<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1999.
REGISTRATION NO. 333-70373
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
CONDUCTUS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 77-0162388
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
969 W. MAUDE AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 523-9950
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
CHARLES E. SHALVOY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONDUCTUS, INC.
969 W. MAUDE AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 523-9950
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
BROOKS STOUGH, ESQ.
WILLIAM E. GROWNEY, JR., ESQ.
KEVIN A. LUCAS, ESQ.
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
(650) 321-2400
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 26, 1999
3,069,243 SHARES
[LOGO]
CONDUCTUS, INC.
COMMON STOCK
CERTAIN OF OUR STOCKHOLDERS ARE OFFERING 3,069,243 SHARES OF OUR COMMON STOCK.
THIS OFFERING IS NOT BEING UNDERWRITTEN. SEE "PLAN OF DISTRIBUTION" STARTING ON
PAGE 42.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES CONSIDERABLE RISKS. SEE "RISK FACTORS"
STARTING ON PAGE 5.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
We will not receive any of the proceeds from the sale of these shares. We
have agreed to bear certain expenses in connection with the registration and
sale of these shares.
Our common stock is traded in the Nasdaq SmallCap Market under the symbol
"CDTS." On April 20, 1999, the closing sale price of our common stock in the
Nasdaq SmallCap Market was $1 3/4 per share.
PROSPECTUS DATED , 1999
<PAGE>
PROSPECTUS SUMMARY
CONDUCTUS, INC.
Conductus, Inc., was founded in 1987 and is based in Sunnyvale, California.
Conductus develops, manufactures and markets electronic components and systems
based on superconductors for applications in the worldwide telecommunications
market. For many applications, the unique properties of superconductors offer
significant performance advantages over products based on conventional copper
electronic components. These advantages, including improved sensitivities and
efficiencies, can lower the cost or improve the performance of electronic
components at the system level.
We are registering the common stock to comply with contractual obligations
arising under the Series B Preferred Stock and Warrant Purchase Agreement, dated
September 11, 1998, by and among Conductus and investors in our Series B
preferred stock financing. We are registering these shares of common stock so
that these investors may sell in the public market any common stock they acquire
upon the conversion of their Series B preferred stock or the exercise of their
warrants.
OUR ADDRESS:
Conductus, Inc.
969 W. Maude Avenue
Sunnyvale, California 94086
(408) 523-9950
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered....................................................................... 3,069,243 shares
Common stock to be outstanding after this offering......................................... 10,213,363 shares
Nasdaq SmallCap Market symbol.............................................................. CDTS
</TABLE>
The above figures are based on the number of shares outstanding as of
February 15, 1999.
The number of shares to be outstanding after this offering assumes:
- the conversion of 2,461,227 shares of currently outstanding Series B
preferred stock convertible into the same number of shares of common
stock, and
- the exercise of currently outstanding warrants to purchase 608,016 shares
of common stock.
However, we cannot predict how many of these shares of Series B preferred stock
will be converted into common stock or how many of these warrants will be
exercised for common stock. The number of shares of common stock outstanding
after this offering could be less than 10,213,363.
The number of shares to be outstanding after this offering does not include
1,020,090 shares of common stock issuable upon the exercise of stock options
outstanding as of February 15, 1999. Nor does that figure include 489,990 shares
reserved for future grants of stock options or 111,606 shares reserved for
future direct stock issuances.
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................................................................. $ 12,543 $ 9,454 $ 4,689
Loss from operations............................................................ (5,109) (7,499) (7,132)
Net loss attributable to common shareholders.................................... (5,004) (7,543) (7,829)
Basic and diluted net loss per share attributable to common shareholders........ $ (0.80) $ (1.09) $ (1.10)
Shares used in per share calculations........................................... 6,263 6,897 7,088
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................................................. $ 2,656
Total assets................................................................................. 7,035
Long-term obligations........................................................................ 1,341
Accumulated deficit.......................................................................... (44,599)
Total stockholders' equity................................................................... 3,364
</TABLE>
The above "basic and diluted net loss per share" and "shares used in per share
calculations" information was computed on the basis described in Note 2 of Notes
to Consolidated Financial Statements.
4
<PAGE>
RISK FACTORS
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US, OR THAT
WE CURRENTLY CONSIDER IMMATERIAL, MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ SMALLCAP MARKET, OUR COMMON
STOCK WILL BECOME LESS EASILY TRADABLE AND YOU MAY FIND YOURSELF UNABLE TO
QUICKLY AND EASILY BUY OR SELL OUR COMMON STOCK
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 has since informed us that our
application to be listed on the Nasdaq SmallCap Market has been denied. We have
requested an oral hearing on the subject which has not yet been scheduled, and
delisting of our common stock has been stayed pending the results of this
hearing.
Although Conductus satisfied Nasdaq's requirements for listing on the Nasdaq
SmallCap Market as of December 31, 1998, we do not expect to satisfy these
requirements as of March 31, 1999. We are taking actions designed to help us
satisfy the listing requirements by June 30, 1999. These actions include seeking
to raise additional equity capital and seeking to reduce our operating losses.
However, we may not be successful in these efforts. In addition, even if we are
successful, Nasdaq may deny our appeal if they believe we will not satisfy the
criteria over the longer term.
If our common stock is delisted, trading in our common stock, if any, would
then be conducted in the over-the-counter market on an electronic bulletin
board, or in what are commonly referred to as the "pink sheets." You would then
find it more difficult to sell, or to quickly and accurately obtain quotations
as to the price of, our common stock.
In addition, if we fail to maintain either (a) net tangible assets, as
defined in Rule 3a51-1 of the Securities Exchange Act, of at least $2,000,000 or
(b) average revenue over a three year period of at least $6,000,000, we could
become subject to certain "penny stock" rules. These rules subject brokers and
dealers who sell or make a market in our common stock to additional trading
rules and requirements. For example, these brokers or dealers would be required
to maintain detailed records on Conductus and their own trading activities in
connection with our common stock. Consequently, this could affect the
willingness of brokers and dealers to sell or make a market in our common stock.
This, in turn, could affect your ability to quickly and easily sell our common
stock.
WE HAVE A HISTORY OF LOSSES AND MAY NEVER BECOME PROFITABLE
We cannot assure you that we will ever be profitable or, if we become
profitable, that we will continue to be profitable thereafter. As of December
31, 1998, we had accumulated net losses of approximately $44.6 million. We
expect to incur substantial additional losses at least through 1999 as we expand
our operations. Continued development of our products may require us to commit
substantial resources to:
- research and development,
5
<PAGE>
- the establishment of additional pilot and commercial-scale fabrication
processes and facilities, and
- enhanced quality control, marketing, sales and administrative
capabilities.
In order to become profitable, we must successfully develop, manufacture,
introduce and market our potential products. Our failure to become profitable or
maintain our profitability could significantly harm the value of our common
stock.
WE WILL NEED SUBSTANTIAL ADDITIONAL CAPITAL IF WE ARE TO CONTINUE OUR OPERATIONS
Our revenues from product sales have been limited. As of December 31, 1998,
we had cash reserves of approximately $2.9 million. We anticipate that our
existing sources of liquidity and anticipated revenue will satisfy our projected
working capital and other cash requirements through June 1999. However, changes
in our plans or other events affecting us may result in the expenditure of these
resources before then. THE REPORT OF OUR INDEPENDENT ACCOUNTANTS INCLUDED IN
THIS PROSPECTUS INCLUDES AN EXPLANATORY PARAGRAPH RELATED TO THE SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
If we are to continue our operations, we will need to raise substantial
additional funds, and these funds may not be available on favorable terms or at
all. Our failure to raise enough capital to meet our needs could force us to
reduce or cease some or all of our operations. These events could significantly
harm our results of operations and the value of our common stock.
BECAUSE OUR FUTURE OPERATING RESULTS ARE UNPREDICTABLE AND LIKELY TO FLUCTUATE
SIGNIFICANTLY, THE VALUE OF OUR COMMON STOCK IS DIFFICULT TO EVALUATE
Our operating history is limited, and our operating results are susceptible
to significant fluctuations. Thus, we cannot reliably predict future operating
results, making it difficult for you to assess the value of our common stock. We
believe that period-to-period comparisons of our operating results are not
necessarily meaningful, and you should not rely upon period-to-period
comparisons as indications of future performance.
Our future operating results may vary significantly due to factors
including:
- Demand for our products;
- The size and timing of significant orders, and their fulfillment;
- The size and timing of government funding contracts;
- Inflexible product life cycles which may affect our ability to change and
compete;
- Changes in our pricing policies, or those of our competitors;
- Changes in our operating expenses and our ability to control costs;
- Our customers' budget cycles;
- Product quality problems;
- Our ability, and our subcontractors' ability, to obtain sufficient
supplies of limited or sole-source components for our products;
- Consolidation by competitors and indirect channel partners; and
- Regulatory changes.
In addition, we may experience changes in our mix of domestic and international
revenues, our mix of direct sales and indirect sales, and the channels through
which we sell our products. For these reasons,
6
<PAGE>
our gross profit and operating margins may fluctuate significantly. These
factors make it difficult to predict our future operating results.
Another factor making our future operating results difficult to predict is
the fact that our products are typically shipped shortly after orders are
received. Accordingly, future quarterly revenues are difficult to predict since
they depend substantially on orders booked and shipped during those quarters.
Product revenues are also difficult to forecast because our sales cycle, which
may increase in the future, varies substantially from customer to customer and
by distribution channel. We base our expense levels and plans for expansion,
including our plan to significantly increase both our sales & marketing and
research & development efforts, in significant part on our expectations of
future revenues. These expenses and expansion plans are relatively fixed in the
short-term. Consequently, our operating results in any given quarter are likely
to be disproportionately harmed if revenues in that quarter fall below our
expectations.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE
SUPERCONDUCTIVE ELECTRONICS
INDUSTRY OR AGAINST ALTERNATIVE TECHNOLOGIES
Although the market for superconductive electronics currently is small and
in the early stages of development, we believe this market is intensely
competitive. A number of large companies with substantially greater financial
resources and capabilities are engaged in programs to develop and commercialize
products which may compete with ours, or they may begin such programs if the
market develops. Smaller companies, including Illinois Superconductor
Corporation and Superconductor Technologies, Inc., are also developing and
commercializing superconductive electronic products. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations are engaged in development programs that may lead to commercial
superconductive electronic products. Our success will depend on our ability to
develop and maintain our technological leadership while managing the various
risks described in this prospectus. Our failure to compete successfully could
significantly harm our business and financial condition and the value of our
common stock.
In addition to the products that our planned products will compete with
directly, a number of competing approaches and technologies are currently being
used to increase the capacity and improve the quality of wireless networks, some
of which may be less expensive or offer better performance. These approaches
include increasing the numbers of cellular transmission stations, increasing
tower heights, locating filters and amplifiers at the top of antennas and using
advanced antenna technology. We may not succeed in competing with these
alternate technologies, and for this reason our business, operating results and
financial condition may suffer.
WE DEPEND HEAVILY UPON GOVERNMENT CONTRACTS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS WOULD
SUFFER IF, AMONG OTHER THINGS, ANY OF THESE CONTRACTS ARE TERMINATED OR
ADVERSELY MODIFIED
A significant portion of our revenue has been derived from contracts with
the U.S. government. Although we anticipate that government contract revenues
will grow in 1999 compared to 1998, revenues from government contracts may not
grow and may fall. A reduction in, or discontinuance of, the government's
commitment to or our participation in such programs would significantly harm our
business, operating results and financial condition. Our revenue from
government-related contracts represented approximately 77% of total revenue for
fiscal years 1996 and 1997 and 79% of total revenue for fiscal 1998. Our
contracts involving the U.S. government may include various risks, including:
- Termination by the government for their own convenience;
- Reduction or modification in the event of changes in the government's
requirements or budgetary constraints;
7
<PAGE>
- Increased or unexpected costs causing losses or reduced profits under
contracts where our prices are fixed or unallowable costs under contracts
where the government reimburses us for costs and pays an additional
premium;
- Risks of potential disclosure of our confidential information to third
parties;
- The failure or inability of the main contractor to perform its contract in
circumstances where we are a subcontractor;
- The failure of the government to exercise options provided for in the
contracts;
- The government's right in certain circumstances to freely use technology
developed under contracts with it; and
- Exercise of the U.S. government's right to require us to license to third
parties patented technology developed under government contracts if we
fail to continue to develop the technology.
The programs in which we participate may extend for several years, but are
normally funded on an annual basis. The U.S. government may not continue to fund
programs to which our development projects apply, particularly in light of
recent legislative initiatives to reduce the funding of various U.S. government
agencies and programs. Even if funding is continued, we may fail to compete
successfully to obtain funding pursuant to such programs.
BECAUSE WE DEPEND ON A SMALL NUMBER OF CUSTOMERS, HARM TO, OR THE LOSS OF, ANY
OF THESE RELATIONSHIPS COULD SIGNIFICANTLY HARM OUR BUSINESS, FINANCIAL
CONDITION OR OPERATING RESULTS
To this day, a relatively small number of customers have accounted for a
significant portion of our total revenue, and we expect that this trend will
continue for the foreseeable future. Accordingly, our future operating results
will continue to substantially depend on the success of a few customers and our
relationships with them. Any reduction or delay in sales of our products to one
or more of these key customers could significantly harm our business, financial
condition and results of operations. Our operating results will also depend on
our ability to successfully develop relationships with additional key customers.
We cannot assure you that we will retain our largest customers or that we will
be able to recruit additional key customers.
Most of our customers can cease doing business with us with limited notice
and with little or no penalty. Our customer agreements typically do not require
minimum purchases. Further, many of our customers also have relationships with
our competitors. These relationships may affect the purchasing decisions of such
customers. We cannot assure you that our customers will not choose to direct
their business to our competitors.
BECAUSE THE SUPERCONDUCTIVE ELECTRONICS MARKET IS NEW AND UNCERTAIN, WE CANNOT
PREDICT WHETHER OUR PRODUCTS WILL BE COMMERCIALLY ACCEPTED
The superconductive electronics market is new, with limited product
commercialization to date. Since our inception we have been engaged principally
in research and development activities. Although we have introduced a number of
superconductive electronic products, most of our revenues to date have been
derived from research and development contracts. We may not successfully
develop, introduce and market new products or product enhancements. Any new
products or product enhancements may not be well received in the marketplace or
achieve any significant degree of commercial acceptance.
We cannot assure you that, even if our products meet performance standards
acceptable to the superconductive electronics market, we will be able to
manufacture adequate quantities of any products we introduce at costs low enough
for us to continue to operate on a timely basis, or that any such products will
offer price/performance advantages sufficient to achieve market acceptance. If
we fail to
8
<PAGE>
successfully develop, manufacture and commercialize products that offer
sufficient price/performance advantages or to achieve significant market
acceptance on a timely and cost-effective basis, our business, operating results
and financial condition could be harmed.
WE MAY NOT SUCCESSFULLY ADJUST TO THE RAPIDLY CHANGING SUPERCONDUCTIVE
ELECTRONICS MARKET
The field of superconductivity is characterized by rapidly advancing
technology. Our success depends upon our ability to keep pace with advancing
superconductive technology, including materials, processes and industry
standards. We have focused our development efforts to date principally on
yttrium barium copper oxide, a high-temperature superconductor. However, yttrium
barium copper oxide may not ultimately prove commercially competitive against
other currently known materials or materials that may be discovered in the
future.
We will have to continue to develop and integrate advances in technology for
the fabrication of electronic circuits and devices and manufacture of commercial
quantities of our products. We will also need to continue to develop and
integrate advances in complementary technologies. We cannot assure you that our
development efforts will not be rendered obsolete by research efforts and
technological advances made by others or that materials other than those
currently used by us will not prove more advantageous for the commercialization
of superconductive electronic products.
OUR SALES CYCLES ARE LONG AND UNPREDICTABLE, MAKING OUR FUTURE PERFORMANCE AND
THE VALUE OF OUR COMMON STOCK UNPREDICTABLE
Because customers who purchase our systems must commit a significant amount
of capital and other resources, sales to our customers are subject to delays
beyond our control. Our customers must consider budgetary constraints, comply
with internal procedures for approving large expenditures and complete whatever
testing is necessary for them to integrate new technologies that will affect
their key operations. While the sales cycle for an initial order of our products
is typically 6 to 12 months, we may experience longer sales cycles in the
future. Such delays or lengthened sales cycles could have a material adverse
effect on our business, operating results and financial condition.
THE YEAR 2000 COULD FORCE US TO SPEND SIGNIFICANT FUNDS TO PREPARE FOR POTENTIAL
PROBLEMS, AND WE COULD EXPERIENCE SIGNIFICANT LOSSES AT THAT TIME
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 our computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of our key operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. Although we are working to avoid any problems, year 2000
problems could harm our operations and cause significant losses.
In addition, as our year 2000 compliance project continues, we may discover
additional problems for which we may not be able to develop, implement, or test
possible solutions. Also, we may find that the costs of these activities
materially exceed our current expectations. Necessary expenses arising from
these additional problems would harm our results of operations.
BECAUSE THE TRADING PRICE OF OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE, WE
MAY BE EXPOSED TO COSTLY SECURITIES CLASS ACTION LAWSUITS
The market price of our common stock has been and is likely to continue to
be highly volatile. Our common stock may be significantly affected by the
following factors:
- Actual or anticipated fluctuations in our operating results;
9
<PAGE>
- Announcements of technological innovations;
- New products or new contracts by us or our competitors;
- Conditions and trends in the telecommunications and other technology
industries;
- Changes in financial estimates of our future results by securities
analysts.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. In the past, securities class
action lawsuits have often been brought against such companies following periods
of stock price volatility. We may be affected by similar litigation in the
future which could result in substantial costs and cause a diversion of
management's attention and resources. These events could significantly harm our
business, operating results and financial condition.
BECAUSE WE DEPEND HEAVILY ON THE SUCCESSFUL DEVELOPMENT AND SALE OF OTHER
COMPLEMENTARY TECHNOLOGIES, WE MAY NOT SUCCEED IF CERTAIN OTHER PRODUCTS AND
TECHNOLOGIES ARE NOT AVAILABLE TO US
Our success depends on the commercial availability of a number of other
technologies, such as specialized mechanical refrigeration systems, super-cooled
semiconductor technology and specialized microchip materials. Some of these
complementary technologies are in the development stage. We do not intend to
devote significant efforts or resources to developing these technologies; we
depend on the development activities of third parties in these areas. We cannot
assure you that these technologies will be successfully developed and
commercialized, or that they will achieve market acceptance.
OUR DEPENDENCE ON A SMALL NUMBER OF SUPPLIERS MAKES US PARTICULARLY VULNERABLE
TO EVENTS WHICH IMPACT OUR SUPPLIERS, MOST OF WHICH EVENTS ARE BEYOND OUR
CONTROL
Certain components of our subsystems, including cryocoolers, are currently
obtained from a single source or a limited number of suppliers. Our business,
operating results and financial condition could be significantly harmed by (a)
an inability to develop alternative sources or to meet customer demand, (b) a
prolonged interruption in supply, or (c) a significant increase in price of one
or more components.
OUR FAILURE TO SUCCESSFULLY DEVELOP COLLABORATIVE RELATIONSHIPS WITH GOVERNMENT
AGENCIES, RESEARCH INSTITUTIONS AND OTHER COMPANIES COULD HARM OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS
We have established and continue to seek collaborative arrangements with
corporate partners, government agencies and public and private research
institutions to develop, manufacture and market superconductive electronic
products. Our success depends on the development and success of these
collaborative arrangements. However, we may not be able to enter into
collaborative arrangements on commercially reasonable terms, and even if
established, these arrangements may not succeed. Even if these programs are
successful, we cannot assure you that our collaborative partners will not seek
to manufacture jointly developed products themselves or obtain them from
alternative sources. Finally, these programs (a) may require us to share control
over our development, manufacturing and marketing programs and relinquish rights
to our technology, (b) may be subject to termination at the discretion of our
collaborative partners and (c) may restrict our ability to engage in certain
areas of product development, manufacturing and marketing.
10
<PAGE>
OUR ABILITY TO PROTECT OUR PATENTS AND OTHER PROPRIETARY RIGHTS IS UNCERTAIN,
EXPOSING US TO POSSIBLE LOSSES OF COMPETITIVE ADVANTAGE
Our efforts to protect our proprietary rights may not succeed in preventing
their infringement by others or ensure that these rights will provide us with a
competitive advantage. Pending patent applications may not result in issued
patents and the validity of our issued patents may be subject to challenge.
Third parties may also be able to design around the patented aspects of our
products. Additionally, certain of the issued patents and patent applications
are jointly owned by us and third parties. The fact that any owner or co-owner
of a patent has the right to license rights under their patent or application
which could cause us to lose exclusive control over our inventions. These events
could result in losses of competitive advantage, which losses may harm our
business, financial condition and results of operation.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US IN CONNECTION WITH OUR USE
OF YTTRIUM BARIUM COPPER OXIDE COULD MATERIALLY HARM OUR RESULTS OF OPERATIONS
The patent positions of companies using high-temperature superconductor
technology, including Conductus, are uncertain and there is significant risk
that others, including our competitors, have obtained or will obtain patents
relating to our planned products or technology.
