<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 0-11915
CONDUCTUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0162388
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
969 W. MAUDE AVE.
SUNNYVALE, CA 94086
(Address of principal executive offices)
(408) 523-9950
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
--- ---
As of July 31, 1999 there were 7,156,716 shares of the Registrants Common stock
outstanding.
<PAGE>
CONDUCTUS, INC.
FORM 10-Q
June 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------------------------------- ----
<S> <C>
Item 1: Financial Statements............................................................................1
Condensed Balance Sheets at June 30, 1999 and December 31, 1998.................................1
Condensed Statements of Operations for the Three Months and Six
Months Ended June 30, 1999 and 1998.............................................................2
Condensed Statements of Cash Flows for the Six Months Ended June 30,
1999 and 1998...................................................................................3
Notes to Condensed Financial Statements.........................................................4
Item 2 : Management's Discussion and Analysis of Financial Condition and Results of Operations...........7
Item 3: Quantitative and Qualitative Disclosures About Market Risk.....................................12
PART II: OTHER INFORMATION
- ---------------------------
Item 1: Legal Proceedings..............................................................................13
Item 2: Changes in Securities..........................................................................13
Item 3: Default upon Senior Securities.................................................................13
Item 4: Submission of Matters to a vote of Security Holders............................................13
Item 5: Other Information..............................................................................13
Item 6: Exhibits and Reports on Form 8-K...............................................................14
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
CONDUCTUS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 1,952,535 $ 1,547,169
Short-term investments................................................ 310,167 1,341,014
Accounts receivable .................................................. 3,123,524 1,109,794
Inventories........................................................... 793,709 842,384
Prepaid expenses and other current assets............................. 72,728 145,470
------------------ ------------------
Total current assets................................................ 6,252,663 4,985,831
Property and equipment, net........................................... 1,657,123 2,020,324
Other assets.......................................................... 90,404 28,800
------------------ ------------------
Total assets........................................................ $ 8,000,190 $ 7,034,955
================== ==================
LIABILITIES
Current liabilities:
Current portion of long-term debt..................................... $ 816,930 $ 892,139
Accounts payable...................................................... 520,531 658,982
Other accrued liabilities............................................. 1,226,353 778,758
------------------ ------------------
Total current liabilities........................................... 2,563,814 2,329,879
Long-term debt, net of current portion................................ 983,157 1,341,407
------------------ ------------------
Total liabilities................................................... 3,546,971 3,671,286
------------------ ------------------
STOCKHOLDERS' EQUITY
Preferred stock.......................................................... 5,736,124 5,683,461
Common stock............................................................. 716 714
Additional paid-in capital............................................... 42,299,686 42,278,423
Accumulated deficit...................................................... (43,583,307) (44,598,929)
------------------ ------------------
Total stockholders' equity.......................................... 4,453,219 3,363,669
------------------ ------------------
Total liabilities and stockholders' equity.......................... $ 8,000,190 $ 7,034,955
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONDUCTUS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Product sales............................... $ 142,400 $ 173,284 $ 539,170 $ 437,362
Contract.................................... 430,529 866,512 1,348,136 1,730,126
License..................................... 5,000,000 - 5,000,000 -
--------------- --------------- --------------- ---------------
Total revenues........................... 5,572,929 1,039,796 6,887,306 2,167,488
--------------- --------------- --------------- ---------------
Costs and expenses:
Cost of product sales...................... 597,283 618,653 1,166,950 1,467,569
Research and development................... 1,032,867 1,414,397 2,154,162 3,202,550
Selling, general and administrative........ 1,275,898 864,953 2,110,367 1,962,756
--------------- --------------- --------------- ---------------
Total costs and expenses................. 2,906,048 2,898,003 5,431,479 6,632,875
--------------- --------------- --------------- ---------------
Income (loss) from operations................. 2,666,881 (1,858,207) 1,455,827 (4,465,387)
Interest income............................... 23,220 14,175 48,964 42,774
Interest expense.............................. (91,450) (88,878) (188,329) (144,501)
Other income (expense)........................ 9,368 - 11,870 -
--------------- --------------- --------------- ---------------
Income (loss) before taxes............... 2,608,019 (1,932,910) 1,328,332 (4,567,114)
Tax expense (1,350) - (1,350) -
--------------- --------------- --------------- ---------------
Net income (loss)........................ 2,606,669 (1,932,910) 1,326,982 (4,567,114)
Preferred dividend............................ (99,680) - (311,360) -
--------------- --------------- --------------- ---------------
Net income (loss) attributable to
common shareholders........................ $ 2,506,989 $ (1,932,910) $ 1,015,622 $ (4,567,114)
=============== =============== =============== ===============
