus" or the "Company") has retained Sutro & Co.
Incorporated ("Sutro") to act as its exclusive financial advisor with respect
to the private placement (the "Financing") of equity or equity-related
securities (the "Securities") on a best efforts basis on terms satisfactory
to the Company and in compliance with Section 4(2) of the Securities Act of
1933 as amended, and other federal and state securities laws.
1. SERVICES TO BE RENDERED - Sutro will assist the Company in effecting the
Financing on the terms and conditions of this letter agreement. In this
regard, we propose to undertake certain activities including, if
appropriate, the following:
(a) Advising the Company as to the form and structure of the Financing;
(b) Assisting in the preparation of a Private Placement Memorandum (the
"Memorandum") describing the Company, the transaction and the
securities offered in connection therewith (the "Securities").
Responsibility for the contents of such Memorandum shall be solely
that of the Company, and the Memorandum shall not be made available
to or used in discussions with prospective investors (the "Party"
or "Parties") by Sutro until both the Memorandum and its use for
that purpose have been approved by the Company;
(c) Identifying, introducing to, and consulting as to strategy for
initiating discussions with, potential investors;
(d) Negotiating the sale of the Securities to investors;
(e) Assisting in the preparation of definitive documentation for the
Financing.
1 of 4
<PAGE>
2. RETAINER - Sutro shall be paid a nonrefundable retainer in the amount of
$25,000 which shall be deemed compensation hereunder and which shall be
credited against any fees payable pursuant to paragraph 3(a) upon
completion of the Financing.
3. COMPENSATION - Upon completion of the Financing, the Company agrees to
pay Sutro:
(a) A cash placement fee (the "Placement Fee") equal to the greater of
$200,000 or six percent (6%) of the Securities sold to new investors and
three percent (3%) of the Securities to sold to existing shareholders and
certain investors listed on Attachment A. The Placement Fee is paid upon
consummation of, and out of the proceeds of, the proposed Financing.
Notwithstanding the above, Sutro will not be due a Placement Fee on the
first $400,000 raised from Asset Management Company or on Securities sold
to current Directors of the Company. The Placement Fee will be payable
regardless of the size of the Financing and whether or not the Financing
occurs in one transaction or a series of transactions.
4. SUTRO'S EXPENSES - In addition to the foregoing fees, and regardless of
whether the Financing contemplated by this letter agreement is
consummated, the Company agrees, upon request from time to time, to
promptly reimburse Sutro for all reasonable out-of-pocket expenses up to
limit of $25,000, including, but not limited to, such costs as
(i) printing, telephone, fax, courier service, copying, accommodations,
travel, and direct computer expenses, secretarial overtime and fees and
(ii) disbursements of legal counsel, if required. In the event, the
above expenses exceed $25,000; the Company will approve expenses in
advance, which approval shall not be unreasonably withheld.
5. TERM AND TERMINATION RIGHTS - It is understood that the Company hereby
engages Sutro on an exclusive basis for investment banking services
relating to the Financing for a term (the "Term") commencing on the date
hereof and ending on September 30, 1998. The Term shall be automatically
renewed for successive 30 day periods unless either party gives written
notice to the other within 30 days of the expiration of the Term of its
desire that this engagement expire.
Notwithstanding the foregoing, either Sutro or the Company may terminate
its obligation hereunder without liability if, in the reasonable opinion
of either party, a change has occurred in the Company's financial
condition, results of operations, properties, business prospects, or the
composition of the Company's management or Board of Directors, which has
adversely effected the marketability of the Company. The remaining
provisions of this letter relating to the payment of expenses incurred
prior to the end of the Term and the Indemnification Agreement shall
survive any termination or expiration of the engagement.
2 of 4
<PAGE>
If during the Term, or within the six months following the expiration
thereof, (a) a financing transaction or transactions occur for the
benefit of the Company which involves a Party (i) identified to the
Company by Sutro or (ii) with whom the Company or Sutro had a discussion
regarding the Financing during the engagement and whether or not such
discussions were initiated by Sutro, or (b) the Company enters into a
definitive agreement with any such Party specified in (i) or (ii) above
which subsequently results in a financing transaction or transactions,
then the Company will be obligated to pay Sutro the fees and expenses of
Sections 3 and 4.
6. SALE TRANSACTION - If during the Term, the Company consummates a Sale
Transaction (as defined below) or reaches a definitive agreement which
subsequently results in a Sale Transaction, the Company agrees to pay or
cause to be paid to Sutro, a sale transaction fee (the "Sale Transaction
Fee") equal to the lesser of three percent (3%) of the Aggregate
Consideration (as defined below) or $750,000. The Sale Transaction Fee
will be payable in cash upon the closing of the Sale Transaction.
The term "Sale Transaction" shall be defined to include any merger,
consolidation, sale of assets, tender or exchange offer, leveraged
buy-out, formation of a joint venture or partnership, reorganization or
other business combination, pursuant to which the business of the
Company is combined with that of an acquiring entity or any entity
affiliated with one or more acquirers (the "Party" or "Parties"), where
the Party has at least 50% of the capital stock of the surviving company.