We cannot assure you that we will obtain licenses to patents covering
yttrium barium copper oxide compositions, if these patents are issued, or to any
other patents applicable to our business, on commercially reasonable terms. We
may be required to expend significant resources to develop alternatives that
would not infringe the yttrium barium copper oxide patents or to obtain licenses
to the technology that we infringe or would infringe. We may not be able to
successfully design around these patents or obtain licenses to them and may have
to defend ourselves at substantial cost against allegations of infringement of
third party patents. An adverse outcome in such a suit could subject us to
significant liabilities or require us to cease using such technology. Even the
cost of defending a patent lawsuit would constitute a major financial burden for
us, one that would significantly harm our business, operating results and
financial condition.
OUR LIMITED COMMERCIAL MANUFACTURING EXPERIENCE AND CAPABILITIES COULD HAMPER
OUR SUCCESS IN THE HIGHLY COMPETITIVE AND COMPLEX SUPERCONDUCTIVE PRODUCTS
MARKET
Our failure to develop an adequate manufacturing capacity would
significantly harm our business, operating results and financial condition. We
have established a limited production facility. To date, we have focused
primarily on developing fabrication processes and producing limited quantities
of superconducting thin films and components. Although our processing technology
derives principally from semiconductor manufacturing technology, the fabrication
of high-temperature superconductor components is especially difficult because of
specific properties unique to high-temperature superconductor materials.
We cannot assure you that we can develop the enhanced processing technology
necessary to develop more advanced superconducting devices and circuits or that
we will be able to attain commercial yields in the future. Even if we can attain
commercial yields, we may suffer recurring yield problems caused by mask
defects, impurities in materials and other factors. While we have established
limited production facilities for our electronics products, we may not be able
to expand our processing, production control, assembly, testing and quality
assurance capabilities to produce existing or planned superconductive electronic
products in adequate commercial quantities.
11
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OUR SUCCESS DEPENDS ON THE ATTRACTION AND RETENTION OF SENIOR MANAGEMENT AND
TECHNICAL PERSONNEL WITH EXPERTISE RELEVANT TO THE HIGH-TEMPERATURE
SUPERCONDUCTOR MARKET
As a competitor in the highly technical high-temperature superconductor
market, we depend heavily upon the efforts of our existing senior management and
technical teams. The loss of the services of one or more members of these teams
could slow our product development and commercialization objectives. Due to the
specialized nature of high-temperature superconductors, we also depend upon our
ability to attract and retain qualified technical and key management personnel.
In addition, we target our products towards markets that require substantial
industry knowledge and expertise. We currently have limited expertise in these
areas and it is essential that we attract and retain qualified personnel with
expertise in manufacturing, marketing, sales and support in each of our targeted
markets. Competition for qualified personnel in the high-temperature
superconductor market is intense and we may not be able to continue to attract
and retain qualified personnel necessary for the development of our business.
REGULATORY CHANGES NEGATIVELY AFFECTING WIRELESS COMMUNICATIONS COMPANIES COULD
SUBSTANTIALLY HARM OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS
The operation of cellular and personal communications services communication
stations, or "base stations," is strictly regulated in the United States by the
Federal Communications Commission. Base stations and equipment marketed for use
in base stations must meet specific technical standards. Our ability to sell our
high-temperature superconductor filter subsystems will depend upon the rate of
deployment of personal communications services, or "PCS," the ability of base
station equipment manufacturers and of cellular base station operators to obtain
and retain the necessary approvals and licenses, and changes in regulations that
may impact the requirements for our products. Any failure or delay of base
station manufacturers or operators in obtaining necessary approvals could
significantly harm our business, operating results and financial condition.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS COULD BE ESPECIALLY COSTLY DUE TO THE
HAZARDOUS MATERIALS WE MUST USE AS A MAKER OF SEMICONDUCTORS
We are subject to a number of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our business. Any failure to
comply with present or future regulations could result in fines being imposed,
suspension of production or interruption of our operations. In addition, these
regulations could restrict our ability to expand or require us to acquire costly
equipment or incur other significant expenses to comply with environmental
regulations or to clean up prior discharges.
BECAUSE OUR CORPORATE GOVERNANCE STRUCTURE MAY PREVENT OUR ACQUISITION BY
ANOTHER COMPANY, YOU MAY BE DENIED A PREMIUM OVER THE PUBLIC TRADING PRICE FOR
YOUR SHARES
It is possible that the acquisition of a majority of our outstanding voting
stock by another company could result in our shareholders receiving a premium
over the public trading price for their shares. However, we have adopted a
stockholder rights plan which, if triggered, could make it more difficult for a
third party to acquire a majority of our outstanding voting stock, even if doing
so would create an immediate benefit to our stockholders. Further, provisions of
our restated certificate of incorporation and bylaws and of Delaware corporate
law could delay or make more difficult an acquisition of Conductus by merger,
tender offer or proxy contest, even if it would create an immediate benefit to
our stockholders. For example, our restated certificate of incorporation does
not permit stockholders to act by written consent and our bylaws require advance
notice of any matters to be brought before the stockholders at the annual
meeting.
12
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In addition, our board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the terms of this preferred
stock, including voting rights of those shares, without any further vote or
action by the stockholders. The rights of the holders of common stock may be
subordinate to, and adversely affected by, the rights of holders of preferred
stock that may be issued in the future. The issuance of preferred stock could
also make it more difficult for a third party to acquire a majority of our
outstanding voting stock. These factors could result in the loss of a premium
over the public trading price for their shares of Conductus.
WE DO NOT INTEND TO PAY DIVIDENDS
We have never paid cash dividends and do not anticipate paying cash
dividends on the common stock in the foreseeable future.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE SUBJECT TO RISKS
AND UNCERTAINTIES
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS INVOLVE PROJECTIONS BASED UPON CURRENT EXPECTATIONS, AND THEIR
ACCURACY IS SUBJECT TO RISKS AND UNCERTAINTIES. YOU SHOULD CONSIDER ANY
STATEMENTS THAT ARE NOT STATEMENTS OF HISTORICAL FACT TO BE FORWARD-LOOKING
STATEMENTS. WE HAVE TRIED, WHEREVER POSSIBLE, TO IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT"
AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS AND EVENTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DISCREPANCY INCLUDE
THOSE DISCUSSED IN "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE OF THIS PROSPECTUS, AND WE DO NOT ASSUME
ANY OBLIGATION TO UPDATE ANY OF THESE FORWARD-LOOKING STATEMENTS.
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<PAGE>
USE OF PROCEEDS
Conductus will not receive any proceeds from the sale of these shares of
common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not expect to do so in the foreseeable future. We anticipate that all future
earnings generated from operations will be retained to develop and expand our
business. Our board of directors, at their discretion, will determine whether we
will pay dividends on the common stock in the future. In addition, our line of
credit prohibits us from paying cash dividends without the lender's consent.
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the Nasdaq National Market under the
trading symbol "CDTS" on August 12, 1993, and moved to the Nasdaq SmallCap
Market on November 10, 1998. The following table presents quarterly information
on the high and low closing sales prices for shares of our common stock for the
periods indicated, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter................................................................ $ 15 $ 6 1/2
Second Quarter............................................................... 16 1/2 9 3/4
Third Quarter................................................................ 12 7/8 7 5/8
Fourth Quarter............................................................... 9 1/2 6
1997
First Quarter................................................................ $ 9 1/4 $ 6
Second Quarter............................................................... 7 5/8 5 5/8
Third Quarter................................................................ 6 5/16 4 7/8
Fourth Quarter............................................................... 5 7/8 3 1/4
1998
First Quarter................................................................ 5 2 31/32
Second Quarter............................................................... 4 3/8 2 7/8
Third Quarter................................................................ 4 1/2 2 1/16
Fourth Quarter............................................................... 2 1/4 1 1/64
</TABLE>
As of April 20, 1999, the closing sale price of our common stock was $1 3/4
per share.
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
both the Financial Statements and accompanying notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the balance sheet data at December 31, 1997 and 1998 are derived from
and are qualified by reference to, the audited financial statements included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1994 and 1995 and the balance sheet data at December 31,
1994, 1995 and 1996 are derived from audited financial statements not included
in this prospectus. The results of operations for the year ended December 31,
1998 or any other period are not necessarily indicative of future results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Contract......................................................... $ 7,048 $ 8,148 $ 9,691 $ 7,266 $ 3,698
Product sales.................................................... 1,588 2,434 2,852 2,188 991
--------- --------- --------- --------- ---------
Total revenues................................................. $ 8,636 $ 10,582 $ 12,543 $ 9,454 $ 4,689
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loss from operations............................................... $ (4,876) $ (4,423) $ (5,109) $ (7,499) $ (7,132)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss attributable to common shareholders....................... $ (4,544) $ (4,422) $ (5,004) $ (7,543) $ (7,829)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and diluted net loss per common share attributable to common
shareholders..................................................... $ (0.85) $ (0.80) $ (0.80) $ (1.09) $ (1.10)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculations.............................. 5,323 5,543 6,263 6,897 7,088
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................................................... $ 7,076 $ 4,287 $ 9,135 $ 1,822 $ 2,656
Total assets....................................................... 12,541 10,128 16,081 8,762 7,035
Long-term debt, less current portion............................... 533 1,146 1,022 310 1,341
Total stockholders' equity......................................... 9,529 5,814 11,183 4,301 3,364
</TABLE>
- ------------------------
The above "basic and diluted loss per common share" and "shares used in per
share calculations" information was computed on the basis described for net loss
per share in Note 2 of Notes to Financial Statements.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DESCRIPTION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ALONG WITH THE FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We develop, manufacture and market electronic components and systems based
on superconductors for applications in the worldwide telecommunications markets.
As of December 31, 1998, we had accumulated losses of approximately $44,599,000
and we expect to incur significant additional losses during 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
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Total revenues consist primarily of contract revenue and, to a lesser
extent, product sales. Our total revenues decreased to $4,689,000 in 1998 from
$9,454,000 in 1997 and $12,543,000 in 1996.
Revenue under U.S. government research and development contracts represented
approximately 77% of total revenue in 1996 and 1997 and 79% of revenue in 1998.
Contract revenue decreased to $3,698,000 in 1998 from $7,266,000 in 1997 and
$9,691,000 in 1996. The decreases in contract revenue relate primarily to the
narrowing scope of our business interests in 1997 and 1998. During this time, we
began to focus exclusively on contracts relating to our wireless
telecommunications business and did not continue to seek additional contracts
related to superconducting technologies outside of the wireless
telecommunications market. We have submitted 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 and anticipate that government contract revenues will
increase compared to 1998, 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.
Revenue from product sales represented approximately 23% in 1996 and 1997
and 21% in 1998. Product revenue decreased to $991,000 in 1998 from $2,188,000
in 1997 and $2,852,000 in 1996. The decreases in product revenue relate
primarily to a decrease in revenue from products that do not relate to our core
market, including sales of magnetic sensing systems, and other products
partially offset by an increase in revenue from sales of our wireless
telecommunications products. Conductus recognized revenue on its wireless
telecommunications products of $96,000 and $762,000 in 1997 and 1998,
respectively. Future sales of these products are subject to numerous technical
and market risks.
Cost of product sales were $1,824,000, $1,845,000 and $2,685,000 for 1996,
1997 and 1998, respectively. The cost of products in 1996 and 1997 were
primarily composed of costs of superconducting magnetic systems manufactured by
our Instrument and Systems Division, which we disposed of in 1997. The cost of
products in 1998 were primarily composed of costs of the wireless
telecommunications products. Cost of product sales increased slightly from 1996
to 1997 despite lower volume of sales due to inventory write-downs of
approximately $457,000 related to our Instrument and Systems Division products
and to certain related product lines. Cost of product sales increased in 1998
compared to 1997 despite the lower volume of sales primarily as a result of the
increased overhead and start up costs associated with our wireless
communications products.
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<PAGE>
Gross margins were 36%, 16% and (171%) for 1996, 1997 and 1998,
respectively. The decrease in gross margins from 1996 to 1997 was primarily due
to the inventory write-downs discussed above. The decrease in gross margins from
1997 to 1998 was primarily due to the start up costs of wireless communications
product lines in late 1997. We anticipate gross margins to increase as shipments
of the wireless communication products increase, however we cannot assure you
that margins will improve in the future. Costs of contract revenues are included
in research and development expenses and are discussed below.
Research and development includes both externally and internally funded
projects. Research and development expenses were $11,774,000, $10,626,000 and
$5,621,000 and represented 94%, 112% and 120% of our revenues in 1996, 1997 and
1998, respectively. The decrease in 1997 compared to 1996 is primarily related
to the impact of the $2,425,000 decrease in contract revenues during the
comparison periods and, to a lesser extent, the dispositions of our Instrument
and Systems Division and our nuclear magnetic resonance product line. These
decreases were offset somewhat by increased spending on new wireless
communication and development activities.
The decrease in 1998 compared to 1997 is primarily related to the decrease
in contract revenues. Externally funded research and development programs,
primarily under contracts with agencies of the U.S. government, accounted for
approximately $13,178,000, $9,814,000 and $5,661,000 of total operating costs
and expenses in 1996, 1997, and 1998, respectively. These decreases reflect
reductions in federal research and development funding and the narrower scope of
our business interests in 1997 and 1998. 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 compared to 1998.
Selling, general and administrative expenses include costs associated with
marketing, sales, and various administrative activities. Selling, general and
administrative expenses were $4,054,000, $4,330,000 and $3,514,000 in 1996, 1997
and 1998, respectively. The increase in spending in 1997 compared to 1996 was
primarily due to increased sales and marketing spending related to commercial
wireless communication products, offset somewhat by lower spending due to the
disposition of our Instrument and Systems division. The decrease in spending in
1998 compared to 1997 was related to decreases in spending in administration
compared to the prior year resulting from lower overall headcount levels. We
expect to continue to incur increasing sales and marketing expenses to the
extent we increase sales of commercial products, particularly in the
communications markets.
Interest income was $263,000, $267,000 and $97,000 in 1996, 1997 and 1998,
respectively. The decrease in interest income in 1998 compared to 1997 was
primarily due to lower average cash balances during the comparison periods.
Interest charges related primarily to our loan from a leasing company as
well as our bank term loans. Interest expense was $183,000, $202,000 and
$530,000 in 1996, 1997 and 1998, respectively. The increase in interest expense
during these years was primarily the result of higher average debt levels during
the comparison periods. Interest expense in 1998 includes interest payments on
the bridge loan facility we entered into with our bank, payments related to the
outstanding loan from a leasing company and the amortization of the value of
warrants issued to the bank and leasing companies.
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 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.
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<PAGE>
We do not believe that inflation has had a material effect on our financial
condition or results of operations during the past three fiscal years. However,
we cannot assure you that our business will not be affected by inflation in the
future.
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, including net proceeds
of $6,344,000 raised in September 1998,
- $43,970,000 from U.S. government contracts,
- $2,234,000 in outstanding borrowings under various lease and bank loan
arrangements, and
- $3,784,000 in interest income.
In September 1998, we issued a total of 2,461,227 shares of Series B
preferred stock, and issued warrants to purchase 492,242 shares of common stock,
for a total of $6,344,461.
As of December 31, 1998 our aggregate cash, cash equivalents and short term
investments totaled $2,888,000 compared to $3,168,000 as of December 31, 1997.
Additionally, we have entered into 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 December 31, 1998, the total amount outstanding under the bank line of credit
facility was $255,180 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. There were no balances outstanding under the equipment
line as of December 31, 1998.
Net cash used in operations was $4,897,000 $4,702,000 and $7,258,000 for
1996, 1997, and 1998, respectively. The decrease in net cash used in operations
for 1997 compared to 1996 was due primarily to a decrease in accounts
receivable, higher provision for excess and obsolete inventory, and the decrease
in prepaid expenses, offset somewhat by a larger net loss in 1997. The increase
in net cash used in operating activities in 1998 compared to 1997 was primarily
due to a comparatively smaller decrease in accounts receivable compared to the
prior period as well as a decrease in accounts payable and accrued liabilities
partially offset by an increase in inventory during the comparison periods.
Accounts receivable, net of allowance for doubtful accounts, was $2,055,000 and
$1,110,000 as of December 31, 1997 and 1998, respectively. This decrease was
primarily the result of a decrease in related contract and product revenues from
1997 and 1998 and, to a lesser extent, the increase in the allowance for
doubtful accounts from 1997 to 1998. The increase in the allowance for doubtful
accounts during the comparison periods was primarily due to an increase in the
proportion of accounts greater than 90 days old relative to the total
outstanding balance in 1998 compared to 1997. The increase in the level of
inventory from 1997 to 1998 was primarily due to an increase in the level
wireless communications products during the year required to satisfy ongoing and
anticipated trials and shipments of our latest products partially offset by an
increase in the allowance for obsolete inventory related to discontinued
products and early versions of wireless communications products. We anticipate
that we will incur significant additional net losses during 1999 and anticipate
that our accounts receivable and inventories may increase during 1999 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 1999.
Net cash provided by (used in) investing activities was ($4,868,000) in
1996, compared to $5,848,000 in 1997, and ($1,035,000) in 1998. The change in
1997 compared to 1996 is primarily due to
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<PAGE>
the change in proceeds from sales of short term investments and purchase of
short term investments. In 1997 we sold $5,956,000 more of our short term
investments than we purchased to increase cash, while in 1996 we purchased
$3,633,000 more of short term investments than we sold to invest cash. The
change in 1998 compared to 1997 was primarily due to relatively higher purchases
of short term investments than proceeds received on maturities of short term
investments. In 1998, we purchased $784,000 more of short term investments than
we sold to decrease cash. In addition, capital expenditures decreased by
$575,000 in 1997 compared to 1996 and decreased by $438,000 in 1998 compared to
1997, due to lower spending on laboratory and manufacturing equipment. We
anticipate that our capital expenditures will increase slightly in 1999 as we
continue our transition to manufacture greater volumes of commercial products.
Net cash provided by financing activities was $7,229,000 in 1998 compared to
$345,000 in 1997 and $10,612,000 in 1996. The decrease in 1997 compared to 1996
was primarily due to lower net proceeds from the issuance of common stock. The
net cash provided by financing activities in 1996 was primarily due to our
follow-on offering in June of 1996 and borrowings under our equipment loans,
offset by principal payments under capital lease obligations and equipment term
loans. The net cash provided by financing activities in 1998 was primarily due
to the issuance of preferred Series B stock and related warrants as well as
proceeds from borrowings in excess of debt payments during the year. We have
received limited revenues from product sales to date.
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.
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.
We anticipate total capital expenditures of approximately $900,000 during
1999, which will be funded primarily from our $1,000,000 lease line of credit
for new equipment purchases. We anticipate that existing sources of liquidity
and anticipated revenue, primarily from government contracts, will
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<PAGE>
satisfy our projected working capital and other cash requirements through June
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 June 1999. Additionally, we can give you no assurance that additional
financing will be available on acceptable terms or at all.
THE YEAR 2000 ISSUE
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 June 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 by June 1999. We estimate that 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 March 1999, and to complete phase three by the end of June
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 have begun to formally communicate 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
20
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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.
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.
RECENT ACCOUNTING 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.
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statement No. 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
Statement No. 133 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. We do not currently hold derivative instruments or engage in hedging
activities.
We are currently in the process of assessing the implications of these
statements and have not yet determined the impact of their adoption.
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BUSINESS
OVERVIEW
We develop, manufacture and market electronic components and subsystems
based on high-temperature superconductor technology. The unique properties of
superconductors provide the basis for electronic products with significant
potential performance advantages over products based on competing materials such
as copper and semiconductors. Depending on the application, these advantages
include enhanced sensitivity, efficiency, speed and operating frequency, as well
as reduced power consumption, size, weight, and cost.
In 1997, we focused our efforts on applications for the telecommunications
market that take advantage of the superior performance and benefits afforded by
high-temperature superconductor technology. We have developed our line of
ClearSite front-end receiver subsystems for cellular and personal communications
services, or "PCS," base stations. Base stations send and receive wireless
communication signals. ClearSite products can provide significant benefits in
base station performance, reduce the size of the required filter components and
enable network services providers to rapidly deploy new or upgraded systems for
increasingly demanding environments.
In the existing cellular communications infrastructures, network service
providers must overcome problems of limited CAPACITY, insufficient COVERAGE, and
increasing INTERFERENCE. Both cellular PCS network operators face the increasing
need for cost-effective solutions that address these problems. As the wireless
communications infrastructure expands, the incidence of such problems is
increasing, often leading to decreased customer satisfaction and increased
customer turnover. These problems decrease a network operator's ability to
compete effectively and impact the ability to maximize billable minutes.
ClearSite products effectively improve coverage, reduce interference and
increase network capacity, thus improving the network operators' ability to
compete effectively and increase billable airtime. We have begun initial product
shipments to customers, continue to support field test trials and are developing
additional ClearSite products to be introduced soon.
We began field testing our ClearSite products in wireless base stations in
1996 with four cellular operators. Testing progressed to the beta stage late in
that year with the initiation of an extended field trial with Cellcom, Inc., a
service provider in Wisconsin. This trial, which concluded in April 1997 with
the first commercial order for multiple ClearSite products, successfully
demonstrated a significant reduction in the number of dropped calls and enhanced
voice quality. Commercial product shipments began in December 1997.