Net income (loss) per share:
Basic...................................... $ 0.35 $ (0.27) $ 0.14 $ (0.65)
=============== =============== =============== ===============
Diluted.................................... $ 0.26 $ (0.27) $ 0.10 $ (0.65)
=============== =============== =============== ===============
Shares used in per share calculations:
Basic...................................... 7,148,360 7,083,000 7,146,273 7,049,000
=============== =============== =============== ===============
Diluted.................................... 9,749,117 7,083,000 9,686,210 7,049,000
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CONDUCTUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................ $ 1,326,982 $ (4,567,114)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization............................................ 415,370 451,496
Amortization of discount on long term debt............................... (22,703) -
Provision for excess and obsolete inventories............................ 119,882 96,176
Provision for allowance for doubtful accounts............................ (133,974) 52,710
(Increase), decrease in:
Accounts receivable...................................................... (1,879,756) 389,494
Inventories.............................................................. (71,207) (154,072)
Prepaid expenses and other current assets................................ 72,742 (494,504)
Other assets............................................................. (61,604) 7,992
Increase, (decrease) in:
Accounts payable and other accrued liabilities........................... 108,785 (670,616)
--------------- ----------------
Net cash used in operating activities................................ (125,483) (4,888,438)
--------------- ----------------
Cash flows from investing activities:
Maturities of short-term investments..................................... 1,037,213 556,633
Purchases of short-term investments...................................... (6,367) -
Acquisition of property and equipment.................................... (52,169) (194,038)
--------------- ----------------
Net cash provided by investing activities............................ 978,677 362,595
--------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings................................................. - 4,450,000
Net proceeds from issuance of common stock............................... 21,265 120,278
Costs to register preferred stock........................................ (58,337) -
Principal repayments on long-term debt................................... (410,756) (1,383,277)
--------------- ----------------
Net cash provided by (used in) financing activities.................. (447,828) 3,187,001
--------------- ----------------
Net increase (decrease) in cash and cash equivalents..................... 405,366 (1,338,842)
Cash and cash equivalents at beginning of period............................ 1,547,169 2,611,560
--------------- ----------------
Cash and cash equivalents at end of period.................................. $ 1,952,535 $ 1,272,718
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<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 June 30, 1999 and for the
three and six months ended June 30, 1999 and 1998 include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial information set forth herein. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for an entire year. The December 31, 1998 balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
BASIC AND DILUTED LOSS PER SHARE:
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net income (loss)......................$ 2,506,989 $ (1,933,171) $ 1,015,622 $ (4,567,115)
================= ================== ================== =================
Weighted average number of
shares outstanding................... 7,148,360 7,083,000 7,146,273 7,049,000
----------------- ------------------ ------------------ -----------------
Shares used in computing
basic earnings (loss) per share...... 7,148,360 7,083,000 7,146,273 7,049,000
----------------- ------------------ ------------------ -----------------
Weighted average number of dilutive
common equivalent shares used in
computing diluted income (loss)
per share:
Series B preferred................. 2,461,230 - 2,461,230 -
Stock options...................... 139,527 - 78,707 -
----------------- ------------------ ------------------ -----------------
Shares used in computing diluted
net income (loss) per share.......... 9,749,117 7,083,000 9,686,210 7,049,000
================= ================== ================== =================
Net income (loss) per share:
Basic................................$ 0.35 $ (0.27) $ 0.14 $ (0.65)
================= ================== ================== =================
Diluted..............................$ 0.26 $ (0.27) $ 0.10 $ (0.65)
================= ================== ================== =================
</TABLE>
Common equivalent shares including common stock options and warrants
that could have potentially diluted basic earnings per share that were not
included in the computations of diluted loss per share because of
anti-dilution were approximately 92,000 and 110,000, respectively for the
three and six-month periods ended June 30, 1998.
4
<PAGE>
CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENT PRONOUNCEMENTS:
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This standard requires
companies to capitalize qualifying computer software costs, which are incurred
during the application development stage and amortize them over the software's
estimated useful life. Statement of Position 98-1 is effective for fiscal years
beginning after December 15, 1998. The adoption of Statement of Position 98-1
had no impact on the Company's financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, Statement of Position
98-5 is effective for fiscal years beginning after December 15, 1998. The
adoption of Statement of Position 98-5 had no impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new standards of
accounting and reporting for derivative instruments and hedging activities. This
statement requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
Statement No. 133 will be effective for fiscal years beginning after June 15,
1999. Conductus does not currently hold derivative instruments or engage in
hedging activities.
2. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------- -------------------
<S> <C> <C>
U.S. government contracts:
Unbilled
Recoverable costs and accrued profit on
progress completed - not billed............. $ 851,850 $ 726,342
Billed.......................................... 77,718 297,525
Commercial......................................... 252,617 378,562
License fee........................................ 2,100,000 -
Allowance for doubtful accounts.................... (158,661) (292,635)
------------------- -------------------
$ 3,123,524 $ 1,109,794
=================== ===================
</TABLE>
5
<PAGE>
CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Raw materials....................................... $ 356,832 $ 441,130
Work in process..................................... 582,062 198,341
Finished goods...................................... 412,450 640,666
Allowance for excess and obsolete inventories....... (557,635) (437,753)
------------------- -------------------
$ 793,709 $ 842,384
=================== ===================
</TABLE>
4. LONG TERM DEBT:
Our credit facilities consist of a loan from a leasing company, a bank
equipment term loan, a bank line of credit and a lease line of credit for new
equipment purchases. Obligations related to our credit facilities as of June 30,
1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Loan payable to leasing company..................... $ 1,672,497 $ 1,978,366
Bank equipment term loan payable.................... 127,590 255,180
------------------- -------------------
Total.......................................... 1,800,087 2,233,546
Less: current portion............................... 816,930 892,139
------------------- -------------------
Long-term debt................................. $ 983,157 $ 1,341,407
=================== ===================
</TABLE>
All of the credit facilities contain reporting and financial covenants.
In the event of default on any of these covenants, no further amounts would be
advanced to the Company under any facility. Additionally, the entire amounts
outstanding could become due and payable immediately upon default and those
assets that are collateralized could be seized, unless the lender waives such
default. At June 30, 1999, Conductus was in compliance with all financial
covenants.
5. LICENSE AGREEMENT:
On May 4, 1999, the Company entered into a definitive agreement with
General Dynamics Information Systems, Inc. (GDIS) to license its high
temperature superconductive (HTS) electronics and cryoelectronics technology.
Under the license agreement, GDIS purchased rights to Conductus' HTS thin-film
technology and other intellectual property for $5,000,000 plus future royalties
and will have rights to use and sell this technology for use in U.S. Government
or state, local and foreign government markets, as defined. Under the license
agreement, GDIS made an immediate payment to the Company of $2,900,000. In
addition, GDIS will pay the Company $175,000 on the first day of each month for
12 months beginning on July 1, 1999. The Company and GDIS also entered into a
Cross-License, Supply and Training Agreement under which the Company and GDIS
agreed to cross-license any updates to the licensed technology developed by
either party. Additionally, the Company will provide product and training to
GDIS in exchange for payment at standard commercial rates from GDIS. As a result
of this transaction, Conductus recognized revenues of $5,000,000 during the
quarter, which represented 90% and 73%, respectively of total revenues for the
three and six-month periods ended June 30, 1999.
6
<PAGE>
Item 2 : Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. CONDUCTUS, INC.'S (THE "COMPANY" OR
"CONDUCTUS") ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" IN PART 1
OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1998. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT ON
FORM 10-Q.
OVERVIEW
We develop, manufacture and market electronic components and systems
based on superconductors for applications in the worldwide telecommunications
markets. As of June 30, 1999, we had accumulated losses of approximately
$43,583,000 and we expect to incur significant additional losses during the
remainder of 1999. We, alone or with collaborative partners, must
successfully develop, manufacture, introduce and market our potential
products in order to achieve profitability. We do not expect to recognize
meaningful product sales until we successfully develop and commercialize
superconductive components, systems and subsystems that address significant
market needs.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND
1998
Total revenues consist primarily of contract revenue and, to a
lesser extent, product sales. In addition, in May 1999, Conductus entered
into a definitive agreement with General Dynamics Information Systems, Inc.
(GDIS) to license its high temperature superconductive (HTS) electronics and
cryoelectronics technology. Under the license agreement, GDIS purchased
rights to Conductus' HTS thin-film technology and other intellectual property
for $5,000,000 plus future royalties and will have rights to use and sell
this technology for use in U.S. Government or state, local and foreign
government markets. As a result of this agreement, Conductus recorded license
revenues of $5,000,000 during the second quarter of 1999.