The term "Aggregate Consideration" shall be defined to include cash,
equity securities, the fair market value of revolving credit facilities,
straight and convertible debt instruments or other obligations, and any
other form of payment or assumption of obligations made to the Company
or its shareholders in connection with the Sale Transaction. If any of
the consideration to be received by the Company is contingent upon
future performance of the Company's operations (e.g. revenues or
income), the portion of the fee attributable to such consideration shall
be paid to Sutro at such time or times as the Company receives such
consideration.
7. DUE DILIGENCE - In connection with Sutro's engagement, the Company and
its advisors will furnish Sutro with all data, material, and information
concerning the Company (the "Information") which Sutro reasonably
requests, all of which will be accurate and complete in all material
respects, except with respect to the Company's financial statements
which shall present fairly the financial position of the Company, to the
best of the Company's knowledge, at the time furnished. The Company
recognizes and confirms that in advising it and in undertaking the
assignment, Sutro will be using and relying on the Information and
financial and other information furnished to Sutro by potential
interested Parties, without independent verification. Moreover, Sutro
will not perform any appraisal of the assets or businesses of the
Company or any Party. Sutro is hereby authorized to use and deliver the
Information, and any other data obtained by Sutro from reliable
published sources, to prospective interested Parties. In connection with
the engagement of Sutro hereunder, the Company has entered into a
separate letter agreement, dated as of the date hereof, providing for
the indemnification of Sutro and certain related parties by the Company
(the "Indemnification Agreement").
8. RIGHT OF FIRST REFUSAL - The Company will provide Sutro with the right
of first refusal for one year to serve as a managing underwriter on any
public or private financing (debt or equity), or act as an advisor on
any merger, business combination, recapitalization or sale of some or
all of the equity or assets of the Company (collectively, "Future
Services"). In the event the Company notifies Sutro of its intention to
pursue an activity that would enable Sutro to exercise its right of
first refusal to provide Future Services, Sutro shall notify the Company
of its election to provide such Future Services,
3 of 4
<PAGE>
including notification of the compensation and other terms to which
Sutro claims to be entitled, within twenty (20) days of written notice
by the Company. In the event Sutro is engaged by the Company to provide
such Future Services, Sutro will be compensated as is reasonable and
customary within the industry PROVIDED; HOWEVER, that the terms of the
Indemnification Agreement shall apply to any additional engagement.
9. CALIFORNIA LAW - This letter agreement and the related indemnification
agreement referred to above shall be deemed made in California. Such
agreements shall be governed by the laws of the state of California,
without regard to such state's rules concerning conflicts of laws.
Should suit be brought to enforce this letter agreement or the
Indemnification Agreement, the prevailing party shall be entitled to
recover from the other reimbursement for reasonable attorneys' fees. Any
dispute arising from the interpretation, validity or performance of this
letter agreement or any of its terms and provisions shall be submitted
to binding arbitration with the National Association of Securities
Dealers.
10. Upon execution of this engagement letter, Sutro and the Company will
exchange mutually acceptable Confidentiality Agreements.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to us the enclosed duplicate copy of this letter
agreement along with the retainer. We look forward to working with you and to
the successful conclusion of this assignment.
Very truly yours,
SUTRO & CO. INCORPORATED
By: /s/ John M. Morris
---------------------------------
John M. Morris
Managing Director
Accepted and Agreed to
as of the date written above:
CONDUCTUS, INC.
By: /s/ Charles E. Shalvoy
-------------------------------------
Charles E. Shalvoy
President and Chief Executive Officer
4 of 4
<PAGE>
[LETTERHEAD]
Attachment A
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
CONFIDENTIAL
------------
March 24, 1998
Sutro & Co. Incorporated
11150 Santa Monica Blvd.
Suite 1500
Los Angeles, CA 90025
Gentlemen:
In consideration of Sutro's agreement to act on behalf of Conductus, Inc.
(the "Company"), in connection with the private placement, pursuant to the
engagement letter of even date herewith (the "Engagement Letter"), we hereby
agree to indemnify and hold harmless Sutro, its affiliates, the respective
partners, directors, officers, agents and employees of Sutro and its
affiliates and each person, if any, controlling Sutro or any of its
affiliates within the meaning of either Section 15 of the Securities Act of
1933 or Section 20 of the Securities Exchange Act of 1934, (Sutro and each
such other person are hereinafter referred to as an "Indemnified Person"),
from and against any such losses, claims, damages, expenses and liabilities
(or actions in respect thereof), joint or several, as they may be incurred
(including all legal fees and other expenses incurred in connection with
investigating, preparing, defending, paying, settling or compromising any
claim, action, suit, proceeding, loss, damage, expense or liability, whether
or not in connection with an action in which any Indemnified Person is a
named party) to which any of them may become subject (including in settlement
of any action, suit or proceeding, if such settlement is effected with the
Company's consent, which consent shall not be unreasonably withheld), and
which are related to or arise out of Sutro's engagement, the transaction
contemplated by such engagement or any Indemnified Person's role in
connection therewith, including, but not limited to, any losses, claims,
damages, expenses and liabilities (or actions in respect thereof) arising out
of, based upon or caused by any untrue statement or alleged untrue statement
of a material fact contained in the offering memorandum, or any amendment or
supplement thereto, or in any other document of the Company furnished to any
party or to Sutro in connection with the Financing Transaction, or arising out
of, based upon or caused by any omission or alleged omission to state in any
of them a material fact required to be stated therein or necessary to make
the statements in any of them not misleading. The Company will not, however,
be responsible under the foregoing provisions with respect to any loss,
claim, damage, expense or liability to the extent that a court having
jurisdiction shall have determined by a final judgment (not subject to
further appeal) that such loss, claim, damage, expense or liability resulted
from actions taken or omitted to be taken by Sutro due to its gross
negligence or willful misconduct. All capitalized terms not otherwise defined
herein have the same meaning as ascribed to them in the Engagement Letter,
unless the context indicates or requires otherwise.