From 1987 to 1997, we pursued the development of materials and process
technology for high-temperature superconductor technology as well as
applications research. These efforts were sponsored in part by military and
government agency funding. We initiated commercial product shipments of high-
temperature superconductor technology films in 1990 and of high-temperature
superconductor technology systems in 1992 addressing multiple markets, including
the communications, health care and instrumentation markets. In late 1996, we
made the strategic decision to focus on the rapidly growing telecommunications
market. In the third quarter of 1997, we completed two organizational changes
aimed at focusing on wireless communications. We closed our Instrument and
Systems Division and sold our nuclear magnetic resonance spectroscopy probe
business. Research and development efforts are now focused on developing
applications in the communications market, including superconducting circuits
for high-speed telecommunications switching.
Our target market is both global and growing. According to Federal
Communications Commission and industry reports, there are over 25,000 installed
cellular base stations in the U.S. In addition, industry sources estimate that
more than 70,000 PCS base stations will be installed throughout the U.S. by the
end of 2005. The present cellular communications network, operating at
frequencies near 850 MHz, was established when the typical cellular phone was
capable of transmitting up to 3 watts of
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radio frequency power and the number of subscribers was relatively low. Today,
portable handsets that transmit only 0.6 watts are increasingly replacing
higher-power mobile telephones, thereby decreasing the effective receiving range
of existing base stations. As a result, in rural areas where base stations are
widely separated, current cellular customers can experience dropped calls due to
"dead zones" in coverage. At the same time, the increasing demand for cellular
service in urban areas has caused service providers to use a greater number of
channels within their allotted frequency bands, thereby increasing interference.
Moreover, the arrival of PCS and other competing services has placed new
emphasis upon quality of service for established cellular operators.
Our current customers include such leading wireless service providers as
AllTel, RadioFone, Cellcom and NTT-DoCoMo. In addition, we have completed
initial field tests with Carolina West Wireless, Kansas Cellular and Citizens
Mohave, have ongoing tests with U.S. Cellular and COMMNET, and are scheduling
trials with Cellular One, Ameritech and three regional Bell wireless groups. We
also have established significant strategic alliances and development agreements
with industry leaders such as Lucent Technologies and CTI-Cryogenics, a division
of Helix Technology Corporation. With the continued growth of global
telecommunications networks, network service providers are increasingly
outsourcing critical components in an effort to introduce their products
quicker, reduce production and development costs, and circumvent the increasing
scarcity of skilled specialists in advanced telecommunications technology.
Our current sales and marketing strategy relies primarily on direct sales
for our communications products. We believe that our products have significant
long-term potential as new generations of telecommunications equipment are
installed throughout the world due to the integration of technology advances and
the opening of new markets. We intend to leverage our product line, established
relationships with industry leaders, and use our experienced team of engineers
to provide support and services to network operators worldwide.
BACKGROUND
SUPERCONDUCTORS
Superconductors are materials that have the ability to transport electrical
energy with little or no loss when cooled to a "critical" temperature. The
intrinsic properties of superconductors are unique in nature and offer potential
performance benefits to electrical and electronic systems. These include
reliable signal transmission, extreme magnetic sensitivity and efficient
high-speed switching. When electrical currents flow through ordinary materials,
they encounter resistance which consumes energy by converting electrical energy
into heat energy. Depending on whether direct or alternating current is applied,
superconductors have the ability to transport electrical current with no
resistance at all or with only a tiny fraction of what is found in the best
conventional conductors. This property is extremely beneficial in electronic
components. Other intrinsic properties of superconductors enable the fabrication
of unique electronic devices, including high-speed electronic switches and
ultra-sensitive magnetic sensors.
From 1911, when superconductivity was first discovered, until 1986, the
critical temperatures for all known superconductors did not exceed 23 K (-418
DEG. F). As a result, superconductivity was not widely used in commercial
applications because of the high cost and complexities associated with reaching
and maintaining such low temperatures. In 1986, a new class of superconducting
materials, referred to as high-temperature superconductors, was discovered
having critical temperatures above 77 K (-320 DEG. F), the boiling point of
liquid nitrogen. These high critical temperatures allow some materials to be
cooled to a superconducting state using liquid nitrogen, which is inexpensive
and relatively easy to use. The science and technology of extremely low
temperatures is known as "cryogenics." We believe that this ability to obtain
the benefits of superconducting technology at more easily achieved temperatures
enables much broader commercial applications.
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The cooling required for high-temperature superconductors can also be useful
for other materials. Many electronic technologies exhibit enhanced performance
at reduced temperatures. But the most compelling performance improvements are
enabled by superconductive electronics. When the unique advantages of
superconductive electronics are complemented by the advantages of other
super-cooling technologies, the result is a hybrid system whose overall
performance can justify the additional expense associated with super-cooling. We
currently employ this hybrid approach in our front-end receiver systems, which
combine superconductive filters with super-cooled low noise amplifiers.
OUR APPROACH
We develop electronic devices and components using thin-film technology
based upon yttrium barium copper oxide. We believe yttrium barium copper oxide
is the high-temperature superconductor best suited for electronic applications.
We combine what we believe to be the world's most advanced yttrium barium copper
oxide thin-film technology with expertise in electronic device and component
design, analog and digital electronic engineering, super-cooling, mechanical
engineering and system integration. We believe that systems containing
superconductive electronic technology will offer superior performance, reduce
the costs of performing desired functions, or do both.
CHOICE OF MATERIAL. Although a number of high-temperature superconductors
have been identified, we have focused upon the development of yttrium barium
copper oxide. Yttrium barium copper oxide is the only high-temperature
superconductor for which there has been both significant development and
successful demonstration of multilayer technology. We believe that multilayer
structures can be used for better film quality and stability and enhanced device
functionality. We have developed several proprietary processes for producing
yttrium barium copper oxide and other thin-film materials as well as for
fabricating superconducting components and devices.
THIN-FILM EXPERTISE. We use a thin-film fabrication approach. The
fabrication of our components and circuits involves specialized processes, which
are the subject of our patents or proprietary know-how. We have performed
pioneering work in materials, processes and structures based on thin-film
superconductive technology, and have developed processes we believe are capable
of routinely producing a variety of high quality films for several applications.
Compared to "thick-film" approaches and ceramic fabrication techniques, we
believe the thin-film approach is more versatile, enables more compact
components and provides superior superconducting properties.
FOCUS ON COMPLETE SOLUTIONS. We believe that superconductive component
technology can best be provided to customers in the form of integrated
subsystems that incorporate the superconductive components, additional
electronic circuits and devices, and the self-contained refrigeration equipment
and packaging required to maintain the reduced temperatures necessary to sustain
superconductivity. For this reason, in addition to its thin-film expertise, we
have also established significant expertise and know-how in electronic device
and component design, analog and digital electronic engineering, super-cooling,
mechanical engineering and system integration. We seek to make the presence of
superconductive and super-cooling components an entirely integral feature of our
products. By skillful integration of the refrigeration system into its
communications filter subsystems, for example, and by selection of a
refrigeration approach with proven durability, we believe that our products can
be easily accommodated and well accepted by end users. Furthermore, we believe
that providing our technology at the subsystem level to system manufacturers in
specific markets will allow us to rapidly and efficiently expand both our
product line and our customer base.
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BUSINESS AND DEVELOPMENT STRATEGY
Our strategy for developing, manufacturing and marketing superconductive
electronics products includes the following key elements:
COMMERCIALIZE PRODUCTS WITH SIGNIFICANT MARKET POTENTIAL. We believe that
the largest potential near-term market for superconductor-based products is the
wireless communications market. We are actively marketing front-end systems as
well as developing additional component-based subsystems for this market.
DEVELOP COMMERCIAL INFRASTRUCTURE. We are building the manufacturing, sales
and marketing infrastructures we believe are necessary to support the
commercialization of our products in our target markets. This includes the
development of thin-film deposition techniques suitable for high-volume
manufacturing, the acquisition and build-out of manufacturing and assembly
areas, the hiring of employees with significant marketing experience in key
product areas and the expansion of our sales team.
MAINTAIN TECHNOLOGICAL LEADERSHIP. We have devoted significant resources to
developing proprietary high-temperature superconductor thin-film manufacturing
and process technologies. Based on publicly available information, we believe
that our technologies are more advanced than those of other companies or
research laboratories. We currently own, alone or with others, 22 U.S. patents
and three related foreign patents. We also have eight patent applications
pending in the U.S. and related patents pending in other countries relating to
various aspects of our technologies.
WIRELESS COMMUNICATIONS APPLICATIONS
The initial applications for superconductive technology in the
communications market are in the area of infrastructure equipment for wireless
base stations. Commercial wireless communications systems use radio frequency
signals to establish communications between customers using portable or mobile
telephones and communication stations, or "base stations," operated by service
providers. Cellular telephone networks are divided into specific coverage areas
called cells, each of which has a base station for sending and receiving voice
and other communications within the cell. The base station contains electronic
equipment required to send and receive radio signals.
In setting up a base station, the service provider seeks to install
equipment with sufficient sensitivity within the frequency band assigned to it
to handle communications with the lowest power handsets over its entire
geographical area and with sufficient selectivity to avoid interfering signals
from adjacent frequency bands. Filters within these base stations select
frequencies within the operator's assigned bands and reject unwanted
frequencies. Amplifiers boost the strength of signals coming in and out of the
base station. The operator's assigned frequency range is then allocated using
one of several schemes to provide telephone service to multiple subscribers. The
capacity of the system depends upon the number of effective channels; that is,
channels whose signal quality is sufficient to satisfy customer demands for
clear communications.
Cellular base stations currently face a number of operating problems. These
include signal interference caused by multiple communications channels, poor
signal quality resulting from lower-power, hand-held telephones and strained
capacity due to the growing demand for cellular service. The advent of PCS
technology will place additional demands on the performance of wireless base
stations and upon the size of base station hardware. We believe that
superconductive filters used in conjunction with super-cooled amplifiers have
the potential to offer solutions to several operating problems in cellular base
stations as well as to provide solutions to anticipated problems in the growing
network of PCS base stations.
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BENEFITS OF SUPERCONDUCTIVE TECHNOLOGY FOR WIRELESS COMMUNICATIONS
Superconductive technology can offer significant benefits in base station
receivers. The unique characteristics of superconducting materials can be
exploited to create filters that simultaneously deliver superior performance
with respect to adjacent-band interference rejection and with respect to
"insertion loss," reduction of the desired signal because of the filter. Because
of their low-loss property, superconductors provide the closest
physically-attainable approximation to a perfect filter, which would allow 100%
of the desired signals to pass through and screen out 100% of the unwanted
signals.
An immediate benefit of superconductor technology in base station
applications is the ability to provide superior interference rejection by making
practical filters with a large number of poles. A second benefit of
superconducting filters is the potential ability to fully utilize the available
spectrum without introducing guard bands or blocked channels at the band edge. A
third benefit of superconductor and, more generally, cryoelectronic technology
in base stations is the potential for providing extended coverage by virtue of
reducing the noise floor in the receiver front end of the base station. A fourth
benefit offered by superconductor technology is the potential for reducing the
size and weight of filter subsystems that utilize thin-film superconductor
components.
APPLICATIONS FOR SUPERCONDUCTING FILTERS
Superconducting filters offer performance advantages to analog systems as
well as to digital protocols. Depending upon the application, one or more of the
benefits of the technology noted above may come into play.
In current cellular systems, the needs of urban and rural operators are
quite different. Urban base stations are typically high-capacity cells in harsh
or otherwise congested environments. Key issues are interference and capacity.
In contrast, rural base stations see relatively low call volumes but struggle
with problems with the handset to base station transmissions because of the
lower power levels transmitted by hand-held phones. In this environment, range
extension and coverage improvement are the key issues.
The growing PCS infrastructure presents a variety of opportunities for
superconducting filter technology. With multiple bands, large numbers of base
stations, new interference sources and tight space constraints, all the virtues
of superconducting filter technology are likely to be needed to solve problems.
The match-up between benefits and applications for superconductors in wireless
systems is summarized in the chart below.
<TABLE>
<CAPTION>
SUPERCONDUCTOR RURAL URBAN
BENEFIT REASON CELLULAR CELLULAR PCS
- --------------------------------------- --------------------------------------- ----------------- ----------------- ---
<S> <C> <C> <C> <C>
Reduced interference................... Sharp filters X X
Increased capacity..................... Sharp filters X X
Improved coverage/extended range....... Reduced system noise X X
Compact form-factor.................... Thin-film technology X X
</TABLE>
FUTURE APPLICATIONS
We are exploring the application of superconductive and cryoelectronic
technologies to a variety of applications in the broader communications market.
Among these are subsystems for communications satellites, antenna components and
various elements of high-speed and/or high-bandwidth communications equipment.
STRATEGIC ALLIANCES AND DEVELOPMENT AGREEMENTS
We are party to a number of collaborative arrangements with corporations and
research institutions with respect to the research, development and marketing of
some of our potential products. We evaluate, on an ongoing basis, potential
collaborative relationships and intend to continue to pursue
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such relationships. Our future success will depend significantly on our
collaborative arrangement with third parties. We cannot assure you that these
arrangements will result in commercially successful products.
LUCENT TECHNOLOGIES, INC. Conductus and Lucent entered into a joint
development and licensing agreement in April 1996, under which we are developing
a superconductive transceiver filter subsystem for the PCS market. Both
Conductus and Lucent are to provide technical support to the program. Initial
tests of a prototype of the receiver portion of the subsystem were conducted in
April 1996. A more complex prototype subsystem containing six high-temperature
superconductor receiver channels and three conventional transmit filters was
delivered to Lucent at the end of that year. Each party will retain rights to
the intellectual property it develops under the program, subject to certain
nonexclusive licensing rights of the other party, and jointly developed
intellectual property will be jointly owned.
CTI-CRYOGENICS. Conductus and CTI-Cryogenics, a division of Helix Technology
Corporation, entered into a collaboration agreement in September 1995, under
which CTI will work with us to design interfaces between CTI cryocoolers and our
subsystems.
HIGH-TEMPERATURE SUPERCONDUCTOR THIN-FILM MANUFACTURING ALLIANCE. Conductus
is a principal member of the High-Temperature Superconductor Thin-Film
Manufacturing Alliance, an association formed in November 1995 to develop
cost-effective manufacturing methods for yttrium barium copper oxide thin-films
for radio-frequency applications, establish industry standards and provide
second-sourcing and technology transfer among the companies under a program
currently funded in part by the Department of Defense Advanced Research Projects
Agency. Superconductor Technologies, Inc. is the other principal member of this
association. Other members include Stanford University, the Georgia Research
Corporation, Focused Research, Microelectronic Control and Sensing Incorporated,
IBIS and BDM Federal. Each member of the association will have certain access to
the technology of the other parties that is developed under the program.
RESEARCH AND DEVELOPMENT
GOVERNMENT CONTRACTS
Our research and development expenses in the fiscal years 1996, 1997 and
1998 were approximately $11,774,000, $10,626,000 and $5,621,000, respectively.
Externally funded research and development programs, primarily under contracts
with the U.S. government, accounted for approximately $13,178,000, $9,814,000
and $5,661,000 of total operating expenses in the fiscal years 1996, 1997, and
1998, respectively. Our revenue from government-related contracts represented
approximately 77% of total revenues for fiscal years 1996 and 1997 and 79% for
fiscal 1998.
We believe that we will continue to be heavily dependent on U.S. government
contracts to fund a significant portion of our research and development
programs. Our strategy is to fund a significant portion of our research and
development, particularly for wireless communications and digital electronics
applications, through contracts with agencies of the U.S. government.
As of December 31, 1998, Conductus had received aggregate awards since its
inception of approximately $50,347,000 from U.S. government agencies, including
approximately $43,970,000, recognized as revenue by us through December 31,
1998.
Our contracts involving the U.S. government are, or may be, subject to
numerous risks. These risks include:
- Termination at the government's convenience;
- Reductions or modifications due to changes in the government's
requirements or budgetary constraints;
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- Increased or unexpected costs causing losses or reduced profits under
fixed-price contracts or the occurrence of non-reimbursable costs under
contracts which otherwise allow reimbursements of costs;
- Disclosure of our confidential information to third parties;
- The failure or inability of a general contractor to perform its contract
in circumstances where we are a subcontractor;
- The failure of the government to exercise contractual options;
- The government's right to freely use technology developed under its
contracts with others; and
- The government's ability to require us to license patented technology
developed under contracts funded by the government if we fail to continue
to develop the technology.
In addition, we cannot assure you the government will continue its
commitment to programs to which our development projects are applicable,
particularly in light of recent legislative initiatives to reduce the funding of
various U.S. government agencies and programs. Nor can we assure you that we can
compete successfully to obtain funding pursuant to such programs.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADEMARKS
We have received 28 U.S. patents and three related foreign patents. Six
issued patents were assigned to Bruker Instruments, Inc. under an asset purchase
agreement entered into in July 1997. We retain a license to freely use the
technology related to those patents outside the nuclear magnetic resonance field
of use. The remaining 22 patents have unexpired terms ranging from 11 to 17
years. Additionally, we have 8 patent applications pending. International
counterparts of several of these pending applications or issued patents have
been filed under the Patent Cooperation Treaty with a number of applications
currently pending in various countries worldwide.
These patents and patent applications cover processes and products in many
aspects of our business. Certain of the issued patents and patent applications
are jointly owned by us and others. Any party owner has the right to license
rights under such patents and applications, which could result in us not having
exclusive control over some inventions. We will continue to file other U.S. and
key international patent applications as part of our business strategy to
protect technology we consider important to providing a competitive market
advantage for our technologies.
We also rely upon trade secrets, unpatented know-how, continuing
technological innovation, employee and third-party nondisclosure agreements and
the pursuit of licensing opportunities in order to develop and maintain our
competitive position.
We believe that, since the discovery of high-temperature superconductors in
1986, several thousand patent applications have been filed worldwide and over
600 patents have been granted in the U.S. relating to high temperature
superconductivity. In some cases, these patents and applications may be
overlapping. There are interference proceedings pending regarding rights to
inventions claimed in some of the applications. Accordingly, the patent
positions of companies using high-temperature superconductor technology,
including Conductus, are uncertain and involve both complex legal and factual
questions. Consequently, there is significant risk that others have obtained or
will obtain patents relating to our planned products or technology and that we
will be unable to obtain licenses on commercially reasonable bases or at all.
A patent issue of particular importance to us relates to copper oxides,
including yttrium barium copper oxide. We have neither obtained any issued
patents nor have we filed any patent applications covering the composition of
any copper oxides. However, several U.S. and foreign patent applications are
pending that would, if issued, cover the composition of yttrium barium copper
oxide. We understand that at least several U.S. applications are the subject of
an interference proceeding currently pending. Additionally, E. I. duPont de
Nemours & Co. has notified us that it is the exclusive licensee of
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patents issued in Israel, Sweden, Taiwan and the United Kingdom covering the
composition of yttrium barium copper oxide and a method for using yttrium barium
copper oxide in superconducting applications. We anticipate that we will be
required to obtain a license to use yttrium barium copper oxide in order to
continue to develop and sell products based on yttrium barium copper oxide.
We have granted to others non-exclusive, royalty-bearing licenses to some of
our proprietary technologies for the manufacture and distribution of various
equipment, including rotating target holders, substrate heaters and mutual
inductance probes to be used in low temperature cryogenic measurement systems.
Through our strategic relationships, we have received rights to certain
intellectual property developed by our partners, as well as commitments from
those partners to offer licenses to certain background technology. We cannot
assure you that the terms of these licenses will allow us to compete
effectively.
Additionally, successful marketing of a material portion of Conductus'
ClearSite products depends in part on nonexclusive licenses obtained from
various licensers. There can be no assurance that such licenses will not be
terminated by licensors or that Conductus will be able to develop alternate
products that do not require these or other licenses.
We own the U.S. registered trademarks "CONDUCTUS-Registered Trademark-," the
Conductus logo and "Mr. SQUID-Registered Trademark-." We claim rights to the
trademarks "ClearSite-TM-" and "pcSQUID-TM-."
MANUFACTURING
We have performed pioneering work in materials, processes and structures
based on thin-film superconducting technology. We have established a pilot
production facility at our headquarters in Sunnyvale, California, to fabricate,
test and assemble thin films and components. We fabricate two-, three- and
four-inch wafers in two cleanroom areas that consist, in the aggregate, of
approximately 2,600 square feet. Additionally, we assemble systems in a 3,250
square foot manufacturing facility which includes cleanrooms of approximately
1,250 square feet. We combine what we believe to be the world's most advanced
yttrium barium copper oxide thin-film technology with expertise in electronic
and device component design, analog and digital electronic engineering, low
temperature packaging, mechanical engineering and system integration.
The primary materials and equipment used in our ClearSite products include
substrates, yttrium barium copper oxide precursors and processing equipment. We
procure our substrates from several suppliers. We primarily utilize yttrium,
barium and copper to produce yttrium barium copper oxide. These metals are
available from numerous vendors. In limited cases, we use yttrium barium copper
oxide purchased from two sources. Our processing equipment is assembled from
off-the-shelf components which we can obtain from multiple sources.
We believe that most of our products will be in the form of subsystems that
incorporate superconducting and cryoelectronic components with super-cooling
refrigerators and conventional electronic assemblies. Apart from the
superconducting components which are manufactured by us, we anticipate that most
other components of our subsystems will be purchased as standard products from
commercial vendors or specially ordered from various suppliers. These include
super-cooling refrigerators, printed circuit boards, product cases and housings,
vacuum vessels and other components. Certain ClearSite product components,
including cryocoolers, are currently obtained from a single source or a limited
number of suppliers. Although we do not believe that we are ultimately dependent
upon any supplier as a sole source or limited source for any critical
components, our inability to develop alternative sources, a prolonged
interruption in supply or a significant increase in price of one or more
components would harm our business, operating results and financial condition.