Total revenues increased by 436% to $5,573,000 for the quarter ended
June 30, 1999 from $1,040,000 in the comparable period of 1998. Revenues for
the six months ended June 30, 1999 were $6,887,000, which represents an
increase of 218% over the comparable period of 1998.
Revenue under U.S. government research and development contracts
represented approximately 8% and 20%, respectively of total revenue for the
three month and six month periods ended June 30, 1999 compared to 83% and 80%
for the comparable periods of 1998. The decrease in contract revenues as a
percent of total revenues was primarily due to the impact of the license
revenues on total revenue and, to a lessor extent, a reduction of contract
revenues during the comparison periods. Contract revenues decreased by 50% to
$431,000 and by 22% to $1,348,000, respectively for the three and six-month
periods ended June 30, 1999 from the comparable periods of 1998. This
decrease is primarily attributable to the completion of several government
contracts. We have submitted, or are in the process of preparing, several
proposals related to prospective contracts associated with our core wireless
business and we will continue to submit proposals as additional programs
become available. We believe we will be able to participate in several of the
contracts for which proposals have been submitted or are in preparation,
however we cannot assure you that we will receive the level of awards we
anticipate. Additionally, the recognition of revenue and receipt of payment
pursuant to these contracts and awards are subject to numerous risks.
Product revenues for the three months ended June 30, 1999 decreased
by 18% to $142,000 from $173,000 in the comparable period of 1998. This
decrease is primarily due to a decrease in revenues from the sales of
magnetic sensing systems and other products discontinued in the prior year,
which do not relate to our core market. For the six months ended June 30,
1999, product revenues increased by 23% to $539,000 from $437,000 in the
comparable period of 1998. This increase in product revenues was primarily
the result of an increase in sales of the Company's wireless
telecommunications products during the comparison periods partially offset by
a decrease in revenues from the sales of magnetic sensing systems and other
products.
7
<PAGE>
Cost of product sales was primarily composed of costs of products
related to our wireless telecommunications products. Cost of product sales
was $597,000 for the quarter ended June 30, 1999 compared to $619,000 for the
comparable period of 1998. For the six months ended June 30, 1999, cost of
product sales was $1,167,000 compared to $1,468,000 for the comparable period
of 1998. These decreases are primarily attributable to the decreases in the
sales of magnetic sensing systems and other products discontinued in the
prior year as well as the lower gross margins resulting from the integration
of the wireless products into the product mix during the comparison periods.
Research and development includes both externally and internally
funded projects. Research and development expenses were $1,033,000 in the
quarter ended June 30, 1999 compared to $1,414,000 in the comparable period
of the prior year. For the six-month period ended June 30, 1999, research and
development expenses were $2,154,000 compared to $3,203,000 in the first six
months of 1998. Research and development, as a percentage of revenue,
represented 19% and 31%, respectively for the three and six month periods
ended June 30, 1999. This compares to research and development expenses 136%
and 148% as a percentage of revenue for the comparable periods of 1998. The
decrease in research and development expense was primarily attributable to a
decrease in spending on internally funded projects as well as a decrease in
contract activities during the comparison periods. The decrease in research
and development expenses as a percentage of revenues is primarily the due to
the impact of the increased levels of revenues during the comparison periods
resulting from the license revenues recorded during the quarter ended June
30, 1999. Although spending on internal research and development has decrease
from the prior year, we expect to continue to incur significant research and
development expenses on internally funded programs as we seek to develop
additional commercial products, particularly in the wireless communications
area and, as a result, anticipate moderate increases in research and
development expenses during the remainder of 1999.
Selling, general and administrative expenses include costs
associated with marketing, sales, and various administrative activities.
Selling, general and administrative expenses were $1,276,000 and $865,000 in
the quarters ended June 30, 1999 and 1998, respectively. For the six months
ended June 30, 1999 and 1998, selling, general and administrative expenses
were $2,110,000 and $1,963,000, respectively. The increase in spending during
the comparison periods was primarily due to legal, consulting and other
charges recorded during the second quarter of 1999 related to the completion
of the license agreement with GDIS. As we continue to focus on the expansion
of the wireless products business, we expect sales and marketing expenses to
increase during 1999 as compared to 1998 to the extent we increase sales of
commercial products, particularly in the communications markets.
Interest and other expense, net was $59,000 and $75,000 for the
three-month periods ended June 30, 1999 and 1998, respectively. For the six
months ended June 30, 1999 and 1998, Interest and other expense, net was
$128,000 and $102,000, respectively. Interest charges related primarily to
our loan from a leasing company as well as our bank term loan.