1 of 3
<PAGE>
Promptly after receipt by an Indemnified Person of notice of the commencement
of any action, such Indemnified Person will, if a claim in respect thereof is
to be made against the Company, notify the Company of the commencement
thereof; but the omission to notify the Company will not relieve it from any
liability which it may have to any Indemnified Person otherwise than stated
in this Indemnification Agreement. In case any such action is brought against
any Indemnified Person, and it notifies the Company of the commencement
thereof, the Company will be entitled to participate therein and, to the
extent that it may wish, to assume the defense thereof, with counsel
reasonably satisfactory to such Indemnified Person; provided, however, that
if the defendants in any such action include both the Indemnified Person and
the Company and counsel for the Indemnified Person reasonably determines
there is a conflict of interest that cannot or should not be waived, the
Company shall not have the right to direct the defense of such action on
behalf of such Indemnified Person and such Indemnified Person shall have the
right to select separate counsel to defend such action on behalf of such
Indemnified Person. After notice from the Company to such Indemnified Person
of its election to assume the defense thereof and approval by such
Indemnified Person of counsel appointed to defend such action, the Company
will not be liable to such Indemnified Person for any legal or other
expenses, other than reasonable costs of investigation, incurred by such
Indemnified Person in connection with the defense thereof, unless: (i) the
Indemnified Person shall have employed separate counsel in accordance with
the proviso to the next preceding sentence (it being understood, however,
that in connection with such action the Company shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in
any one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances);
or (ii) the Company has authorized the employment of counsel for the
Indemnified Person at the expense of the Company. After any notice from the
Company to such Indemnified Person, the Company will not be liable for the
costs and expenses of any settlement of such action effected by such
Indemnified Person without the consent of the Company.
If the indemnity referred to above should be, for any reason whatsoever,
unenforceable, unavailable to or otherwise insufficient to hold harmless
Sutro and each Indemnified Person in connection with the transaction, each
Indemnified Person shall be entitled to receive from the Company, and the
Company shall pay, contributions for such losses, claims, damages,
liabilities and expenses (or actions in respect thereof) so that each
Indemnified Person ultimately bears only a portion of such losses, claims,
damages, liabilities, expenses and actions as is appropriate (i) to reflect
the relative benefits received by Sutro on the one hand and the Company on
the other hand in connection with the transaction or (ii) if the allocation
on that basis is not permitted by applicable law, to reflect not only the
relative benefits referred to in clause (i) above but also the relative
fault of Sutro and the Company in connection with the actions or omissions to
act which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations; provided, however,
that in no event shall the aggregate contribution of all Indemnified Persons
to all losses, claims, damages, liabilities, expenses and actions exceed the
amount of the fee actually received by Sutro pursuant to the engagement
letter. The respective relative benefits received by Sutro and the Company in
connection with the transaction shall be deemed to be in the same proportion
as the aggregate fee paid to Sutro in connection with the transaction bears
to the total consideration of the transaction. The relative fault of Sutro
and the Company shall be determined by reference to, among other things,
whether the actions or omissions to act were by Sutro or the Company and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action or omission to act.
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The indemnity, contribution and expense payment obligations of the Company
referred to above shall be in addition to any liability which the Company may
otherwise have and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of any Indemnified
Person and the Company. The Company also agrees that the Indemnified Persons
shall have no liability to the Company or any person asserting claims on
behalf of or in right of the Company for or in connection with any matter
referred to in this letter except to the extent that any such liability
results from the gross negligence or willful misconduct of Sutro in
performing the services that are the subject of this letter and in no event
shall such liability exceed the amount of fees actually received by Sutro
hereunder.
Very truly yours,
CONDUCTUS, INC.
By: /s/ Charles E. Shalvoy
-------------------------------------
Charles E. Shalvoy
President and Chief Executive Officer
Accepted and Agreed to
as of the date written above:
SUTRO & CO. INCORPORATED
By: /s/ John M. Morris
-------------------------------
John M. Morris
Managing Director
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