We are focusing on the development of our production processes and are
manufacturing limited quantities of superconducting components and products
incorporating those components at our Sunnyvale, California, facility. Apart
from the production of superconducting components, we expect that our
manufacturing activities generally will be limited to cleaning, final assembly,
vacuum bakeout and
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testing. We are producing these products in limited commercial quantities and
are continuing to expand our capabilities.
COMPETITION
Although the market for superconductive electronics currently is small and
in the early stages of development, we believe this market will become intensely
competitive if products with significant market potential are successfully
developed.
A number of large American, Japanese and European companies are engaged in
research and development programs that we believe could lead to the development
and/or commercialization of superconductive electronic products. These include,
among others: DuPont, IBM, TRW, and Northrop-Grumman Corporation in the U.S.;
and Fujitsu Ltd., Hitachi Ltd., NEC Corp., and Sumitomo Electric Industries,
Ltd. in Japan.
We also believe that a number of smaller companies are engaged in various
aspects of the development and commercialization of superconductive electronics
products. These include, among others, Hypres, Inc. in digital circuits; and
Illinois Superconductor Corp. and Superconductor Technologies Inc. in wireless
communications. Furthermore, academic institutions, governmental agencies and
other public and private research organizations are engaged in development
programs which may lead to competitive arrangements for commercializing
superconductive electronics products. In addition, if the superconductor
industry does develop further, new competitors with significantly greater
resources are likely to enter the field.
Several of our existing collaborative arrangements permit, and future
arrangements also may permit, us and our partner to use the technology developed
under these arrangements. Accordingly, we may compete with our partners for
commercial sales of any products developed under these arrangements.
We believe that the principal competitive factors in the market for
superconductive electronics will be the following:
- the ability to develop commercial applications of superconductive
technology;
- product performance, including speed, sensitivity, size and power
dissipation;
- price; and
- product quality and reputation.
We believe that we are competitive with regard to these factors. Nonetheless,
because the market for superconductive electronics is at an early stage, our
relative competitive position in the future is difficult to predict.
SALES AND MARKETING
In order to successfully commercialize our products, we are expanding our
sales, marketing and distribution staffing and activities. During 1998, we hired
a new Vice President Sales and Marketing who will be responsible for expanding
the sales organization for the commercial wireless market. Our current sales and
marketing strategy relies primarily on direct sales for our communications
products. We sell our magnetic sensors primarily to one company.
We intend to add personnel to support our sales and marketing efforts. These
employees will be actively engaged in direct marketing to customers, as well as
in sales and marketing support. We actively market our products through direct
mail advertisements and advertisements in trade journals, as well as through
demonstrations at industry trade shows. Our employees have published the results
of their research at Conductus widely in trade and technical journals.
Additionally, our employees have frequently presented our technology as invited
speakers at conferences worldwide.
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For the fiscal years 1996, 1997, 1998, commercial sales to one customer of
$1,560,000, $896,000, and $76,000 were 12%, 9% and 2% of total revenues,
respectively. This customer, Niki Glass Ltd., acts primarily as a distributor of
our magnetic sensing products, selling to end-users
ENVIRONMENTAL MATTERS
We use certain hazardous materials in our research and manufacturing
operations. As a result, we are subject to federal, state and local governmental
regulations. We believe that we have complied with all regulations and have all
permits necessary to conduct our business.
EMPLOYEES
As of December 31, 1998, we had a total of 53 full-time equivalent employees
of which 22 hold advanced degrees. Of the total full-time employees, 30 were
engaged in research and product development, 9 in manufacturing, 3 in sales and
marketing, and 11 in administration and finance. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
FACILITIES
Our principal facility, including our pilot production facility, is located
in two buildings providing approximately 40,000 square feet of available space
in Sunnyvale, California, with leases which will expire in August 2000 and 2001.
During 1997, we subleased our facility in San Diego, California, to Niki Glass,
in connection with an asset sale of certain of the assets of the Instrument and
Systems division. That lease expired in February 1998.
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MANAGEMENT
OFFICERS AND DIRECTORS
Our officers and directors, and their ages as of December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Charles E. Shalvoy............................ 50 President, Chief Executive Officer and Director
Ron Wilderink................................. 40 Vice President of Finance and Chief Financial Officer
Jim Simmons................................... 49 Vice President, Sales and Marketing
Graham Y. Mostyn.............................. 44 Vice President, Engineering
Randy W. Simon, Ph.D.......................... 44 Vice President, Technology Programs
John F. Shoch, Ph.D.(1)(2).................... 49 Chairman of the Board
Martin Cooper(1).............................. 69 Director
Robert M. Janowiak............................ 61 Director
Martin J. Kaplan(2)........................... 60 Director
</TABLE>
- ------------------------
Mr. Shoch and Mr. Cooper comprise our audit committee, and Mr. Shoch and Mr.
Kaplan comprise our compensation committee.
MR. SHALVOY joined us in June 1994 as President, Chief Executive Officer and
Director. From 1988 to 1994, he was President and Chief Operating Officer of
Therma-Wave, Inc., a manufacturer of semiconductor production equipment. Prior
to that he was employed by Aehr Test Systems, Emerson Electric Corp. and Raychem
Corporation in a variety of senior management positions. Mr. Shalvoy holds a
B.S. in Mechanical Engineering from the University of Notre Dame and an M.B.A.
from Stanford University.
MR. WILDERINK was appointed Chief Financial Officer in 1998. From 1995 until
1998, he was Vice President, Corporate Controller of Oak Technology, Inc., a
multinational semiconductor manufacturer. His prior experience includes
management positions in the finance organizations of Bell Microproducts, Inc., a
distributor of high technology products, and VMX, Inc., a manufacturer of
integrated voice processing systems. Mr. Wilderink holds a B.S. degree in
Accounting from San Jose State University.
MR. SIMMONS joined us in November 1998 as Vice President Sales and
Marketing. From 1994 to 1998 he was Vice President, Marketing and Sales of
Superconductor Technologies, Inc., a manufacturer of high-temperature
superconducting wireless subsystems. His prior experience includes senior
management positions at Therma-Wave, Inc., Nanometrics, Inc. and KLA Instruments
Corporation and various management positions at Hewlett-Packard. Mr. Simmons
holds a B.S. degree in Applied Physics from California Institute of Technology
and an M.B.A. from Harvard Business School.
MR. MOSTYN joined us in November 1996 as Vice President of Engineering. From
1992 to 1996, he was the Director of RF and Analog Engineering and later the
Director of Engineering, Network Systems Division of MicroUnity, Inc., a
communications products start-up company. Prior to that, he spent 10 years with
Harris Corporation in engineering management positions. Mr. Mostyn holds a B.A.
and M.A. in physics from Cambridge University, England.
DR. SIMON joined us in October 1990 as Senior Scientist and served as
Director of Research and Development from March 1991 to January 1993 and as Vice
President, Marketing and Development from January 1993 to November 1994 and Vice
President, Technology Programs and Investor Relations from November 1994 to
November 1995 and Vice President, Technology Programs since November 1995. From
January 1985 to October 1990, he held a variety of scientific and managerial
positions
32
<PAGE>
at TRW, where he headed TRW's Superconductivity Research Department's
high-temperature superconductivity program and managed TRW's internal research
and development program on high-temperature superconductive electronics. Dr.
Simon holds a B.S. in Physics from Pomona College and an M.S. and a Ph.D. in
Physics from the University of California, Los Angeles.
DR. SHOCH has served as Chairman of the Board since our inception in 1987.
As a founder, Dr. Shoch served as President from 1987 to 1988. Since 1985, he
has been a general partner of AMC Partners 84, which is the general partner of
Asset Management Associates 1984, a venture capital investment fund and a
principal stockholder. Dr. Shoch holds a B.S. in political science and an M.S.
and Ph.D. in computer science from Stanford University.
MR. COOPER has served as a director since January 1995. Since 1992, Mr.
Cooper has served as Chairman and Chief Executive Officer of ArrayComm, Inc., a
company he co-founded that manufactures intelligent antennas for wireless
applications. Previously he was co-founder, Chairman, Chief Executive Officer
and President of Cellular Business Systems, Inc., a provider of management
information software to the cellular industry that was purchased by Cincinnati
Bell in 1983. Mr. Cooper worked for 29 years at Motorola Inc., where he started
out as a Senior Development Engineer in 1954 and advanced to Corporate Director
of Research and Development in 1983. Mr. Cooper earned a B.S. and M.S. in
Electrical Engineering from the Illinois Institute of Technology.
MR. JANOWIAK has served as a director since December 1996. Since 1982, he
has served as the Executive Director of the International Engineering
Consortium. Prior to that, he was President of Federal Signal Corporation's
Signal Group, a provider of public safety products and systems. Mr. Janowiak
also held positions with ITT Research and Rockwell, where he advanced to
Vice-President, General Manager of the Information Products Division. Mr.
Janowiak earned a B.S.E.E. from the University of Illinois, an M.S.E.E. from
Illinois Institute of Technology and an M.B.A. from the University of Chicago.
MR. KAPLAN has served as a director since July 1996. Since 1997, Mr. Kaplan
has served as an Executive Vice-President of Pacific Telesis Group. Prior to
that he was President--Network Services Group of Pacific Bell, and its
successor, Pacific Telesis, for 38 years in various senior management positions.
Mr. Kaplan earned a B.S. in engineering from California Institute of Technology.
There are no family relationships among our executive officers or directors.
33
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below provides certain summary information concerning the
compensation earned by Charles E. Shalvoy, our Chief Executive Officer, and each
of our other four most highly compensated executive officers whose earned
compensation was in excess of $100,000 for fiscal 1998. These five individuals
will be referred to as the "named officers." The salary figures below include
amounts deferred under our 401(k) plan. Mr. Daley's employment spanned September
1997 to November 1998, and Ms. Mayberry's employment spanned November 1997 to
November 1998. Mr. Mostyn's employment began in November 1996.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
AWARDS
ANNUAL COMPENSATION ----------------------
------------------------ SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) UNDERLYING OPTIONS(#)
- ------------------------------------------------------ --------- ---------- ------------ ----------------------
<S> <C> <C> <C> <C>
Charles E. Shalvoy.................................... 1998 $ 185,929 $ 17,150 275,000(2)
President and CEO 1997 197,088 11,000 --
1996 185,682 64,600 --
James J. Daley........................................ 1998 154,877 -- 80,000(3)
Vice President 1997 43,753 8,000 --
1996 -- -- --
Ainslie Mayberry...................................... 1998 165,360 -- 8,479
Acting Chief Financial Officer 1997 3,995 -- --
1996 -- -- --
Graham Y. Mostyn...................................... 1998 130,152 -- 75,000(4)
Vice President 1997 140,004 18,000 60,000(5)
1996 15,616 10,000 60,000
Randy W. Simon, Ph.D.................................. 1998 120,850 12,500 30,000(6)
Vice President 1997 125,908 5,000 60,000(7)
1996 113,698 23,664 20,000
</TABLE>
- ------------------------
(1) Bonuses earned in each fiscal year are calculated and paid at the beginning
of each subsequent year.
(2) Includes options granted for 225,000 shares in exchange for cancellation of
an equal number of shares under a repricing program.
(3) Includes options for 80,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
(4) Includes options for 60,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
(5) Includes options for 60,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
(6) Includes options for 20,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
(7) Includes options for 40,000 shares granted in exchange for cancellation of
an equal number of shares under a repricing program.
34
<PAGE>
OPTION GRANTS DURING LAST FISCAL YEAR
The table below contains information concerning the stock option grants made
to each of the named officers in fiscal 1998. A total of 941,746 options to
purchase our common stock were granted in fiscal 1998. No stock appreciation
rights were granted during fiscal 1998.
The figures in the right-hand columns regarding potential realizable option
values are based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These rates of appreciation do not represent estimates of
our future stock price, and we provide no assurance to either you or the named
officers that our stock will appreciate at these rates.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 0% ($/SH) 5% ($) 10% ($)
- ------------------------------------ ----------- --------------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy.................. 8,334 0.9% $ 3.63 10/24/06 -- $ 15,597 $ 37,914
41,666 4.4 3.63 10/24/06 -- 77,977 189,551
130,910* 13.9 3.63 06/06/04 -- 165,999 378,082
84,090* 8.9 3.63 06/06/04 -- 106,629 242,861
10,000* 1.1 3.63 06/06/04 -- 12,680 28,881
James J. Daley...................... 80,000* 8.5 3.63 09/15/07 -- 169,304 422,049
Ainslie Mayberry.................... 2,225 0.2 0 05/06/08 $ 4.00 14,498 23,084
1,429 0.2 0 06/10/08 3.06 7,130 11,353
930 0.1 0 08/14/08 3.06 4,640 7,389
1,197 0.1 0 10/01/08 2.25 4,387 6,986
2,698 0.3 0 11/25/08 1.56 6,869 10,938
Graham Y. Mostyn.................... 15,000 1.6 3.81 04/16/08 -- 35,965 91,142
60,000* 6.4 3.63 11/05/06 -- 112,818 274,497
Randy W. Simon, Ph.D................ 10,000 1.1 3.81 04/16/08 -- 23,977 60,761
20,000* 2.1 3.63 01/23/07 -- 38,775 94,917
</TABLE>
- ------------------------
*These options were granted April 13, 1998, in exchange for an original option
previously granted covering the same number of shares with the per share
exercise price of $5.50 for Mr. Shalvoy's options, $5.375 for Mr. Daley's
options and $6.50 for Messrs. Mostyn's and Simon's options. None of these
options will be vested before April 13, 1999. Upon that date, all of these
options will be vested to the extent provided in the vesting schedule
applicable to the corresponding original option, with the original vesting
commencement date.
35
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The table below sets forth information concerning option exercises and
option holdings of the named officers at the end of fiscal 1998. No stock
appreciation rights were exercised during fiscal 1998, nor were any stock
appreciation rights outstanding at the end of fiscal 1998.
Some of the option shares listed below are immediately exercisable. However,
we have the right to repurchase any such option shares if the optionee ceases
service before vesting in such shares. Specifically, 228,637, 42,586 and 79,546
are immediately exercisable by Mr. Shalvoy, Mr. Mostyn and Mr. Simon,
respectively.
The "value of in-the-money options" figures in the right-hand columns were
calculated on the basis of the fair market of our common stock on December 31,
1998, $1.56 per share, minus the exercise price of the options.
Mr. Daley and Ms. Mayberry ceased their service to Conductus in November
1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS
SHARES AT FISCAL YEAR END IN-THE- MONEY OPTIONS
ACQUIRED VALUE (#) AT FISCAL YEAR END ($)
ON EXERCISE REALIZED -------------------- ----------------------
NAME (#) ($) VESTED UNVESTED VESTED UNVESTED
- ------------------------------------------------------- ------------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy..................................... -- -- 21,666 253,334 0 0
James J. Daley......................................... -- -- 17,333 0 0 0
Ainslie Mayberry....................................... 8,479 $ 23,036 0 0 0 0
Graham Y. Mostyn....................................... -- -- 0 75,000 0 0
Randy W. Simon, Ph.D................................... -- -- 59,290 40,256 $ 38,955 $ 188
</TABLE>
36
<PAGE>
TEN-YEAR OPTION/SAR REPRICINGS
On both April 29, 1997, and April 13, 1998, our compensation committee and
our board of directors established a program under which employees who had
elected to surrender those of their options that were above the closing price of
our common stock on April 29, 1997, and April 13, 1998, respectively, would
receive in exchange new options with an exercise price at the closing price on
those dates. The new options would cover the same number of shares as the
surrendered options, would have the same status under the tax laws as the
surrendered options and would not be exercisable for one year following each
option exchange date, until April 29, 1998 and April 13, 1999, respectively,
after which they would become exercisable as provided in the original vesting
schedule.
The repricings were undertaken to attract and retain employees while
maintaining relatively low cash compensation. Pursuant to the repricing program,
the following table sets forth information concerning repricing of options held
by any executive officer during the last ten completed fiscal years:
<TABLE>
<CAPTION>
EXERCISE
SECURITIES PRICE AT
UNDERLYING MARKET PRICE TIME OF LENGTH OF ORIGINAL
NUMBER OF OF STOCK AT REPRICING OPTION TERM
OPTIONS TIME OF OR NEW REMAINING AT DATE
REPRICED OR REPRICING OR AMENDMENT EXERCISE OF REPRICING OR
NAME DATE AMENDED (#) AMENDMENT ($) ($) PRICE ($) AMENDMENT (YRS)
- ------------------------------------------ --------- ------------ ------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy........................ 04/13/98 130,910 $ 3.63 $ 5.50 $ 3.63 6.2
04/13/98 84,090 3.63 5.50 3.63 6.2
04/13/98 10,000 3.63 5.50 3.63 6.2
James J. Daley............................ 04/13/98 80,000 3.63 5.38 3.63 9.4
Ainslie Mayberry.......................... -- -- -- -- -- --
Graham Y. Mostyn.......................... 04/13/98 60,000 3.63 6.50 3.63 8.7
04/29/97 60,000 6.50 8.00 6.50 9.5
Randy W. Simon, Ph.D...................... 04/13/98 20,000 3.63 6.50 3.63 8.8
04/29/97 20,000 6.50 11.50 6.50 8.9
04/29/97 20,000 6.50 8.38 6.50 9.8
</TABLE>
37
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN
CONTROL AGREEMENTS
None of our executive officers, other than Charles E. Shalvoy, have
employment agreements, and their employment may be terminated at any time at the
discretion of our board of directors. We entered into an agreement with Mr.
Shalvoy, our President and Chief Executive Officer, on May 3, 1994, which
provides for accelerated vesting of his option shares as if he remained employed
for one additional year in the event that his employment is terminated without
cause following certain mergers, acquisitions or sales of all or substantially
all of our assets.
Under our 1992 Stock Option/Stock Issuance Plan, upon the occurrence of a
merger, reverse merger or sale of all or substantially all of our assets,
outstanding options held by the Chief Executive Officer and our other executive
officers will automatically accelerate and may be exercised as fully vested
shares, unless such options are assumed by the successor corporation.
In addition, our compensation committee has the authority as plan
administrator to provide for the accelerated vesting of the shares of common
stock subject to outstanding options held by the Chief Executive Officer and our
other executive officers, whether granted under our 1992 plan or any earlier
plan, in the event that a change in control occurs or in the event that their
employment were to be terminated, whether involuntarily or through a forced
resignation, following a change in control. For the purposes of this paragraph,
a change in control occurs when a successful tender offer for more than 50% of
our outstanding common stock results in a hostile takeover of Conductus or when
a majority of the members of our board of directors changes as a result of one
or more contested elections for board membership.
38
<PAGE>
CERTAIN TRANSACTIONS
In October 1988, we entered into a five-year coordinated research program
agreement with Hewlett-Packard. In June 1993, we modified this agreement by
entering into a new five-year agreement. In addition, Hewlett-Packard has made a
total equity investment of $6,230,000 in Conductus and beneficially owns more
than 5% of our stock.
The current Hewlett-Packard agreement requires us and Hewlett-Packard to
exchange reviews and assessments of our technical and applications developments,
particularly with respect to their potential application to Hewlett-Packard
product lines. Hewlett-Packard has the right to appoint an Hewlett-Packard
employee as a member of our scientific advisory board. Hewlett-Packard will
jointly own with us any invention by this scientific advisory board member
acting under the current Hewlett-Packard agreement or using our confidential
information.
We have entered into separate indemnification agreements with our directors
and officers. These agreements require, us, among other things, to:
- indemnify them against certain liabilities that may arise by reason of
their status or service as directors or officers, other than liabilities
arising from actions not taken in good faith or in a manner the indemnitee
believed to be opposed to our best interest,
- advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified, and
- obtain directors' and officers' insurance if available on reasonable
terms.
In September 1998, we issued a total of 2,461,227 shares of Series B
preferred stock, and issued warrants to purchase 492,242 shares of common stock,
for a total of $6,344,461. Each share and corresponding warrant was issued for
$2.70. Mr. Grimes, a holder of more than 5% of our outstanding capital stock,
purchased 244,444 shares and 48,888 warrants. Entities affiliated with Asset
Management Associates 1984, a holder of more than 5% of our outstanding capital
stock, purchased 1,296,300 shares and 259,260 warrants. John F. Shoch, Chairman
of the Board, is a general partner of AMC Partners 84, the general partner of
Asset Management Associates 1984.
39
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John F. Shoch, who became a member of our compensation committee in May
1993, is a general partner of AMC Partners 84, which is the general partner of
Asset Management Associates 1984, the beneficial owner of more than five percent
of our common stock. Mr. Shoch is also a general partner of Asset Management
Partners 1996, L.P., which is the general partner of Asset Management Associates
1996, L.P., the beneficial owner of more than five percent of our common stock.
Dr. Shoch served as Chief Executive Officer from September 1987 until October
1988.
1992 STOCK OPTION/STOCK ISSUANCE PLAN
Under our 1992 Stock Option/Stock Issuance Plan as amended, a total of
2,080,000 shares of common stock are authorized for issuance. If any options
granted under this plan are forfeited or terminate for any other reason without
having been exercised in full, then the unpurchased shares subject to those
options will become available for additional grants. If shares granted or
purchased under this plan are forfeited, then those shares will also become
available for additional grants under this plan.