As a result of incurring losses, we have not incurred any income tax
liability. We have established a valuation allowance against our deferred tax
assets (principally the tax benefit of our net operating losses) and review
this allowance on a periodic basis. At such time that we believe that it is
more likely than not that the deferred tax asset will be realized, the
valuation allowance will be reduced.
We do not believe that inflation has had a material effect on our
financial condition or results of operations during the past two fiscal
years. However, we cannot assure you that our business will not be affected
by inflation in the future.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through:
- $13,251,000 in net proceeds from our initial public offering of
common stock in August 1993.
- $9,892,000 in net proceeds from our follow-on public offering of
common stock in June 1996,
- $20,989,000 raised in private placement financings,
- $45,319,000 from U.S. government contracts,
- $1,800,000 in outstanding borrowings under various lease and
bank loan arrangements, and
- $3,843,000 in interest income.
As of June 30, 1999 our aggregate cash, cash equivalents and short
term investments totaled $2,263,000. Additionally, we have a bank line of
credit facility and an equipment lease line. We may borrow up to a maximum of
$2,000,000 under the bank line of credit based on a limitation of 80% of
certain eligible receivables. As of June 30, 1999, the total amount
outstanding under the bank line of credit facility was $128,000 and no
additional amount was available under the line. Under the equipment lease, we
may finance up to a total of $1,000,000 of future equipment acquisitions. The
balance outstanding under the equipment line as of June 30, 1999 was $195,000.
Net cash used in operations was $125,000 during the six months ended
June 30, 1999. Net cash used in operations was primarily the result of an
increase in net assets partially offset by net income of $1,327,000 during
the period. We anticipate that we will incur significant additional net
losses during the remainder of 1999 and anticipate that our accounts
receivable and inventories may increase as a result of increased working
capital requirements to support wireless telecommunications products. As a
result, we anticipate the use of additional cash in operating activities
during the remainder of 1999.
Net cash provided by investing activities was $979,000 during the
six months ended June 30, 1999. The balance was primarily related to the
proceeds from sales of short-term investments during the period partially
offset by investments in additional property and equipment.
Net cash used in financing activities was $448,000 during the six
months ended June 30, 1999. This usage was primarily related to principal
payments under capital loans payable and an equipment term loan.
We anticipate total capital expenditures of approximately $500,000
during the remainder of 1999, which will be funded primarily from our
$1,000,000 lease line of credit for new equipment purchases.
All of our credit arrangements contain reporting and financial
covenants, which we are required to satisfy. We cannot assure you that we
will satisfy all such covenants in the future. We cannot assure you that if
we default on any of the covenants, we could obtain a waiver of the default
from the lender. In the event of default on any of these covenants, no
further amounts would be advanced to us under any facility, the entire
amounts outstanding could become due and payable immediately upon default,
and those assets that are collateral could be seized, unless such default is
waived by the lender.
9
<PAGE>
To date we have received limited revenues from product sales. The
continued development of our products will require a commitment of
substantial funds to conduct further research and development and testing, to
establish commercial-scale manufacturing and to market these products. We
expect to use significant amounts of cash for capital equipment and to
support operations until product revenues increase. Additional financing may
not be available on acceptable terms or at all. Unless we are able to raise
significant additional funds, through debt or equity issuances, asset sales
or otherwise, we will be required to delay, reduce or eliminate one or more
of our research and development programs or obtain funds from collaborative
partners or others that may require us to relinquish rights to our
technologies or potential products that we would not otherwise relinquish.
Our future capital requirements will depend on many factors, including:
- continued progress in our research and development programs,
- the magnitude of these programs,
- the time and cost involved in obtaining any required regulatory
approvals,
- the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patents,
- successful completion of technological, manufacturing and market
requirements,
- changes in existing research relationships,
- the availability of funding under government contracts,
- our ability to establish collaborative arrangements, and
- the cost of manufacturing scale-up and the amount and timing of
future revenues.
As discussed in Note 5 of the Notes to Condensed Financial
Statements, the Company entered into a definitive agreement with General
Dynamics Information Systems, Inc. (GDIS) to license its high temperature
superconductive (HTS) electronics and cryoelectronics technology on May 4,
1999. Under the license agreement, GDIS made an immediate payment to the
Company of $2,900,000. In addition, GDIS will pay the Company $175,000 on the
first day of each month for 12 months beginning on July 1, 1999.
We anticipate that existing sources of liquidity and anticipated
revenue, primarily from government contracts in addition to the cash payments
resulting from the license transaction described above, will satisfy our
projected working capital and other cash requirements into the fourth quarter
of 1999. However, there can be no assurance that changes in our plans or
other events affecting Conductus will not result in the expenditure of our
resources before then. Additionally, we can give you no assurance that
additional financing will be available on acceptable terms or at all.
10
<PAGE>
YEAR 2000 COMPLIANCE
The potential problem presented by the year 2000 is the result of
computer programs being written using two digits rather than four to define
the applicable year. As a result, many computer systems and applications
experience problems handling dates beyond the year 1999 and will need to be
modified before the year 2000 in order to function properly. Any of our
computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations, causing disruptions of key operations.
Important operations, which could be disrupted, include, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
We have expended resources to review our products, services and
internal use software to identify those products, services and systems that
may not properly process the year 2000 date. The costs related to potential
year 2000 problems are expensed as incurred, and represent a reallocation of
existing resources.
Our compliance project comprises four phases: (1) identification of
risks, (2) assessment of those risks, (3) development of remedies and
contingency plans, and (4) implementation and testing. The following
describes the status of our year 2000 compliance project, and our estimates
regarding future compliance expenses, in relation to four pertinent aspects
of our business:
SALES, MANUFACTURING AND FINANCE INFORMATION SYSTEMS. We are
currently in the fourth phase of our compliance project. Our vendors have
confirmed that the versions of software currently in use are year 2000
compliant. We plan to complete our tests by the end of September 1999. We do
not anticipate incurring any material expenses to complete our tests on these
systems.
NETWORK HARDWARE, SOFTWARE AND DESKTOP WORKSTATIONS. We have
completed phase three and have developed a plan to complete an upgrade of all
non-compliant hardware and software. We estimate that all non-compliant
hardware and software will be replaced early in the fourth quarter and we
estimate we will spend approximately $250,000 replacing non-compliant
equipment.
PRODUCTS WE HAVE SOLD. Our completed assessment indicates that these
products are year 2000 compliant. We do not anticipate incurring any material
expenses related to products we have sold or to any current product designs.
FABRICATION AND MANUFACTURING EQUIPMENT. We are completing phase two
and beginning to develop remedies and contingency plans. We expect to
complete phase two by the end of August 1999, and to complete phase three by
the end of October 1999.
We are unable to estimate the remaining financial impact, if any, of
the year 2000 because our assessment phase is not completed. However, we
currently anticipate that our $1,000,000 equipment lease line will be
sufficient to cover both the network costs and any costs that may be incurred
related to the upgrade or replacement of fabrication and manufacturing
equipment in 1999.
We are in the process of formally communicating with our significant
suppliers and large customers to determine the extent to which we are
vulnerable to their failure to fix their own year 2000 problems. We cannot
assure you that the systems of other companies on which our systems rely will
be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with our systems, would not harm us.
As our year 2000 compliance project continues, we may (a) discover
additional year 2000 problems, (b) may not be able to develop, implement, or
test remedies or contingency plans, or (c) may find that the costs of these
activities exceed current expectations and become material. These
contingencies could force us to spend additional time and money to avoid
potential year 2000 problems.
11
<PAGE>
In the event we do not complete our compliance program as scheduled,
the year 2000 could cause significant problems. If all of our key operations
cease to function properly, we could experience an enterprise-wide shutdown
for an unknown period of time. We are unable to assess the magnitude of any
losses that could result from this worst case scenario.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Conductus' general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. Our
exposure to financial market risks relates primarily to our exposure to the
impact of changes in interest rates on our fixed income investment portfolio
and long-term debt obligations.
FIXED INCOME INVESTMENTS
The primary objective of our investment activities is to preserve
our principal while maximizing yields without significantly increasing risk.
To achieve this objective, we maintain a portfolio that consists primarily of
short-term, high-quality commercial paper and foreign debt. All of our fixed
income investments have maturities of less than one year. Hence, our exposure
related to changes in interest rates is somewhat limited due to the
short-term nature of our portfolio. We do not use derivative financial
instruments in our investment portfolio.
DEBT OBLIGATIONS
Conductus' outstanding debt consists of term loan obligations that
are primarily based on fixed rates. Therefore, our exposure to changes in
interest rates is limited because any increase or decrease in interest rates
would not significantly increase or decrease interest expense on our debt
obligations.