The plan is divided into three separate components:
- The discretionary option grant program;
- The automatic option plan program; and
- The stock issuance program.
The maximum number of option shares and direct stock issuances that may be
granted to a single person in a calendar year is 750,000 shares.
Under the discretionary option grant program, eligible individuals,
including officers and non-employee board members, may be granted incentive
options or nonstatutory options. The exercise price of incentive stock options
granted under the plan must be at least equal to the fair market value of our
common stock on date of grant. The exercise price of nonstatutory options
granted under the plan must be at least equal to 85% of the fair market value of
our common stock on the date of grant.
Under the automatic option grant program, non-employee board members
automatically receive nonstatutory options to purchase shares of our common
stock. At the time that each non-employee board member first becomes a
non-employee board member, he or she is automatically granted at the time of
such initial election or appointment an option to purchase 15,000 shares of
common stock. The options are immediately exercisable, subject to our repurchase
right. This repurchase right lapses with respect to 20% of the option shares
upon completion of 12 months of board service from the date of grant, and the
remainder of the option shares in 48 equal monthly installments. Additionally,
at each annual stockholders meeting, non-employee board members who have served
at least 90 days will receive an option to purchase 3,000 shares of common
stock. This annual grant vests as to 1/3 of the option shares upon completion of
12 months of service and the remainder of the option shares in two equal annual
installments.
Under the stock issuance program eligible individuals are allowed to
purchase shares of our common stock at fair market value or for such
consideration as the compensation committee deems advisable. Options granted
under the plan may be immediately exercisable for all the option shares, on
either a vested or unvested basis, or may become exercisable for fully vested
shares in one or more installments over the participant's period of service.
Shares issued under the stock issuance program may either be vested upon
issuance or subject to a vesting schedule tied to the participant's period of
future service or to the attainment of designated performance goals.
No option may be granted with a term exceeding ten years. However, each
option may be subject to earlier termination within a designated period
following the optionee's cessation of service. In 1992,
40
<PAGE>
we issued options at below fair market value, resulting in a compensation charge
of $295,000, which is being amortized to the statement of operations over the
vesting period of the related options. As of September 30, 1998, this entire
balance had been amortized. In 1998, the Company issued options at below fair
market value, resulting in a compensation charge of $20,346, which was charged
to operations in 1998.
Upon the occurrence of a merger, reverse merger or sale of all or
substantially all of our assets, outstanding options will automatically
accelerate and may be exercised as fully vested shares, unless they are assumed
by the successor corporation. In addition, the compensation committee has the
authority as administrator of the plan to provide for the accelerated vesting of
the shares of common stock subject to outstanding options, whether granted under
the plan or any predecessor plan, in the event that a change in control occurs
or in the event that their employment were to be terminated (whether
involuntarily or through a forced resignation) following a change in control. A
change in control is a hostile takeover effected through a successful tender
offer for more than 50% of our outstanding common stock or through a change in
the majority of the members of our board of directors as a result of one or more
contested elections.
Options granted under the automatic option grant program will fully
accelerate upon the occurrence of a change in control, merger, reverse merger or
sale of all or substantially all of our assets.
A summary of the status of our stock option plans as of December 31, 1996,
1997 and 1998, and changes during the years ending on these dates is presented
below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------------------
AVAILABLE
FOR AVERAGE
GRANT UNDER EXERCISE
OPTION PLAN SHARES PRICE PER SHARE PRICE
------------ ---------- ------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996.................................... 279,038 1,022,308 $ 0.16 - 7.25 $ 4.04
Additional shares authorized................................ 300,000 -- - --
Granted..................................................... (528,000) 528,000 $ 6.50 - 15.25 9.57
Exercised................................................... -- (57,311) $ 0.16 - 7.25 2.08
Canceled.................................................... 107,815 (107,815) $ 0.45 - 11.50 6.09
------------ ---------- --------- --------- -----
Balance, December 31, 1996.................................. 158,853 1,385,182 $ 0.16 - 15.25 $ 6.07
Additional shares authorized................................ 200,000 -- -
Granted..................................................... (644,000) 644,000 $ 3.44 - 8.38 6.31
Exercised................................................... -- (137,000) $ 0.16 - 6.38 2.79
Canceled.................................................... 806,495 (806,495) $ 0.45 - 15.25 7.98
------------ ---------- --------------- -----
Balance December 31, 1997................................... 521,348 1,085,687 $ 0.45 - 13.00 $ 4.68
Additional shares authorized................................ -- -- - --
Granted..................................................... (919,296) 919,296 $ 0.00 - 4.25 3.29
Exercised................................................... -- (111,955) $ 0.00 - 0.88 0.59
Canceled.................................................... 887,938 (887,938) $ 0.88 - 13.00 5.53
------------ ---------- --------------- -----
Balance December 31, 1998................................... 489,990 1,005,090 $ 0.44 - 8.00 $ 3.55
------------ ---------- --------------- -----
------------ ---------- --------------- -----
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In July 1994, we adopted our employee stock purchase plan. A total of
350,000 shares of common stock were authorized for issuance under the plan as of
December 31, 1998. The plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, has been implemented through a series of offering
periods, each with a maximum duration of twelve months, commencing on August 1,
1994, with purchases generally occurring at six-month intervals. The plan is
administered by the compensation committee.
41
<PAGE>
Employees are eligible to participate if they are employed by us for at
least 20 hours per week for more than 5 months per calendar year and have been
employed by us for at least ninety days. The plan permits eligible employees to
purchase common stock through payroll deductions, which may not exceed 10% of an
employee's compensation, nor more than 2,500 shares per participant on any
purchase date. The price of stock purchased under the plan will be 85% of the
lower of the fair market value of the common stock at the beginning of the
offering or on the semi-annual purchase date. Employees may end their
participation in the offering at any time during the purchase period, and
participation ends automatically on termination of employment with us.
Our board of directors may amend or terminate the plan immediately after the
close of any purchase period. However, the board may not, without stockholder
approval, materially increase the number of shares of common stock available for
issuance or materially modify the eligibility requirements for participation or
the benefits available to participants. During 1997 and 1998 employees purchased
50,686 and 28,070 shares for a total of approximately $381,606 and $65,662,
respectively. At December 31, 1998, 111,606 shares were available for future
grants under the plan.
PLAN OF DISTRIBUTION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, of which this prospectus forms a part, in connection with
the future resale of these shares. We have agreed to use our best efforts to
keep this registration statement effective for two years, or at least until all
these shares have been sold by the selling stockholders. Although we will
receive no proceeds from this offering, we will bear all costs, expenses and
fees in connection with this offering. The selling stockholders will bear any
brokerage commissions or similar selling expenses related to their resale of
their common stock.
The common stock offered in this offering may be sold by the selling
stockholders, from time to time, in the following manners:
- in the over-the counter market,
- on the Nasdaq SmallCap Market,
- in privately negotiated transactions, or
- by a combination of the above methods.
The selling stockholders may sell at various fixed prices, at prevailing market
prices or at negotiated prices.
The selling stockholders may use broker-dealers to sell their shares. If
this happens, these broker-dealers will either receive discounts or commissions
from the selling stockholders, or they will receive commissions from purchasers
of shares for whom they acted as agents. These broker-dealers may receive
compensation in excess of customary commissions.
42
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDERS
The following table sets forth, as of February 15, 1999, certain information
regarding beneficial ownership of our common stock, as adjusted to reflect the
sale of the shares offered in this offering by
- each person who is known by us to own beneficially more than five percent
of either our common stock or our Series B preferred stock,
- each of our directors,
- each of the named officers,
- all current officers and directors as a group, and
- each selling stockholder.
The shares to be offered by the selling stockholders will be acquired through
the exercise of their warrants to purchase common stock and conversion of their
shares of Series B preferred stock into shares of common stock.
The beneficial ownership figures in the table below assume the conversion of
all outstanding shares of Series B preferred stock into common stock and the
exercise of all outstanding warrants to purchase common stock. Under this
assumption, 10,213,363 shares of our common stock were outstanding as of
February 15, 1999.
For each person, shares of common stock subject to options or warrants held
by that person which are exercisable as of, or will become exercisable within 60
days of, February 15, 1999, are deemed outstanding. However, such shares are not
deemed outstanding when computing beneficial ownership of any other person.
The registration statement shall also cover any additional shares of common
stock which become issuable in connection with these shares by reason of any
stock dividend, stock split, recapitalization or similar transaction.
AMC Partners 1996, L.P., is the general partner of Asset Management
Associates 1996, L.P. AMC Partners 1984 is the general partner of Asset
Management Partners. Dr. Shoch, the Chairman of the Board, Craig Taylor,
Franklin P. Johnson, Jr. and W. Ferrell Sanders are the general partner of AMC
Partners 1996, L.P., and AMC Partners 1984. Douglas E. Kelley and Tony DiBona
are general partners of AMC Partners 1996, L.P. Franklin P. Johnson, Jr., is the
general partner of Asset Management Partners. Dr. Shoch and Messrs. Sanders,
Kelley, DiBona, Johnson and Taylor disclaim beneficial ownership of any such
shares except to the extent of their pecuniary interests therein.
Unless otherwise indicated, the mailing address of each person listed is
Conductus, Inc., 989 W. Maude Avenue, Sunnyvale California 94086. Persons whose
name is followed with a "+" symbol have a mailing address of c/o Davenport &
Company LLC, 901 East Cary Street, Richmond, VA 23219. Persons whose name is
followed with a "#" symbol have a mailing address of c/o Portola Group, 3000
Sand Hill Road, Suite 2-145, Menlo Park, CA 94025. Mr. Shoch, Mr. DiBona, Asset
Management Associates 1984, Asset Management Associates 1996, L.P., and Asset
Management Partners have a mailing address of 2275 East Bayshore Road, Suite
150, Palo Alto, CA 94303.
43
<PAGE>
<TABLE>
<CAPTION>
THE NUMBER OF
SHARES THE NUMBER OF SHARES BENEFICIALLY
BENEFICIALLY OWNED PRIOR TO THIS OFFERING
OWNED PRIOR TO ASSUMES:
THIS OFFERING -----------------------------------
INCLUDES THE THE CONVERSION OF
FOLLOWING NUMBER SERIES B
SHARES BENEFICIALLY OF SHARES HELD PREFERRED STOCK THE EXERCISE OF
OWNED PRIOR TO OFFERING IN THE FORM OF INTO THE WARRANTS FOR THE
----------------------- IMMEDIATELY FOLLOWING NUMBER FOLLOWING NUMBER
NUMBER OF EXERCISABLE OF SHARES OF OF SHARES OF
NAME (AND ADDRESS OF SELLING STOCKHOLDER) SHARES PERCENT OPTIONS COMMON STOCK COMMON STOCK
- ---------------------------------------------------- ---------- ----------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Asset Management Associates 1984.................... 529,361 5.2 0 148,150 29,630
Asset Management Associates 1996, L.P............... 1,155,558 11.3 0 962,965 192,593
Asset Management Partners........................... 222,222 2.2 0 185,185 37,037
Charles L. Grimes................................... 913,332 8.9 0 244,444 48,888
P.O. Box 136
Mendenhall, PA 19357-0136
Hewlett-Packard Company............................. 558,212 5.5 0 0 0
3000 Hanover Street
Palo Alto, CA 94304
John F. Shoch (1)................................... 1,722,731 16.8 31,812 0 0
Martin Cooper....................................... 24,000 * 24,000 0 0
Robert Janowiak..................................... 21,000 * 21,000 0 0
Martin Kaplan....................................... 26,500 * 24,000 0 0
Charles E. Shalvoy (2).............................. 281,604 2.7 234,697 0 0
James J. Daley...................................... 0 -- 0 0 0
Ainslie Mayberry.................................... 2,698 * 0 0 0
Graham Y. Mostyn.................................... 70,172 * 70,172 0 0
Randy W. Simon...................................... 104,060 1.0 98,855 0 0
2,385,068 22.0 374,358 0 0
All directors and executive officers as a group (9
persons)..........................................
Tony DiBona (3)..................................... 1,165,178 11.4 0 962,965 192,593
Craig Taylor (4).................................... 1,684,919 16.5 0 1,111,115 222,223
Franklin P. Johnson (5)............................. 1,907,141 18.7 0 1,296,300 259,260
W. Ferrell Sanders (4).............................. 1,684,919 16.5 0 1,111,115 222,223
Douglas E. Kelley (6)............................... 1,115,558 11.3 0 962,965 192,593
Banner Partners Minaret, L.P........................ 152,400 1.5 0 127,000 25,400
c/o Bryan E. Edwards
150 Isabella Avenue
Atherton, CA 94027
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
SHARES OWNED AFTER THE
BEING OFFERING
OFFERED IN -----------------------
THIS NUMBER OF
NAME (AND ADDRESS OF SELLING STOCKHOLDER) OFFERING SHARES PERCENT
- ---------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Asset Management Associates 1984.................... 177,780 351,581 3.4
Asset Management Associates 1996, L.P............... 1,155,558 0 --
Asset Management Partners........................... 222,222 0 --
Charles L. Grimes................................... 293,332 620,000 6.1
P.O. Box 136
Mendenhall, PA 19357-0136
Hewlett-Packard Company............................. 0 558,212 5.5
3000 Hanover Street
Palo Alto, CA 94304
John F. Shoch (1)................................... 1,333,338 389,393 3.8
Martin Cooper....................................... 0 24,000 *
Robert Janowiak..................................... 0 21,000 *
Martin Kaplan....................................... 0 26,500 *
Charles E. Shalvoy (2).............................. 0 281,604 2.7
James J. Daley...................................... 0 0 --
Ainslie Mayberry.................................... 0 2,698 *
Graham Y. Mostyn.................................... 0 70,172 *
Randy W. Simon...................................... 104,060 1.0
1,333,338 1,051,730 9.7
All directors and executive officers as a group (9
persons)..........................................
Tony DiBona (3)..................................... 1,164,678 500 *
Craig Taylor (4).................................... 1,333,338 351,581 3.4
Franklin P. Johnson (5)............................. 1,555,560 351,581 3.4
W. Ferrell Sanders (4).............................. 1,333,338 351,581 3.4
Douglas E. Kelley (6)............................... 1,155,558 0 --
Banner Partners Minaret, L.P........................ 152,400 0 --
c/o Bryan E. Edwards
150 Isabella Avenue
Atherton, CA 94027
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
THE NUMBER OF
SHARES THE NUMBER OF SHARES BENEFICIALLY
BENEFICIALLY OWNED PRIOR TO THIS OFFERING
OWNED PRIOR TO ASSUMES:
THIS OFFERING -----------------------------------
INCLUDES THE THE CONVERSION OF
FOLLOWING NUMBER SERIES B
SHARES BENEFICIALLY OF SHARES HELD PREFERRED STOCK THE EXERCISE OF
OWNED PRIOR TO OFFERING IN THE FORM OF INTO THE WARRANTS FOR THE
----------------------- IMMEDIATELY FOLLOWING NUMBER FOLLOWING NUMBER
NUMBER OF EXERCISABLE OF SHARES OF OF SHARES OF
NAME (AND ADDRESS OF SELLING STOCKHOLDER) SHARES PERCENT OPTIONS COMMON STOCK COMMON STOCK
- ---------------------------------------------------- ---------- ----------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
William H. Draper, III Revocable Trust.............. 13,200 * 0 11,000 2,200
William H. Draper
91 Tallwood Court
Atherton, CA 94027
Fred Gibbons........................................ 26,400 * 0 22,000 4,400
11800 Murietta Lane
Los Altos Hills, CA 94022
Micro Cap Partners, L.P............................. 134,400 1.3 0 112,000 22,400
c/o Palo Alto Investors, Inc.
470 University Avenue
Palo Alto, CA 94301
TIFF Investment Program, Inc........................ 120,000 1.2 0 100,000 20,000
c/o Investors Bank & Trust
P.O. Box 9130
Boston, MA 02117
D&S Vending, Inc.+.................................. 13,320 * 0 11,100 2,220
Eaglebrook School+.................................. 22,200 * 0 18,500 3,700
Norman Miller, M.D.+................................ 22,200 * 0 18,500 3,700
Joe Antrium+........................................ 11,160 * 0 9,300 1,860
Philip Klaus, Jr.+.................................. 11,160 * 0 9,300 1,860
44,400 * 0 37,000 7,400
J. Read Branch, Jr. and Janet D. Branch+............
Elizabeth O. Dennis and O. D. Dennis, Jr.+.......... 55,560 * 0 46,300 9,260
Janet J. Dennis+.................................... 11,160 * 0 9,300 1,860
Richard J. Clark 22,200 * 0 18,500 3,700
and Linda S. Clark+...............................
Martin L. Brill+.................................... 11,160 * 0 9,300 1,860
Anthony F. Markel August 1998 GRAT+................. 11,160 * 0 9,300 1,860
Robert F. Mizell+................................... 11,160 * 0 9,300 1,860
George A. Trivette and Janet H. Trivette+........... 26,640 * 0 22,200 4,440
Coleman Wortham+.................................... 60,000 * 0 50,000 10,000
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
SHARES OWNED AFTER THE
BEING OFFERING
OFFERED IN -----------------------
THIS NUMBER OF
NAME (AND ADDRESS OF SELLING STOCKHOLDER) OFFERING SHARES PERCENT
- ---------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
William H. Draper, III Revocable Trust.............. 13,200 0 --
William H. Draper
91 Tallwood Court
Atherton, CA 94027
Fred Gibbons........................................ 26,400 0 --
11800 Murietta Lane
Los Altos Hills, CA 94022
Micro Cap Partners, L.P............................. 134,400 0 --
c/o Palo Alto Investors, Inc.
470 University Avenue
Palo Alto, CA 94301
TIFF Investment Program, Inc........................ 120,000 0 --
c/o Investors Bank & Trust
P.O. Box 9130
Boston, MA 02117
D&S Vending, Inc.+.................................. 13,320 0 --
Eaglebrook School+.................................. 22,200 0 --
Norman Miller, M.D.+................................ 22,200 0 --
Joe Antrium+........................................ 11,160 0 --
Philip Klaus, Jr.+.................................. 11,160 0 --
44,400 0 --
J. Read Branch, Jr. and Janet D. Branch+............
Elizabeth O. Dennis and O. D. Dennis, Jr.+.......... 55,560 0 --
Janet J. Dennis+.................................... 11,160 0 --
Richard J. Clark 22,200 0 --
and Linda S. Clark+...............................
Martin L. Brill+.................................... 11,160 0 --
Anthony F. Markel August 1998 GRAT+................. 11,160 0 --
Robert F. Mizell+................................... 11,160 0 --
George A. Trivette and Janet H. Trivette+........... 26,640 0 --
Coleman Wortham+.................................... 60,000 0 --
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
THE NUMBER OF
SHARES THE NUMBER OF SHARES BENEFICIALLY
BENEFICIALLY OWNED PRIOR TO THIS OFFERING
OWNED PRIOR TO ASSUMES:
THIS OFFERING -----------------------------------
INCLUDES THE THE CONVERSION OF
FOLLOWING NUMBER SERIES B
SHARES BENEFICIALLY OF SHARES HELD PREFERRED STOCK THE EXERCISE OF
OWNED PRIOR TO OFFERING IN THE FORM OF INTO THE WARRANTS FOR THE
----------------------- IMMEDIATELY FOLLOWING NUMBER FOLLOWING NUMBER
NUMBER OF EXERCISABLE OF SHARES OF OF SHARES OF
NAME (AND ADDRESS OF SELLING STOCKHOLDER) SHARES PERCENT OPTIONS COMMON STOCK COMMON STOCK
- ---------------------------------------------------- ---------- ----------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
E. Bryson Powell, III+.............................. 22,200 * 0 18,500 3,700
Grace Associates+................................... 44,400 * 0 9,300 1,860
David A. Wright and 15,600 * 0 13,000 2,600
Carrie H. McAllister+.............................
Doris E. Wright+.................................... 11,160 * 0 9,300 1,860
Robert C. Fitzwilson #.............................. 80,855 * 0 46,296 9,259
Susan Jackson #..................................... 111,555 1.1 0 46,296 9,259
Claude J. and Sandra P. Gaubert and affiliated
trusts #.......................................... 160,107 1.6 0 92,591 18,516
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
SHARES OWNED AFTER THE
BEING OFFERING
OFFERED IN -----------------------
THIS NUMBER OF
NAME (AND ADDRESS OF SELLING STOCKHOLDER) OFFERING SHARES PERCENT
- ---------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
E. Bryson Powell, III+.............................. 22,200 0 --
Grace Associates+................................... 44,400 0 --
David A. Wright and 15,600 0 --
Carrie H. McAllister+.............................
Doris E. Wright+.................................... 11,160 0 --
Robert C. Fitzwilson #.............................. 55,555 25,300 *
Susan Jackson #..................................... 55,555 56,000 *
Claude J. and Sandra P. Gaubert and affiliated
trusts #.......................................... 111,107 49,000 *
</TABLE>
- ------------------------
* Indicates ownership of less than 1% of our common stock
(1)Includes 529,361 shares held by Asset Management Associates 1984, and
1,155,558 shares held by Asset Management Associates 1996, L.P.
(2) Includes 40,307 shares held in the Shalvoy Family Trust and 6,600 shares
held in trust for minor children.
(3) Includes 1,155,558 shares held by Asset Management Associates 1996, L.P.
(4) Includes 1,155,558 shares held by Asset Management Associates 1996, L.P.,
and 529,361 shares held by Asset Management Associates 1984.