12
<PAGE>
PART II: OTHER INFORMATION
Item 1: Legal Proceedings - Not Applicable
Item 2: Changes in Securities - Not Applicable
Item 3: Default upon Senior Securities - Not Applicable
Item 4: Submission of Matters to a vote of Security Holders
On May 27, 1999, we held an annual meeting of stockholders. Because
certain of our stockholders failed to receive notice of the meeting, no
action was taken. We are holding a new annual meeting of stockholders on
August 19, 1999 at 3:00 p.m. local time at our offices located at 969 West
Maude Avenue, Sunnyvale, California 94086.
Item 5: Other Information
Holders of our common stock currently enjoy the substantial benefit
of being able to easily buy or sell our common stock because our common stock
is listed on the Nasdaq SmallCap Market trading system. In November 1998,
Nasdaq informed us that, on the basis of our Quarterly Report on Form 10-Q
for the quarter ending September 30, 1998, our net tangible assets had fallen
below the level required for continued listing of our common stock on the
Nasdaq National Market trading system. Subsequently, we submitted information
to Nasdaq regarding our anticipated future net tangible assets and certain
financing plans. Based on this submission, we applied to have our common
stock listed on the Nasdaq SmallCap Market. Pending approval of our
application, our common stock began trading on the Nasdaq SmallCap Market.
Nasdaq informed us that our application to be listed on the Nasdaq SmallCap
Market had been denied. We requested an oral hearing on the subject, which
was held on May 13, 1999, and delisting of our common stock was stayed
pending the results of this hearing. In July 1999, we were informed that we
have been granted a temporary exception from the net tangible assets
requirement subject to meeting certain conditions. The terms of the exception
require that our net tangible assets, as reflected in this Quarterly Report
on Form 10-Q for the quarter ending June 30, 1999 exceed $3.5 million and
that this Form 10-Q must be filed by August 16, 1999. Once this Form 10-Q has
been filed and Nasdaq determines that we have met the terms of the exception,
our common stock shall continue to be listed on The Nasdaq SmallCap Market.
Pursuant to the terms of the exception that was granted, our common
stock has been trading on the Nasdaq SmallCap Market under the symbol CDTSC.
The "C" will be removed from the end of our symbol when Nasdaq confirms our
compliance with the terms of our exception and with all other criteria
necessary for continued listing.
13
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
(A) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------
<C> <S>
2.1(1) Stock Exchange Agreement dated as of May 28, 1993, between the
Company and Tristan Technologies, Inc.
3.1(2) Restated Certificate of Incorporation.
3.2(3) Restated Bylaws.
3.3(4) Certificate of Designation of Series B Preferred Stock.
4.1(3) Stockholder Rights Plan.
10.1(1) 1987 Stock Option Plan.
10.2(1) Amended 1989 Stock Option Plan.
10.3(5) 1992 Stock Option/Stock Purchase Plan.
10.4(6) 1994 Employee Stock Purchase Plan.
10.5(1) Second Amended and Restated Registration Rights Agreement dated
June 3, 1993.
10.6(4) Form of Series B Preferred Stock and Warrant Purchase Agreement,
dated September, 1998, and September 22, 1998, between the
Company and the Series B Investors.
10.7(4) Form of Warrant to Purchase Common Stock between the Company and
the Series B Investors.
10.8(7) Employment Agreement dated May 3, 1994 between Registrant and Mr.
Charles E. Shalvoy.
10.9(1) Form of Indemnification Agreement between the Registrant and each
of its directors and officers.
10.10(1)+ Coordinated Research Program Agreement dated October 14, 1988 and
Amendment dated May 26, 1991 between the Registrant and
Hewlett-Packard Company ("H-P"), as amended by the Agreement
between Registrant and Hewlett-Packard Company dated June 2,
1993.
10.11(8) Collaboration Agreement between Registrant and CTI dated
September 19, 1995.
10.12(8) High Temperature Superconductor Thin-Film Manufacturing Alliance
Agreement among Registrant, Superconductor Technologies, Inc.,
Stanford University, Georgia Research Corporation,
Microelectronic Control and Sensing Incorporated, IBIS, Focused
Research and BDM Federal dated November 17, 1995.
10.13(9)+ Superconducting Filter Technology Joint Development Agreement
dated April 25, 1996 between the Registrant and Lucent
Technologies Inc.
10.14(4) Engagement Letter between the Company and Sutro and Co. Inc.,
dated March 24, 1998.
10.15(4) Amendment to Engagement Letter between the Company and Sutro and
Co. Inc., dated September 2, 1998.