(5) Includes 1,155,558 shares held by Asset Management Associates 1996, L.P.,
529,361 shares held by Asset Management Associates 1984, and 222,222 shares
held by Asset Management Partners.
(6) Includes 1,155,558 shares held by Asset Management Associates 1996, L.P.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 20,000,000 shares of common stock, $0.0001 par value, and 5,000,000 shares of
preferred stock, no par value.
COMMON STOCK
As of February 15, 1999, there were 7,144,120 shares of common stock
outstanding that were held of record by approximately 78 stockholders. There
will be 10,213,363 shares of common stock outstanding, assuming no exercise
after February 15, 1999, of outstanding options after giving effect to the sale
of these shares and the conversion of our preferred stock into common stock at a
one-to-one ratio.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by our board of directors out of funds legally available therefor. In
the event of the liquidation, dissolution, or winding up of Conductus, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common stock
to be issued upon conversion of the outstanding preferred stock will be fully
paid and nonassessable.
PREFERRED STOCK
Our board of directors has the authority to, without further action by the
stockholders, cause Conductus to issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof. These
attributes include:
- dividend rights,
- dividend rates,
- conversion rights,
- voting rights,
- terms of redemption,
- redemption prices,
- liquidation preferences, and
- the number of shares constituting any series of preferred stock.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of Conductus without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of common stock. The issuance of preferred stock with voting and conversion
rights may adversely affect the voting power of the holders of common stock,
including the loss of voting control to others.
As of February 15, 1999, there were 4,500,000 shares of Series B preferred
stock authorized and 2,461,227 shares of Series B preferred stock outstanding
that were held of record by approximately 35 stockholders. All outstanding
shares of Series B preferred stock are fully paid and nonassessable.
DIVIDENDS. The holders of the Series B preferred stock shall be entitled to
receive cumulative dividends on each March 31, June 30, September 30, and
December 31 following the date of issuance of such Series B preferred stock at
the rate of $0.162 per year. Cumulative dividends shall be paid upon conversion
of the Series B preferred stock or upon the liquidation or dissolution of
Conductus including deemed liquidations as set forth below.
47
<PAGE>
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of Conductus the holders of each share of Series B preferred stock
shall be entitled to receive prior and in preference to the holders of the
common stock, a per share amount equal to $2.70. After the payment of the
liquidation preferences to the holders of the Series B preferred stock, the
remaining assets shall be distributed ratably to the holders of the common stock
pro rata based on the number of shares of common stock held by each. A merger,
acquisition, sale of voting control or sale of substantially all of our assets
in which our stockholders do not own a majority of the outstanding shares of the
surviving corporation shall be deemed a liquidation.
CONVERSION. Holders of Series B preferred stock will have the right
beginning in March 1999 to convert their Series B preferred shares into shares
of common stock, subject to anti-dilution adjustments described more fully
below. Each share of preferred stock shall automatically be converted into
common stock, at the then applicable conversion price at the election of holders
of two-thirds of such Series B preferred stock.
ANTI-DILUTION ADJUSTMENTS. Each share of Series B preferred stock shall
initially be convertible into one share of common stock. The number of shares of
common stock into which shares of a given series of preferred stock is
convertible will be subject to adjustment in the following circumstances:
- any issuance of additional stock for consideration per share less that the
conversion price for such series of preferred stock,
- any subdivision or combination of the outstanding shares of common stock,
- any distribution of (a) a common stock dividend, (b) other distribution
payable in common stock, or (c) a distribution payable in our securities
other than shares of common stock, or
- any adjustment of the common stock issuable upon the conversion of the
preferred stock, whether by recapitalization, reclassification or
otherwise.
VOTING. The Series B preferred stock will vote together with the common
stock and not as a separate class, except as specifically required by law or by
our certificate of incorporation. Each share of Series B preferred stock shall
have the number of votes equal to the number of shares of common stock then
issuable upon conversion of such shares of Series B preferred stock.
PROTECTIVE PROVISIONS. The prior consent or approval of the holders of at
least two-thirds of the preferred stock, voting together as a single class, is
required for us to take specified actions affecting the rights of such holders.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
PREFERRED STOCK RIGHTS PLAN
We adopted a rights agreement on January 29, 1998. On that date, we declared
a dividend of one preferred share purchase right for each share of common stock
outstanding on February 16, 1998. Subject to some exceptions, these rights will
expire on January 28, 2008. Each preferred share purchase right entitles the
holder to purchase from us one one-thousandth of a share of our Series A Junior
participating preferred stock at a price of $29.00. However, these rights are
not currently exercisable.
If any company acquires, or announces their intention to acquire, beneficial
ownership of 15% or more of our common stock, each right holder other than the
acquiring company will then have the right to purchase $58.00 worth of our
common stock upon payment of the $29.00 exercise price. If the acquiring company
should later acquire us or acquire 50% or more of our assets or earning power,
each right holder, other than the acquiring company, will be entitled to receive
$58.00 worth of the acquiring company's common stock upon the payment of the
$29.00 exercise price. Depending on certain other events, the exercise price of
the rights, and the amount of our stock or stock of the acquiring company to be
delivered upon exercise of the rights, may be changed.
48
<PAGE>
Our board of directors may redeem the rights at a price of $0.01 per right
prior to the acquisition by another company of 15% or more of our common stock.
The preferred share purchase rights have certain anti-takeover effects. Exercise
of the rights will significantly dilute a potential acquiror unless the rights
are first redeemed by our board. The rights should not interfere with any
transaction approved by our board.
The common stock offered in this offering will incorporate the rights
agreement by reference. Any shares you buy in this offering will be accompanied
by preferred share purchase rights.
CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation provides that all stockholder actions must
be effected at a duly called meeting and not by a consent in writing. This
provision could discourage potential acquisition proposals and could delay or
prevent a change in control. This provision is intended to enhance the
likelihood of continuity and stability in the composition of our board of
directors and in the policies formulated by the board. This provision is also
intended to discourage certain types of transactions that may involve an actual
or threatened change of control and to reduce our vulnerability to an
unsolicited acquisition proposal. In addition, the provision also is intended to
discourage certain tactics that may be used in proxy fights. However, it could
have the effect of discouraging others from making tender offers for our shares
and, as a consequence, it also may inhibit fluctuations in the market price of
our shares that could result from actual or rumored takeover attempts. It could
also have the effect of preventing changes in our management.
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law, which
generally prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder,
unless:
- prior to such date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned
- (a) by persons who are directors and also officers and
- (b) by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
- on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
49
<PAGE>
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Boston EquiServe
L.P., and its telephone number is (617) 575-2000.
LEGAL MATTERS
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
will pass upon the validity of the common stock offered in this offering.
EXPERTS
The balance sheets as of December 31, 1997 and 1998, and the statements of
operations and comprehensive loss, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report, which includes an
explanatory paragraph related to the substantial doubt about Conductus' ability
to continue as a going concern, of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to these shares
common stock. This prospectus does not contain all of the information set forth
in the registration statement and the exhibits and schedules to the registration
statement. We refer you to the registration statement and its exhibits and
schedules for further information. Statements contained in this prospectus
concerning the contents of any contract or any other document referred to are
not necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the registration statement. Each
such statement is qualified by such reference to such exhibit.
The registration statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-900-SEC-0330. You
may obtain copies of all or any part of the registration statement from the
Commission after paying the prescribed fees. The Commission maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at
http://www.sec.gov.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Financial Statements:
Balance Sheets............................................................................................. F-3
Statements of Operations and Comprehensive Loss............................................................ F-4
Statements of Stockholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Conductus, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations and comprehensive loss, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Conductus,
Inc., at December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Conductus' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming Conductus
will continue as a going concern. As discussed in Note 1 to the financial
statements, Conductus' liquidity has been adversely affected by continuing
losses from operations. In addition, continuation of operations is dependent
upon the availability of additional capital and Conductus' ability to generate
increased revenues and improved gross margins on sales. These issues raise
substantial doubt about Conductus' ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
February 19, 1999
F-2
<PAGE>
CONDUCTUS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1998
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 2,111,560 $ 1,547,169
Restricted cash equivalent...................................................... 500,000 --
Short-term investments.......................................................... 556,633 1,341,014
Accounts receivable (net of allowance for doubtful accounts of $248,232 and
$292,635 for 1997 and 1998)................................................... 2,055,255 1,109,794
Inventories..................................................................... 610,367 842,384
Prepaid expenses and other current assets....................................... 139,479 145,470
-------------- --------------
Total current assets.......................................................... 5,973,294 4,985,831
Property and equipment, net..................................................... 2,700,594 2,020,324
Other assets.................................................................... 87,762 28,800
-------------- --------------
Total assets.................................................................. $ 8,761,650 $ 7,034,955
-------------- --------------
-------------- --------------
LIABILITIES
Current liabilities:
Current portion of long-term debt............................................... $ 1,547,507 $ 892,139
Accounts payable................................................................ 1,539,590 658,982
Other accrued liabilities....................................................... 1,063,721 778,758
-------------- --------------
Total current liabilities..................................................... 4,150,818 2,329,879
Long-term debt, net of current portion.......................................... 309,681 1,341,407
-------------- --------------
Total liabilities............................................................. 4,460,499 3,671,286
-------------- --------------
Commitments (Note 10)
STOCKHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 5,000,000 shares
Series B, no par value; Designated: 4,500,000; Issued and outstanding: none in
1997, 2,461,227 in 1998 (Liquidation value: $6,762,065 at December 31,
1998)......................................................................... -- 5,683,461
Common stock, $0.0001 par value:
Authorized: 20,000,000 shares;
Issued: 7,013,062 and 7,144,120 in 1997 and 1998
Outstanding: 7,004,095 and 7,144,120 in 1997 and 1998........................... 702 714
Additional paid-in capital........................................................ 41,070,636 42,278,423
Accumulated deficit............................................................... (36,770,187) (44,598,929)
-------------- --------------
Total stockholders' equity.................................................... 4,301,151 3,363,669
-------------- --------------
Total liabilities and stockholders' equity.................................... $ 8,761,650 $ 7,034,955
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- -------------
Revenues:
Contract........................................................... $ 9,690,989 $ 7,266,157 $ 3,698,049
Product sales...................................................... 2,851,682 2,187,383 990,737
------------- ------------- -------------
Total revenues................................................... 12,542,671 9,453,540 4,688,786
------------- ------------- -------------
Costs and expenses:
Cost of product sales.............................................. 1,823,622 1,845,413 2,684,994
Research and development........................................... 11,773,587 10,626,133 5,621,284
Selling, general and administrative................................ 4,054,303 4,329,739 3,514,295
Write-off of property and equipment................................ -- 100,000 --
Loss on asset sale................................................. -- 51,741 --
------------- ------------- -------------
Total costs and expenses......................................... 17,651,512 16,953,026 11,820,573
------------- ------------- -------------
Loss from operations................................................. (5,108,841) (7,499,486) (7,131,787)
Interest income...................................................... 262,965 267,492 97,149
Other income (expense)............................................... 25,042 (108,992) (36,391)
Interest expense..................................................... (183,138) (202,395) (529,961)
------------- ------------- -------------
Net loss........................................................... (5,003,972) (7,543,381) (7,600,990)
Preferred dividend................................................... -- -- (227,752)
------------- ------------- -------------
Net loss attributable to common shareholders......................... $ (5,003,972) $ (7,543,381) $ (7,828,742)
------------- ------------- -------------
------------- ------------- -------------
Net loss............................................................. $ (5,003,972) $ (7,543,381) $ (7,600,990)
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments........................... 3,182 (3,808) --
------------- ------------- -------------
Comprehensive loss................................................... $ (5,000,790) $ (7,547,189) $ (7,600,990)
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted net loss per share................................. $ (0.80) $ (1.09) $ (1.10)
------------- ------------- -------------
------------- ------------- -------------
Shares used in per share calculations................................ 6,263,446 6,896,649 7,088,339
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B ADDITIONAL ACCUMULATED OTHER
PREFERRED COMMON PAID-IN COMPREHENSIVE INCOME ACCUMULATED
STOCK STOCK CAPITAL (LOSS) DEFICIT TOTAL
--------- ----------- -------------- --------------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996............. $ -- $ 570 $ 30,035,358 $ 626 ($24,222,834) $5,813,720
Issuance of 69,037 shares of common
stock to employees.................. -- 7 110,318 -- -- 110,325
Issuance of 1,000,000 shares of common
stock through secondary offering,
net of issuance costs............... -- 100 9,892,107 -- -- 9,892,207
Issuance of 57,848 shares of common
stock to employees under the
employee stock purchase plan........ -- 6 340,597 -- -- 340,603
Compensation associated with stock
options granted..................... -- -- 27,001 -- -- 27,001
Unrealized gain on investments, net... -- -- -- 3,182 -- 3,182
Net loss.............................. -- -- -- -- (5,003,972) (5,003,972)
--------- ----- -------------- ------- ------------ ----------
Balances, December 31, 1996........... -- 683 40,405,381 3,808 (29,226,806) 11,183,066
Issuance of 137,000 shares of common
stock to employees.................. -- 14 381,592 -- -- 381,606
Issuance of 50,686 shares of common
stock to employees under the
employee stock purchase plan........ -- 5 247,662 -- -- 247,667
Compensation associated with stock
options granted..................... -- -- 36,001 -- -- 36,001
Unrealized loss on investments, net... -- -- -- (3,808) -- (3,808)
Net loss.............................. -- -- -- -- (7,543,381) (7,543,381)
--------- ----- -------------- ------- ------------ ----------
Balances, December 31, 1997........... -- 702 41,070,636 -- (36,770,187) 4,301,151
Issuance of 2,461,227 shares of
preferred stock net of $300,860
issuance costs...................... 5,572,461 -- -- -- -- 5,572,461
Issuance of common stock warrants..... -- -- 1,040,671 -- -- 1,040,671
Issuance of 111,955 shares of common
stock to employees.................. -- 10 65,798 -- -- 65,808
Issuance of 28,070 shares of common
stock to employees under the
employee stock purchase plan........ -- 2 65,659 -- -- 65,661
Compensation associated with stock
options granted..................... -- -- 35,659 -- -- 35,659
Dividend accretion on preferred
stock............................... 111,000 -- -- -- (227,752) (116,752)
Net loss.............................. -- -- -- -- (7,600,990) (7,600,990)
--------- ----- -------------- ------- ------------ ----------
Balance, December 31, 1998............ $5,683,461 $ 714 $ 42,278,423 $ -- ($44,598,929) $3,363,669
--------- ----- -------------- ------- ------------ ----------
--------- ----- -------------- ------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................................... $ (5,003,972) $ (7,543,381) $ (7,600,990)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 925,718 827,071 931,215
Compensation associated with stock options granted................................. 27,001 36,001 35,659
Amortization of discount on long term debt......................................... -- -- (107,913)
Provision for excess and obsolete inventories...................................... -- 249,845 156,908
(Gain) loss on disposal of equipment............................................... (22,922) 51,741 --
Provision for allowance for doubtful accounts...................................... -- 273,232 53,744
(Increase) decrease in:
Accounts receivable................................................................ (505,439) 1,528,099 891,717
Inventories........................................................................ (455,449) (269,017) (388,925)
Prepaid expenses and other current assets.......................................... (112,152) 258,077 (5,991)
Other assets....................................................................... (63,580) 40,001 58,962
Increase, (decrease) in:
Accounts payable and other accrued liabilities..................................... 314,024 (153,367) (1,282,323)
------------- ------------- ------------
Net cash used in operating activities.......................................... (4,896,771) (4,701,698) (7,257,937)
------------- ------------- ------------
Cash flows from investing activities:
Maturities of short-term investments............................................... 44,266,602 39,401,345 556,633
Purchases of short-term investments................................................ (47,899,357) (33,445,385) (1,341,014)
Acquisition of property and equipment.............................................. (1,264,478) (689,286) (250,945)
Net proceeds from sales of assets.................................................. 29,196 581,243 --
------------- ------------- ------------
Net cash (used in) provided by investing activities............................ (4,868,037) 5,847,917 (1,035,326)
------------- ------------- ------------
Cash flows from financing activities:
Proceeds from borrowings........................................................... 1,229,019 910,132 4,500,000
Net proceeds from issuance of common stock......................................... 10,343,135 629,273 131,469
Net proceeds from issuance of preferred stock...................................... -- -- 5,572,461
Net proceeds from issuance of common stock warrants................................ -- -- 772,000
Principals payments on long-term debt.............................................. (959,765) (1,194,055) (3,747,058)
------------- ------------- ------------
Net cash provided by financing activities...................................... 10,612,389 345,350 7,228,872
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents............................... 847,581 1,491,569 (1,064,391)
Cash and cash equivalents at beginning of period..................................... 272,410 1,119,991 2,611,560
------------- ------------- ------------
Cash and cash equivalents at end of period........................................... $ 1,119,991 $ 2,611,560 $ 1,547,169
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION:
Conductus was formed to develop, manufacture and market superconductive
electronic devices, circuits and systems for sensor, communications, test and
instrumentation, and digital electronics applications. On September 30, 1997,
Conductus discontinued operation of its Instrument and Systems Division and is
now focused on development, manufacturing and marketing of electronic components
and systems based on superconductors for applications in the worldwide
telecommunications market.
SUBSTANTIAL FUTURE CAPITAL NEEDS:
Conductus has received limited revenues from product sales to date and has
cash reserves of approximately $2,888,000 as of December 31, 1998. Conductus
anticipates that existing sources of liquidity and anticipated revenue,
primarily from government contracts, will satisfy projected working capital and
other cash requirements through June 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 June 1999.
The development, manufacture and marketing of Conductus' products will
require a commitment of substantial additional funds. Management is evaluating
alternative methods to raise additional funds, through debt or equity issuances,
asset sales or otherwise, including possible arrangements with collaborative
partners or others that may require Conductus to relinquish rights to certain of
its technologies or potential products that would not otherwise be relinquished.
Unless management is able to raise significant additional funds, Conductus will
be required to delay, scale-back or eliminate one or more research and
development programs. Additionally, management can give no assurance that
additional financing will be available on acceptable terms or at all. No
adjustments have been included in the financial statements to reflect this
uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR:
Prior to January 1998, Conductus used a 52-53 week fiscal year ending on the
last Friday of the month. For convenience of presentation, the accompanying
financial statements have been shown as ending on December 31 of each applicable
period. In January 1998, it changed to a 52 week fiscal year ending on the last
day of the month.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CERTAIN RISKS AND CONCENTRATIONS:
Conductus' superconducting products are concentrated in the electronic
component industry which is highly competitive and rapidly changing. Revenues
for its products are concentrated with a relatively limited number of customers
and suppliers for certain components are concentrated among a few providers. In
addition, approximately 77%, 77% and 79% of its total revenues for each of the
fiscal
F-7
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
years 1996, 1997, and 1998 were from government-related contracts. The
development of new technologies or commercialization of superconductive products
by any competitor, or the conclusion of one or more government contracts could
affect operating results adversely.
CASH, CASH EQUIVALENTS AND INVESTMENTS:
Conductus considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Investments, which
consist primarily of foreign debt, and commercial paper, are stated at fair
market value. Management believes that the financial institutions in which it
maintains such deposits are financially sound and, accordingly, minimal credit
risk exists with respect to these deposits. Additionally, cash and cash
equivalents are held by two U.S. banks.
Other financial instruments, principally accounts receivable, long term debt
and other borrowings are considered to approximate fair value based upon
comparable market information available at respective balance sheet dates.
Investments are deemed by management to be available-for-sale and are
reported at fair market value with net unrealized gains or losses reported as a
separate component of stockholders' equity. Available-for-sale marketable
securities with maturities less than one year from the balance sheet date are
classified as short-term and those with maturities greater than one year from
the balance sheet date are classified as long term.
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Appropriate consideration is given to obsolescence,
excessive levels, deterioration and other factors in evaluating net realizable
value.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciated on the
straight-line method over estimated useful lives of five years for equipment and
furniture and fixtures. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the useful life of the assets or
the related lease term. When assets are disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting gains
and losses are included in results of operations.
Conductus periodically assesses the recoverability of assets by determining
whether the amortization of the asset balance over its remaining life can be
recovered through undiscounted future operating cash flows. The amount of
impairment, if any, is measured as the amount by which the net book value
exceeds the fair value of the asset.
REVENUE RECOGNITION:
Product revenues are generally recognized at the time of shipment.
Appropriate allowance is made for product returns and potential warranty claims
at the time of shipment.
F-8
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESEARCH AND DEVELOPMENT CONTRACTS:
Conductus has entered into contracts to perform research and development for
the U.S. government. Revenues from these contracts are recognized utilizing the
percentage-of-completion method measured by the relationship of costs incurred
to total contract costs. Cost of contract revenues for the years ended December
31, 1996, 1997, and 1998 was $13,178,000, $9,814,000 and $5,661,000,
respectively. Costs include direct engineering and development costs and
applicable overhead.
RESEARCH AND DEVELOPMENT:
Internally funded research and development expenditures are charged to
operations as incurred.
INCOME TAXES:
Conductus utilizes the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred taxes are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
As permitted by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," Conductus accounts for grants of
equity instruments to employees using the intrinsic value method described in
Accounting Principles Board Opinion No. 25. All other grants are accounted for
using the fair value method described in Statement of Financial Accounting
Standards No. 123 with appropriate compensation expense recognition in the
statement of operations, where significant.
BASIC AND DILUTED LOSS PER SHARE:
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 128 "Earnings Per Share," a reconciliation of the
numerator and denominator of the basic and diluted net loss per share is
provided as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- -------------
Numerator--basic and diluted net loss per share:
Net loss attributable to common shareholders... $ (5,003,972) $ (7,543,381) $ (7,828,742)
Denominator--basic and diluted net loss per
share:
Weighted average common shares................. 6,263,446 6,896,649 7,088,339
Basic and diluted net loss per share........... $ (0.80) $ (1.09) $ (1.10)
</TABLE>
In the 1996, 1997, and 1998 computations, common equivalent shares are
excluded from the diluted loss per share as their effect is antidilutive. Common
equivalent shares, including common stock
F-9
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
options, warrants and 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 antidilution were approximately 1,400,000,
1,101,000, and 4,074,000 for the years ended 1996, 1997 and 1998, respectively.
COMPREHENSIVE LOSS:
Conductus adopted Statement of Financial Accounting Standards No. 130,
"Accounting for Comprehensive Income," during fiscal year ended 1998. This
statement establishes standards for reporting and display of comprehensive
income and its components (including revenues, expenses, gains and losses) in a
full set of financial statements. Conductus' unrealized gains and losses on
investments represent the only component of comprehensive income which is
excluded from net income for 1998 and prior years. Conductus' comprehensive loss
has been presented in the financial statements. There were no tax effects
allocated to the component of other comprehensive loss as Conductus currently
pays no taxes and has not recognized any benefits.
RECLASSIFICATIONS:
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
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.
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.
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.
Conductus is currently studying the implications of these statements and has
not yet determined the impact of their adoption.
F-10
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUPPLEMENTAL CASH FLOW DISCLOSURE:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest..................................... $ 191,050 $ 173,571 $ 374,713
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FUNDING ACTIVITIES:
Unrealized gain (loss) on investments, net................................. $ 3,182 $ 3,808 $ --
---------- ---------- ----------
---------- ---------- ----------
OTHER NONCASH EXPENSES:
Compensation associated with stock options granted......................... $ 27,001 $ 36,001 $ 35,639
---------- ---------- ----------
---------- ---------- ----------
Dividend accretion on preferred stock...................................... $ -- $ -- $ 227,752
---------- ---------- ----------
---------- ---------- ----------
Amortization of discount on long term debt................................. $ -- $ -- $ 107,913
---------- ---------- ----------
---------- ---------- ----------
Value of warrants issued in association with long term debt................ $ -- $ -- $ 268,671
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
4. INVESTMENTS:
Investments, all of which are classified as available-for-sale, are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------ --------------------------
<S> <C> <C> <C> <C>
COST MARKET VALUE COST MARKET VALUE
---------- ------------ ------------ ------------
Debt securities:
Foreign debt............................................ $ 289,829 $ 289,829 $ 248,126 $ 248,126
Commercial paper........................................ 247,702 247,702 792,215 792,215
Other................................................... 4,587 4,587 298,468 298,468
Accrued interest........................................ 14,515 14,515 2,205 2,205
---------- ------------ ------------ ------------
Total................................................... $ 556,633 $ 556,633 $ 1,341,014 $1,341,014
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
At December 31, 1998, all scheduled maturities of investments are within one
year. Investments consisted primarily of foreign debt and commercial paper
bearing interest between 4.5% to 5.2% per annum are due to mature between
January 1999 and August 1999.
For the years ended December 31, 1996, 1997, and 1998 gross realized gains
and losses on sales of available-for-sale securities were not material. The cost
of securities sold is based on the specific identification method.
F-11
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
U.S. government contracts:
Unbilled
Recoverable costs and accrued profit on progress completed--not billed............ $ 796,283 $ 726,342
Unrecovered costs and estimated profits subject to future negotiation-- not
billed.......................................................................... 350,000 --
Billed.............................................................................. 793,382 297,525
Commercial............................................................................ 363,822 378,562
Allowance for doubtful accounts....................................................... (248,232) (292,635)
------------ ------------
$ 2,055,255 $ 1,109,794
------------ ------------
------------ ------------
</TABLE>
Recoverable costs and accrued profit and unrecovered costs and estimated
profits not billed are comprised principally of amounts of revenue recognized on
contracts for which billings had not been presented to the contract owners
because the amounts were not billable at the balance sheet date. It is
anticipated such unbilled amounts receivable from the U. S. government at
December 31, 1998 will be billed over the next 120 days as incremental increases
to the contract are funded by the contract administrator.
6. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Raw materials........................................................................... $ 293,336 $ 441,130
Work in process......................................................................... 366,550 198,341
Finished goods.......................................................................... 231,326 640,666
Allowance for excess and obsolete inventories........................................... (280,845) (437,753)
----------- -----------
$ 610,367 $ 842,384
----------- -----------
----------- -----------
</TABLE>
F-12
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1998
------------- -------------
Equipment........................................................................... $ 6,859,265 $ 7,286,069
Leasehold improvements.............................................................. 1,590,605 1,715,096
Furniture and fixtures.............................................................. 424,824 431,861
Construction in process............................................................. 307,386 --
------------- -------------
9,182,080 9,433,026
Accumulated depreciation and amortization........................................... (6,481,486) (7,412,702)
------------- -------------
$ 2,700,594 $ 2,020,324
------------- -------------
------------- -------------
</TABLE>
8. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1998
------------ ----------
Accrued consulting and professional..................................................... $ 138,155 $ 111,022
Accrued compensation.................................................................... 704,676 395,313
Preferred dividend payable.............................................................. -- 116,752
Other accrued liabilities............................................................... 220,890 155,671
------------ ----------
$ 1,063,721 $ 778,758
------------ ----------
------------ ----------
</TABLE>
9. LONG-TERM DEBT AND OTHER BORROWINGS:
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 December
31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Loan payable to leasing company....................................................... $ -- $ 1,978,366
Bank equipment term loan payable...................................................... 1,357,188 255,180
Bank line of credit................................................................... 500,000 --
------------ ------------
Total............................................................................... 1,857,188 2,233,546
Less: current portion................................................................. 1,547,507 892,139
------------ ------------
Long term debt...................................................................... $ 309,681 $ 1,341,407
------------ ------------
------------ ------------
</TABLE>
On April 22, 1998, Conductus entered into a $2,500,000 loan agreement with a
leasing company collateralized by substantially all of the assets of the
Company. In connection with the loan agreement, Conductus granted warrants to
purchase up to $125,000 of the Company's stock at a price equal to the
F-13
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT AND OTHER BORROWINGS: (CONTINUED)
average closing bid price for the five days immediately preceding and including
April 22, 1998, $4.11. The effective interest rate, including the impact of the
warrants, is 13.98%. The warrants were valued using the Noreen-Wolfson valuation
model and have a term of five years. The value of $101,681 assigned to the
warrants is being amortized to interest expense using the effective interest
method.
The bank equipment term loan bears interest at the bank's prime rate plus
2%, with principal and interest payments paid monthly. This term loan matures on
December 31, 1999 subject to renewal of the bank line of credit on April 23,
1999. If the bank line of credit is not renewed, the equipment term loan
requires Conductus to collateralize the term loan with restricted cash deposits.
On April 23, 1998, Conductus entered into a bank line of credit agreement,
which 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 are collateralized by accounts receivable, equipment
and other assets of Conductus. In connection with this line of credit, Conductus
granted warrants to purchase 15,000 shares, 10,000 shares and 25,000 shares of
the Company's common stock to the bank on April 13, 1998, May 31, 1998 and June
30, 1998, respectively. Such grants were based on the length of time the
borrowings remained outstanding and are exercisable at a price of $3.625 per
share. The warrants were valued using the Noreen-Wolfson valuation model and
have a term of five years. The value of $132,455 assigned to the warrants was
charged to interest expense using the effective interest method. As of December
31, 1998, there were no amounts outstanding under this facility however,
outstanding balances under the bank equipment term loan reduce the amount
available under the line of credit and, based on 80% of eligible receivables
there were no amounts available under the line of credit at December 31, 1998.
The line of credit is subject to renewal on April 23, 1999.
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%. Conductus also granted to the leasing
company warrants to purchase up to 15,060 shares of our 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. The warrants were
valued using the Noreen-Wolfson valuation model and have a term of five years.
This line of credit prohibits Conductus from paying cash dividends and expires
on September 30, 1999.
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 December 31, 1998, Conductus was in compliance with all financial
covenants.
F-14
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS:
Conductus leases its administrative, sales, marketing, manufacturing,
research and development facilities under noncancelable operating leases
expiring in August 2000 and 2001. Under the terms of the leases, Conductus is
responsible for certain expenses and taxes.
Future minimum payments under these noncancelable leases are as follows:
<TABLE>
<S> <C>
1999.............................. $ 327,114
2000.............................. 279,114
2001.............................. 122,076
---------
$ 728,304
---------
---------
</TABLE>
Rent expense was $438,531, $385,432 and $316,583 for the years ending
December 31, 1996, 1997, and 1998, respectively.
11. RESEARCH AND DEVELOPMENT ARRANGEMENTS:
Conductus is party to a number of research and development contracts,
generally short-term in nature, which are substantially all with various
agencies of the U.S. government. Credit risk related to accounts receivable
arising from such contracts is considered minimal.
The following describes some of the major programs undertaken by Conductus:
COORDINATED RESEARCH PROGRAM:
In May 1993, Conductus and Hewlett-Packard Company modified a previous
coordinated research program agreement by entering into a new five-year
agreement. In connection with the modifying agreement, Conductus received
$1,000,000 in cash and $230,000 in equipment from Hewlett-Packard in exchange
for issuing 439,286 shares of its Series B preferred stock, which automatically
converted into 137,276 shares of common stock upon the close of Conductus'
initial public offering in August 1993.
This agreement requires Conductus and Hewlett-Packard to exchange reviews
and assessments of Conductus' technical and applications developments,
particularly with respect to their potential application to Hewlett-Packard's
products.
ADVANCED TECHNOLOGY PROGRAM:
In August 1992, Conductus, acting as administrator for and on behalf of a
joint venture formed to conduct research to develop a prototype hybrid
superconductor/semiconductor computer under the Department of Commerce Advanced
Technology Program, entered into a cost-sharing cooperative agreement with the
U.S. government. Under the terms of the five year agreement, the U.S. government
agreed to share costs of the joint venture's research effort up to an aggregate
of $7,450,000, including subcontractor costs. Revenue of $1,613,000 and $714,000
was recognized under this contract for 1996 and 1997, respectively. The contract
was completed in 1997.
FOCUSED RESEARCH INITIATIVE:
In September 1995, Conductus entered into a contract with the Naval Research
Laboratory for the development of high-temperature superconductor receiver coils
for pulse magnetic resonance imaging
F-15
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RESEARCH AND DEVELOPMENT ARRANGEMENTS: (CONTINUED)
prototype for screening of breast cancer. Revenue of $1,473,000, $920,000 and
$100,000 was recognized under the contract for 1996, 1997, and 1998,
respectively.
LUCENT JOINT DEVELOPMENT AGREEMENT:
In April 1996, Conductus entered into a joint development and licensing
agreement with Lucent Technologies, Inc., to develop a superconductive
transceiver filter subsystem for the PCS market. Both Conductus and Lucent
provide technical support to the program. Each party will retain rights to the
intellectual property it develops under the program, subject to certain
nonexclusive licensing rights of the other party, and jointly developed
intellectual property will be jointly owned. Revenue of $428,000, $1,080,000 and
$152,000 was recognized under the agreement for 1996, 1997 and 1998,
respectively.
DARPA CRYOPACKAGING PROGRAM:
In August 1996, Conductus entered into a contract with the Naval Research
Laboratory to solve technical problems associated with the support and
utilization of cryoelectronic components in advanced electronic systems with
particular emphasis on microwave communications. Revenue of $616,000, $847,000
and $1,491,000 was recognized under this contract for 1996, 1997 and 1998,
respectively.
MULTICHANNEL INTERCEPT SYSTEM PROJECT:
In June 1998, Conductus entered into a subcontract with Communications
Solutions, Inc., for the High Temperature Superconductor RF Multichannel
Intercept System Project. Conductus is responsible for the design and
fabrication of the filter/amplifier which will be integrated with the
receiver/controller being designed and fabricated by Communication Solutions,
Inc. The ultimate customer for the project is the U.S. government. Revenue of
$643,000 was recognized under the contract in 1998.
12. STOCKHOLDERS' EQUITY
CAPITAL STOCK:
Under the terms of Conductus' articles of incorporation, the board of
directors may determine the rights, preferences and terms of its authorized but
unissued preferred stock.
SERIES B PREFERRED STOCK:
On September 11, 1998 and September 22, 1998, Conductus sold and issued an
aggregate of 2,461,227 shares of its Series B preferred stock at a price per
share of $2.70 and issued warrants to purchase 492,242 shares of common stock at
an exercise price of $2.70 per share in a private placement of its equity
securities. The offering was not underwritten and raised net proceeds of
$6,344,461. Certain affiliates of Conductus 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, pursuant to Rule 506.
The value of the warrants was determined using the Noreen-Wolfson valuation
model. The value of the warrants is $772,000. The warrants have a term of five
years and are immediately exercisable at a price of $2.70 per share. The
allocation of proceeds between preferred stock and warrants results in a
beneficial
F-16
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
conversion feature in the amount of $222,000. The value of the beneficial
conversion feature will be accreted as preferred dividends over six months.
DIVIDENDS. The holders of the Series B preferred stock shall be entitled to
receive cumulative dividends on each March 31, June 30, September 30, and
December 31 following the date of issuance of such Series B preferred stock at
the rate of $0.162 per year. Cumulative dividends shall be paid upon conversion
of the Series B preferred stock or upon the liquidation or dissolution of
Conductus including deemed liquidations as set forth below.
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of Conductus the holders of each share of Series B preferred stock
shall be entitled to receive prior and in preference to the holders of the
common stock, a per share amount equal to $2.70. After the payment of the
liquidation preferences to the holders of the Series B preferred stock, the
remaining assets shall be distributed ratably to the holders of the common stock
pro rata based on the number of shares of common stock held by each. A merger,
acquisition, sale of voting control or sale of substantially all of our assets
in which our stockholders do not own a majority of the outstanding shares of the
surviving corporation shall be deemed a liquidation.
CONVERSION. Holders of Series B preferred stock will have the right
beginning in March 1999 to convert their Series B preferred shares into shares
of common stock, subject to anti-dilution adjustments described more fully
below. Each share of preferred stock shall automatically be converted into
common stock, at the then applicable conversion price at the election of holders
of two-thirds of such Series B preferred stock.
ANTI-DILUTION ADJUSTMENTS. Each share of Series B preferred stock shall
initially be convertible into one share of common stock. The number of shares of
common stock into which shares of a given series of preferred stock is
convertible will be subject to adjustment in the following circumstances:
- any issuance of additional stock for consideration per share less that the
conversion price for such series of preferred stock,
- any subdivision or combination of the outstanding shares of common stock,
- any distribution of (a) a common stock dividend, (b) other distribution
payable in common stock, or (c) a distribution payable in our securities
other than shares of common stock, or
- any adjustment of the common stock issuable upon the conversion of the
preferred stock, whether by recapitalization, reclassification or
otherwise.
VOTING. The Series B preferred stock will vote together with the common
stock and not as a separate class, except as specifically required by law or by
our certificate of incorporation. Each share of Series B preferred stock shall
have the number of votes equal to the number of shares of common stock then
issuable upon conversion of such shares of Series B preferred stock.
PROTECTIVE PROVISIONS. The prior consent or approval of the holders of at
least two-thirds of the preferred stock, voting together as a single class, is
required for us to take specified actions affecting the rights of such holders.
F-17
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
1992 STOCK OPTION/STOCK ISSUANCE PLAN:
Under Conductus' stock option/stock issuance plan, as amended, a total of
2,080,000 shares of common stock are authorized for issuance under the plan as
of December 31, 1998.
The plan is divided into three separate components: the discretionary option
grant program, the automatic option plan program and the stock issuance program.
Under the discretionary option grant program, eligible individuals may be
granted incentive options or nonstatutory options. The exercise price of
incentive stock options granted under the plan must be at least equal to the
fair market value of the common stock on date of grant. The exercise price of
nonstatutory options granted under the plan must be not less than 85% of the
fair market value of the common stock on date of grant. Under the automatic
option grant program, non-employee board members automatically receive
non-statutory options to purchase shares of common stock. Each non-employee
board member who first becomes a non-employee board member at any time on or
after January 23, 1995 is automatically granted at the time of such initial
election or appointment an option to purchase 15,000 shares of common stock. The
options are immediately exercisable, subject to Conductus' repurchase right
which lapses with respect to twenty percent (20%) of the optioned shares upon
completion of twelve (12) months of board service from the date of grant, and
the remainder of the optioned shares in forty-eight (48) equal monthly
installments. Additionally each year the non-employee board members receive a
3,000 share grant that vests over three years. Under the stock issuance program
eligible individuals are allowed to purchase shares of Conductus' common stock
at fair market value or for such consideration as the compensation committee
deems advisable.
Options granted under the plan may be immediately exercisable for all the
option shares, on either a vested or unvested basis, or may become exercisable
for fully vested shares in one or more installments over the participant's
period of service. Shares issued under the stock issuance program may either be
vested upon issuance or subject to a vesting schedule tied to the participant's
period of future service or to the attainment of designated performance goals.
No option may be granted with a term exceeding ten years. However, each such
option may be subject to earlier termination within a designated period
following the optionee's cessation of service with the Company.
In 1992, Conductus issued options at below fair market value, resulting in a
compensation charge of $295,000, which is being amortized to the statement of
operations over the vesting period of the related options. As of December 31,
1998, this entire balance had been amortized to the Statement of Operations.
In 1998, the Company issued options at below fair market value, resulting in
a compensation charge of $20,346, which was charged to operations in 1998.
F-18
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of Conductus' stock option plans as of December 31,
1996, 1997 and 1998 and changes during the periods ending on these dates is
presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE
FOR
GRANT UNDER
OPTION PLAN SHARES PRICE PER SHARE
------------ ---------- -------------------------------
Balance, January 1, 1996.................................. 279,038 1,022,308 $ 0.16 -- 7.25
Additional shares authorized.............................. 300,000 -- --
Granted................................................... (528,000) 528,000 $ 6.50 -- 15.25
Exercised................................................. -- (57,311) $ 0.16 -- 7.25
Canceled.................................................. 107,815 (107,815) $ 0.45 -- 11.50
------------ ---------- --------- ---------
Balance, December 31, 1996................................ 158,853 1,385,182 $ 0.16 -- 15.25
Additional shares authorized.............................. 200,000 -- --
Granted................................................... (644,000) 644,000 $ 3.44 -- 8.38
Exercised................................................. (137,000) $ 0.16 -- 6.38
Canceled.................................................. 806,495 (806,495) $ 0.45 -- 15.25
------------ ---------- --------- ---------
Balance December 31, 1997................................. 521,348 1,085,687 $ 0.45 -- 13.00
Granted................................................... (919,296) 919,296 $ 0.00 -- 4.25
Exercised................................................. -- (111,955) $ 0.00 -- 0.88
Canceled.................................................. 887,938 (887,938) $ 0.88 - 13.00
------------ ---------- ---------------
Balance December 31, 1998................................. 489,990 1,005,090 $ 0.44 - 8.00
------------ ---------- ---------------
------------ ---------- ---------------
<CAPTION>
<S> <C>
WEIGHTED AVG.
EXERCISE
PRICE
---------------
Balance, January 1, 1996.................................. $ 4.04
Additional shares authorized.............................. --
Granted................................................... 9.57
Exercised................................................. 2.08
Canceled.................................................. 6.09
-----
Balance, December 31, 1996................................ $ 6.07
Additional shares authorized.............................. --
Granted................................................... 6.31
Exercised................................................. 2.79
Canceled.................................................. 7.98
-----
Balance December 31, 1997................................. $ 4.68
Granted................................................... 3.26
Exercised................................................. 0.59
Canceled.................................................. 5.53
-----
Balance December 31, 1998................................. $ 3.55
-----
-----
</TABLE>
At December 31, 1996, 1997 and 1998, vested options to purchase 477,522,
797,925 and 221,521, respectively, were unexercised and the weighted average
prices for the vested options were $3.21, $4.68 and $4.23, respectively.
REPRICING OF STOCK OPTIONS:
On April 29, 1997, the plan administrator of the 1992 Stock Option/Stock
Issuance Plan adopted a plan for repricing of stock options under which each
employee-holder of outstanding options with an exercise price above the closing
price of Conductus' common stock on April 29, 1997, was permitted to elect to
exchange the existing options for new options, subject to the same terms as the
corresponding original stock options being surrendered, except that the exercise
price was equal to the closing price of Conductus' common stock on April 29,
1997, and all shares were to be unvested until April 29, 1998, after which they
would be subject to the original vesting schedule.
On April 13, 1998, the plan administrator adopted a plan for repricing of
stock options under which each employee-holder of outstanding options with an
exercise price above the closing price of Conductus' stock on April 13, 1998,
was permitted to elect to exchange the existing options for new options, subject
to the same terms as the corresponding original stock options being surrendered,
except that the exercise price was equal to the closing price of Conductus'
common stock on April 13, 1998, and all shares were to be unvested until April
13, 1999, after which they would be subject to the original vesting schedule.