10.16(4) Engagement Letter between the Company and Davenport and Co.,
dated September 2, 1998.
10.17(4) Master Lease Agreement between the Company and Leasing
Technologies International, Inc., dated June 15, 1998.
10.18(1) Lease Agreement dated May 3, 1993 between the Registrant and
Mozart-McKee Limited Partnership for Sunnyvale facilities.
10.19(7) Lease Agreement dated December 8, 1994 between Registrant and
Mozart-McKee Limited Partnership for Sunnyvale facilities.
10.20(7) Business Loan Agreement dated August 15, 1994 between Registrant
and Silicon Valley Bank for working capital credit facility and
term loan facility.
10.21(10) Loan Modification Agreement dated June 30, 1997, between
Registration and Silicon Valley Bank modifying the Business Loan
Agreement dated August 15, 1994.
10.22(10) Loan Modification Agreement dated November 12, 1997, between
Registration and Silicon Valley Bank modifying the Business Loan
Agreement dated August 15, 1994.
10.23(10) Loan Modification Agreement dated December 23, 1997, between
Registration and Silicon Valley Bank modifying the Business Loan
Agreement dated August 15, 1994.
10.24(11) Business Loan Agreement dated March 8, 1996 between Registrant
and Silicon Valley Bank for working capital credit facility and
term loan facility.
14
<PAGE>
10.25(12) Business Loan Agreement dated December 27, 1996 between
Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
10.26(4) Master Loan and Security Agreement between the Company and
Transamerica Business Credit Corporation, dated June 26, 1998.
10.27(4) Stock Subscription Warrant Agreement between the Company and
Transamerica Business Credit Corporation, dated June 26, 1998.
10.28(13) Silicon Valley Bank Loan Agreement.
10.29(13) Collateral Assignment, Patent Mortgage and Security Agreement
between the Company and Silicon Valley Bank.
10.30(10)+ Asset Purchase Agreement dated July 9, 1997 between Registrant
and Bruker Instruments, Inc. for sale of assets of Registrant's
NMR Probe business.
10.31(10) Asset Purchase Agreement dated August 15, 1997 between Registrant
and Neocera, Inc. for sale of Registrant's assets related to its
temperature controller business.
10.32(10) Asset Purchase Agreement dated September 3, 1997, between
Registrant and Niki Glass Ltd. for sale of Registrant's assets
related to portions of its instruments business.
10.33(14)+ License Agreement with General Dynamics, dated May 4, 1999.
10.34(14)+ Cross-License, Supply and Training Agreement, dated May 4, 1999.
27.1 Financial Data Schedule.
</TABLE>
+ Confidential treatment granted or requested as to certain portions
of these exhibits.
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (Number 33-64020), filed with the SEC on May 15, 1996, as
amended.
(2) Incorporated herein by reference to the Company's 1993 Annual Report on
Form 10-K.
(3) Incorporated herein by reference to the Company's Registration Statement
on Form 8-K filed with the SEC on January 22, 1998.
(4) Incorporated herein by reference to the Company's Form 10-Q, filed with
the SEC on November 16, 1998.
(5) Incorporated herein by reference to the Company's Registration Statement
on Form S-8, filed with the SEC on November 26, 1997.
(6) Incorporated herein by reference to the Company's Registration Statement
on Form S-8, filed with the SEC on August 5, 1994.
(7) Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-K.
(8) Incorporated herein by reference to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Number 333-3815), filed with the SEC
on June 17, 1996.
(9) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (Number 333-3815), filed with the SEC on May 10, 1996, as
amended.
(10) Incorporated herein by reference to the Company's 1998 Annual Report on
Form 10-K.
(11) Incorporated herein by reference to the Company's 1995 Annual Report on
Form 10-K.
(12) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-K.
(13) Incorporated herein by reference to the Company's Form 10-Q, filed with
the SEC on May 14, 1998.
(14) Incorporated herein by reference to the Company's Form 10-Q, filed with
the SEC on May 17, 1999.
(B) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONDUCTUS, INC.
Dated: August 13, 1999 /s/ Ron Wilderink
-----------------------------------------
Ron Wilderink, Vice President of Finance
and Chief Financial Officer
16
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,952,535
<SECURITIES> 0
<RECEIVABLES> 3,123,524
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<INVENTORY> 793,709
<CURRENT-ASSETS> 6,252,663
<PP&E> 9,485,195
<DEPRECIATION> 7,828,072
<TOTAL-ASSETS> 8,000,190
<CURRENT-LIABILITIES> 2,563,814
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5,736,124
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