F-19
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN:
In July 1994, the Employee Stock Purchase Plan was adopted by the board of
directors. A total of 350,000 shares of common stock are authorized for issuance
under the plan as of December 31, 1998. The purpose of the plan is to provide
eligible employees of Conductus with a means of acquiring common stock of
Conductus through payroll deductions. The purchase price of such stock under the
plan cannot be less than 85% of the lower of the fair market values on the
specified purchase date and the beginning of the offering period. During 1996,
1997 and 1998 employees purchased 57,848, 50,686 and 28,070 shares for a total
of approximately $340,603, $247,667 and $65,661, respectively. At December 31,
1998, 111,606 shares were available for future grants under the plan.
STOCKHOLDER RIGHTS PLAN:
On January 22, 1998, the board of directors declared a dividend of one
preferred share purchase right for each outstanding share of common stock, par
value $0.0001 per share outstanding on February 16, 1998 to the stockholders of
record on that date. Each right entitles the registered holder to purchase from
Conductus one one-thousandth of a share of Series A Junior participating
preferred stock, par value $0.0001 per share, at a price of $29.00 per one
one-thousandth of a preferred share, subject to adjustment. The description and
terms of the rights are set forth in a rights agreement.
COMMON STOCK RESERVED:
At December 31, 1998, Conductus had reserved the following shares of common
stock:
<TABLE>
<S> <C>
Conversion of Series B
preferred...................... 2,461,227
Employee Stock Purchase Plan..... 111,606
Warrants......................... 608,016
Option Plan...................... 1,510,080
---------
4,690,929
---------
---------
</TABLE>
STOCK BASED COMPENSATION PLANS--VALUATION:
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTION EXERCISABLE
-------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE NUMBER
NUMBER REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL AVERAGE AT AVERAGE
PRICES AT 12/31/98 LIFE (YEARS) EXERCISE PRICE 12/31/98 EXERCISE PRICE
- ----------------------- ----------- ------------- --------------- ------------- ---------------
$ 0.45-$0.88 57,374 $ 3.53 $ 0.60 57,374 $ 0.60
$ 1.44-$5.25 832,092 7.57 $ 3.35 376,841 $ 3.01
$ 5.38-$6.50 90,391 6.74 $ 6.19 90,391 $ 6.19
$ 6.56-$8.00 40,233 8.05 $ 7.05 40,233 $ 7.05
------------ ----------- ----- ----- ------------- -----
0.45$-$8.00......... 1,020,090 7.29 $ 3.59 564,839 $ 3.56
------------ ----------- ----- ----- ------------- -----
------------ ----------- ----- ----- ------------- -----
</TABLE>
The following information concerning Conductus' stock issuance plans is
provided in accordance with Statement of Financial Accounting Standards No. 123.
Conductus however continues to apply
F-20
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
[APBO] 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plan.
The fair value of each option grant and purchase right has been estimated on
the date of grant using the Black-Scholes option pricing and valuation model
with the following weighted average assumptions used for grants and purchase
rights in 1996, 1997, and 1998.
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
GROUP A GROUP B GROUP A GROUP B GROUP A GROUP B
---------- ----------- ---------- ----------- ---------- -----------
Risk-free interest rates....................... 6.13% 5.50% 6.23% 5.50% 5.36% 5.17%
Expected life.................................. 4.9 years 6 months 4.4 years 6 months 3.9 years 6 months
Volatility..................................... 0.76 0.76 0.83 0.83 1.05 1.05
Dividend yield................................. -- -- -- -- -- --
</TABLE>
The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents all grants of options to employees,
officers, and directors. Group B represents the employees with purchase rights
under the Employee Stock Purchase Plan.
The weighted average fair value of those options granted in 1996, 1997, and
1998 was $6.19, $4.10, and $3.26. The weighted average fair value of those
purchase rights granted in 1996, 1997, and 1998 was $3.47,and $2.71, and $2.34.
Had compensation cost for these plans been determined based on fair value of
the options at that grant date in 1996, 1997, and 1998 consistent with the
provisions of Statement of Financial Accounting Standards No. 123, Conductus'
net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net loss attributable to common shareholders --As reported........... $ (5,004,000) $ (7,543,000) $ (7,829,000)
--Proforma.................. $ (6,057,000) $ (8,746,000) $ (9,067,000)
Basic and diluted net loss per share --As reported................... $ (0.80) $ (1.09) $ (1.10)
--Proforma........................... $ (0.97) $ (1.27) $ (1.28)
</TABLE>
The above proforma effect may not be representative of the effects on
reported net income for future years as the proforma numbers presented do not
take into account the effect of equity grants made prior to 1995 or additional
future grants.
On March 8, 1996 Conductus issued warrants to acquire 15,000 shares of
common stock at a price of $11.25 per share.
13. 401(K) PROFIT SHARING PLAN:
Conductus has a 401(k) profit sharing plan which covers substantially all
employees. Under the plan, employees are permitted to contribute up to 15% of
gross compensation not to exceed the annual 402(g) limitation for any plan year.
Discretionary contributions may be made by Conductus irrespective of whether it
has net profits. No contributions were made by Conductus during the years 1994
through 1998.
F-21
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. ASSET DISPOSALS:
During the third quarter of 1997, the company disposed of the net assets of
its Systems and Instrumentation Division, and its nuclear magnetic resonance
product line. The following table summarizes the financial impact of the
transactions:
<TABLE>
<S> <C>
Proceeds from the sale of product lines
and related assets.................... $1,128,093
Net book value of assets sold:
Fixed assets.......................... (3,306)
Inventories........................... (629,678)
Costs related to asset disposal......... (546,850)
---------
Loss on asset sale...................... $ (51,741)
---------
---------
</TABLE>
15. INCOME TAXES:
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
<S> <C> <C>
1997 1998
------------- --------------
Property and equipment, principally due to differences in depreciation............. $ 198,000 $ 342,000
Accrued liabilities and other...................................................... 248,000 441,000
Tax credit carryforwards........................................................... 1,191,000 1,006,000
Capitalized research and development expense....................................... 76,000 380,000
Net operating loss carryforward.................................................... 13,028,000 15,411,000
Valuation allowance................................................................ (14,741,000) (17,580,000)
------------- --------------
Net deferred tax asset............................................................. $ -- $ --
------------- --------------
------------- --------------
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax
assets in future tax years, Conductus has placed a valuation allowance against
its otherwise recognizable net deferred tax assets.
At December 31, 1998, Conductus had approximately $42,865,000 and
$14,354,000 in net operating loss carry forwards for federal and state income
purposes, respectively. These expire in the years 1999 through 2018. The
utilization of Conductus' net operating loss carry forwards may be subject to
certain limitations upon certain changes in ownership, as defined.
16. BUSINESS SEGMENT AND MAJOR CUSTOMERS:
Conductus has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 31, 1997. This statement supercedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
Statement No. 131 changes current practice under Statement No. 14 by
establishing a new framework on which to base segment reporting and also
requires interim reporting of segment information.
F-22
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. BUSINESS SEGMENT AND MAJOR CUSTOMERS: (CONTINUED)
Conductus markets its products primarily to customers in the United States
and Japan in the wireless industry. Management uses one measurement of
profitability and does not disaggregate its business for internal reporting.
Commercial sales to one customer as a percentage of revenues were 12%
($1,560,000), 9% ($896,000) and 2% ($76,000), in 1996, 1997 and 1998,
respectively. Receivables from this customer totalled $183,000 at December 31,
1997. There were no outstanding receivables from this customer at December 31,
1998.
Conductus' revenues by geographic area are summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------ ------------
<S> <C> <C> <C>
USA................................................................... $ 10,550,000 $ 8,318,000 $ 4,485,000
Japan................................................................. 1,560,000 896,000 146,000
Rest of the world..................................................... 433,000 240,000 58,000
------------- ------------ ------------
$ 12,543,000 $ 9,454,000 $ 4,689,000
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Conductus, Inc.:
Our audits of the financial statements referred to in our report dated
February 19, 1999 appearing on page F-2 also included an audit of the financial
statement schedule listed in Item 16b of this Form S-1. In our opinion, the
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements.
PricewaterhouseCoopers LLP
San Jose, California
February 19, 1999
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Price Range of Common Stock............................................... 13
Selected Financial Data................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 15
Business.................................................................. 21
Management................................................................ 31
Certain Transactions...................................................... 38
Plan of Distribution...................................................... 41
Principal Stockholders and Selling Stockholders........................... 42
Description of Capital Stock.............................................. 45
Legal Matters............................................................. 48
Experts................................................................... 48
Additional Information.................................................... 48
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,069,243 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by Conductus,
Inc. (the "Company" or "Registrant") in connection with the sale of common stock
being registered. All amounts are estimates except the SEC registration fee.
<TABLE>
<S> <C>
SEC Registration fee............................................ $1,400.00
Printing and engraving expenses................................. 20,000.00
Legal fees and expenses......................................... 25,000.00
Accounting fees and expenses.................................... 15,000.00
Blue sky fees and expenses...................................... 10,000.00
Transfer agent fees............................................. 4,000.00
Miscellaneous fees and expenses................................. 4,600.00
---------
Total..................................................... $80,000.00
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its officers and directors, a form of which is
incorporated herein by reference. The Indemnification Agreements provide the
Registrant's officers and directors with further indemnification to the maximum
extent permitted by the Delaware General Corporation Law."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In March 1996, the Company issued a warrant to purchase 15,000 shares of
common stock at an exercise price of $11.25 per share to Silicon Valley Bank.
In April 1998, the Company issued a warrant to purchase 30,414 shares of
common stock at an exercise price of $4.11 per share to Transamerica Business
Credit Corporation.
In May 1998, the Company issued a warrant to purchase 15,000 shares of
common stock at an exercise price of $3.625 per share to Silicon Valley Bank.
II-1
<PAGE>
In June 1998, the Company issued a warrant to purchase 10,000 shares of
common stock at an exercise price of $3.625 per share to Silicon Valley Bank.
In July 1998, the Company issued a warrant to purchase 25,000 shares of
common stock at an exercise price of $3.625 per share to Silicon Valley Bank.
In July 1998, the Company issued a warrant to purchase 15,060 shares of
common stock at an exercise price of $3.32 per share to Leasing Technologies
International, Inc.
In September 1998, the Company issued to certain investors of the Company
2,461,227 shares of Series B Preferred Stock at $2.70 per share. Such investors
also received a warrant to purchase one share of common stock for every five
shares of Series B Preferred Stock purchased. In total, warrants to purchase
492,242 shares of common stock were issued at an exercise price of $2.70 per
share.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
2.1(1) Stock Exchange Agreement dated as of May 28, 1993, between the Company and Tristan Technologies,
Inc.
3.1(2) Restated Certificate of Incorporation.
3.2(3) Restated Bylaws.
3.3(4) Certificate of Designation of Series B Preferred Stock.
4.1(3) Stockholder Rights Plan.
5.1* Opinion of Counsel.
10.1(1) 1987 Stock Option Plan.
10.2(1) Amended 1989 Stock Option Plan.
10.3(5) 1992 Stock Option/Stock Purchase Plan.
10.4(6) 1994 Employee Stock Purchase Plan.
10.5(1) Second Amended and Restated Registration Rights Agreement dated June 3, 1993.
10.6(4) Form of Series B Preferred Stock and Warrant Purchase Agreement, dated September, 1998, and
September 22, 1998, between the Company and Series B Investors.
10.7(4) Form of Warrant to Purchase Common Stock between the Company and Series B Investors.
10.8(7) Employment Agreement dated May 3, 1994 between Registrant and Mr. Charles E. Shalvoy.
10.9(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.10(1)+ Coordinated Research Program Agreement dated October 14, 1988 and Amendment dated May 26, 1991
between the Registrant and Hewlett-Packard Company ("H-P"), as amended by the Agreement between
Registrant and Hewlett-Packard Company dated June 2, 1993.
10.11(8) Collaboration Agreement between Registrant and CTI dated September 19, 1995.
10.12(8) High Temperature Superconductor Thin-Film Manufacturing Alliance Agreement among Registrant,
Superconductor Technologies, Inc., Stanford University, Georgia Research Corporation,
Microelectronic Control and Sensing Incorporated, IBIS, Focused Research and BDM Federal dated
November 17, 1995.
10.13(9)+ Superconducting Filter Technology Joint Development Agreement dated April 25, 1996 between the
Registrant and Lucent Technologies Inc.
10.14(4) Engagement Letter between the Company and Sutro and Co. Inc., dated March 24, 1998.
10.15(4) Amendment to Engagement Letter between the Company and Sutro and Co. Inc., dated September 2, 1998.
10.16(4) Engagement Letter between the Company and Davenport and Co., dated September 2, 1998.
10.17(4) Master Lease Agreement between the Company and Leasing Technologies International, Inc., dated June
15, 1998.
10.18(1) Lease Agreement dated May 3, 1993 between the Registrant and Mozart-McKee Limited Partnership for
Sunnyvale facilities.
10.19(7) Lease Agreement dated December 8, 1994 between Registrant and Mozart-McKee Limited Partnership for
Sunnyvale facilities.
10.20(7) Business Loan Agreement dated August 15, 1994 between Registrant and Silicon Valley Bank for
working capital credit facility and term loan facility.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
10.21(10) Loan Modification Agreement dated June 30, 1997, between Registration and Silicon Valley Bank
modifying the Business Loan Agreement dated August 15, 1994.
10.22(10) Loan Modification Agreement dated November 12, 1997, between Registration and Silicon Valley Bank
modifying the Business Loan Agreement dated August 15, 1994.
10.23(10) Loan Modification Agreement dated December 23, 1997, between Registration and Silicon Valley Bank
modifying the Business Loan Agreement dated August 15, 1994.
10.24(11) Business Loan Agreement dated March 8, 1996 between Registrant and Silicon Valley Bank for working
capital credit facility and term loan facility.
10.25(12) Business Loan Agreement dated December 27, 1996 between Registrant and Silicon Valley Bank for
working capital credit facility and term loan facility.
10.26(4) Master Loan and Security Agreement between the Company and Transamerica Business Credit
Corporation, dated June 26, 1998.
10.27(4) Stock Subscription Warrant Agreement between the Company and Transamerica Business Credit
Corporation, dated June 26, 1998.
10.28(13) Silicon Valley Bank Loan Agreement.
10.29(13) Collateral Assignment, Patent Mortgage and Security Agreement between the Company and Silicon
Valley Bank.
10.30(10)+ Asset Purchase Agreement dated July 9, 1997 between Registrant and Bruker Instruments, Inc. for
sale of assets of Registrant's NMR Probe business.
10.31(10) Asset Purchase Agreement dated August 15, 1997 between Registrant and Neocera, Inc. for sale of
Registrant's assets related to its temperature controller business.
10.32(10) Asset Purchase Agreement dated September 3, 1997, between Registrant and Niki Glass Ltd. for sale
of Registrant's assets related to portions of its instruments business.
23.1 Consent of Independent Accountants.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
+ 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.
II-4
<PAGE>
(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
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN B
------------ COLUMN C COLUMN E
COLUMN A BALANCE AT -------------------------------- COLUMN D --------------
- -------------------------------------------------- BEGINNING OF CHARGED TO COST CHARGE TO OTHER ----------- BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------------------------------- ------------ --------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts................... $ 50,000 $ -- $ -- $ -- $ 50,000
Allowance for excess and obsolete inventory....... $ 81,000 $ -- $ -- $ -- $ 81,000
Year ended December 31, 1997:
Allowance for doubtful accounts................... $ 50,000 $ 273,232 $ -- $ (75,000) $ 248,232
Allowance for excess and obsolete inventory....... $ 81,000 $ 249,845 $ -- $ (50,000) $ 280,845
Year ended December 31, 1998:
Allowance for doubtful accounts................... $ 248,232 $ 53,744 $ -- $ (9,341) $ 292,635
Allowance for excess and obsolete inventory....... $ 280,845 $ 156,908 $ -- $ -- $ 437,753
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement
II-5
<PAGE>
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, PROVIDED, that
the registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or Rule 3-19
of this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Form F-3.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,
State of California, on this 26th day of April, 1999.
CONDUCTUS, INC.
BY: /S/ CHARLES E. SHALVOY
-----------------------------------------
Charles E. Shalvoy
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ CHARLES E. SHALVOY Officer (Principal
- ------------------------------ Executive Officer) and April 26, 1999
Charles E. Shalvoy Director
* Chief Financial Officer
- ------------------------------ (Principal Financial and April 26, 1999
Ronald Wilderink Accounting Officer)
* Chairman of the Board
- ------------------------------ April 26, 1999
John F. Shoch, Ph.d.
* Director
- ------------------------------ April 26, 1999
Martin Cooper
Director
- ------------------------------
Robert M. Janowiak
Director
- ------------------------------
Martin J. Kaplan
<TABLE>
<S> <C> <C> <C>
*By: /s/ CHARLES E. SHALVOY
-------------------------
Charles E. Shalvoy
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
2.1(1) Stock Exchange Agreement dated as of May 28, 1993, between the Company and Tristan Technologies,
Inc.
3.1(2) Restated Certificate of Incorporation.
3.2(3) Restated Bylaws.
3.3(4) Certificate of Designation of Series B Preferred Stock.
4.1(3) Stockholder Rights Plan.
5.1* Opinion of Counsel.
10.1(1) 1987 Stock Option Plan.
10.2(1) Amended 1989 Stock Option Plan.
10.3(5) 1992 Stock Option/Stock Purchase Plan.
10.4(6) 1994 Employee Stock Purchase Plan.
10.5(1) Second Amended and Restated Registration Rights Agreement dated June 3, 1993.
10.6(4) Form of Series B Preferred Stock and Warrant Purchase Agreement, dated September, 1998, and
September 22, 1998, between the Company and Series B Investors.
10.7(4) Form of Warrant to Purchase Common Stock between the Company and Series B Investors.
10.8(7) Employment Agreement dated May 3, 1994 between Registrant and Mr. Charles E. Shalvoy.
10.9(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.10(1)+ Coordinated Research Program Agreement dated October 14, 1988 and Amendment dated May 26, 1991
between the Registrant and Hewlett-Packard Company ("H-P"), as amended by the Agreement between
Registrant and Hewlett-Packard Company dated June 2, 1993.
10.11(8) Collaboration Agreement between Registrant and CTI dated September 19, 1995.
10.12(8) High Temperature Superconductor Thin-Film Manufacturing Alliance Agreement among Registrant,
Superconductor Technologies, Inc., Stanford University, Georgia Research Corporation,
Microelectronic Control and Sensing Incorporated, IBIS, Focused Research and BDM Federal dated
November 17, 1995.
10.13(9)+ Superconducting Filter Technology Joint Development Agreement dated April 25, 1996 between the
Registrant and Lucent Technologies Inc.
10.14(4) Engagement Letter between the Company and Sutro and Co. Inc., dated March 24, 1998.
10.15(4) Amendment to Engagement Letter between the Company and Sutro and Co. Inc., dated September 2, 1998.
10.16(4) Engagement Letter between the Company and Davenport and Co., dated September 2, 1998.
10.17(4) Master Lease Agreement between the Company and Leasing Technologies International, Inc., dated June
15, 1998.
10.18(1) Lease Agreement dated May 3, 1993 between the Registrant and Mozart-McKee Limited Partnership for
Sunnyvale facilities.
10.19(7) Lease Agreement dated December 8, 1994 between Registrant and Mozart-McKee Limited Partnership for
Sunnyvale facilities.
10.20(7) Business Loan Agreement dated August 15, 1994 between Registrant and Silicon Valley Bank for
working capital credit facility and term loan facility.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
10.23(10) Loan Modification Agreement dated December 23, 1997, between Registration and Silicon Valley Bank
modifying the Business Loan Agreement dated August 15, 1994.
10.24(11) Business Loan Agreement dated March 8, 1996 between Registrant and Silicon Valley Bank for working
capital credit facility and term loan facility.
10.25(12) Business Loan Agreement dated December 27, 1996 between Registrant and Silicon Valley Bank for
working capital credit facility and term loan facility.
10.26(4) Master Loan and Security Agreement between the Company and Transamerica Business Credit
Corporation, dated June 26, 1998.
10.27(4) Stock Subscription Warrant Agreement between the Company and Transamerica Business Credit
Corporation, dated June 26, 1998.
10.28(13) Silicon Valley Bank Loan Agreement.
10.29(13) Collateral Assignment, Patent Mortgage and Security Agreement between the Company and Silicon
Valley Bank.
10.30(10)+ Asset Purchase Agreement dated July 9, 1997 between Registrant and Bruker Instruments, Inc. for
sale of assets of Registrant's NMR Probe business.
10.31(10) Asset Purchase Agreement dated August 15, 1997 between Registrant and Neocera, Inc. for sale of
Registrant's assets related to its temperature controller business.
10.32(10) Asset Purchase Agreement dated September 3, 1997, between Registrant and Niki Glass Ltd. for sale
of Registrant's assets related to portions of its instruments business.
23.1 Consent of Independent Accountants.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
+ 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
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Amendment No.
3 to Form S-1 (File No. 333-70373) of our report, which includes an explanatory
paragraph related to the substantial doubt about Conductus, Inc.'s ability to
continue as a going concern, dated February 19, 1999, on our audits of the
financial statements and our report, dated February 19, 1999, on our audits of
the financial statement schedule of Conductus, Inc. We also consent to the
reference to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
San Jose, California
April 26, 1999
