<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-11915
------------------------
CONDUCTUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0162388
(State of incorporation) (I.R.S. Employer Identification No.)
969 W. MAUDE AVENUE
SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 523-9950
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHT, $0.0001 PAR VALUE
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of March 3, 2000, was approximately $511.0 million based on
the closing sale price of the Company's Common Stock, as reported by the
Nasdaq SmallCap Market on March 3, 2000. Shares of Common Stock held by each
officer, director and holder of 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes. On March 3, 2000, approximately 16,145,000
shares of the Registrant's Common Stock, $0.0001 par value, were outstanding.
The information in this paragraph assumes the conversion of all outstanding
Series B and Series C Preferred Stock and the exercise of all outstanding
warrants.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in those parts of
this Annual Report on Form 10-K as set forth below, but only to the extent
specifically stated in such parts hereof:
(1) Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders scheduled to be held on May 25, 2000, are incorporated by
reference into Part III.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I.........................................................................................................1
ITEM 1. BUSINESS.......................................................................................1
ITEM 2. PROPERTIES....................................................................................20
ITEM 3. LEGAL PROCEEDINGS.............................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS...........................................20
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........................20
ITEM 6. SELECTED FINANCIAL DATA.......................................................................21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.....................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..........26
PART III......................................................................................................27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................27
ITEM 11. EXECUTIVE COMPENSATION........................................................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................27
PART IV.......................................................................................................27
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..............................27
</TABLE>
i
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K AND IN REPORTS
INCORPORATED BY REFERENCE THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING
STATEMENTS THAT REFLECT CONDUCTUS, INC.'S CURRENT EXPECTATIONS REGARDING ITS
FUTURE RESULTS OF OPERATIONS AND PERFORMANCE AND ACHIEVEMENTS. WE HAVE TRIED,
WHEREVER POSSIBLE, TO IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY USING WORDS
SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS.
THESE STATEMENTS REFLECT OUR CURRENT BELIEFS AND ARE BASED ON INFORMATION
CURRENTLY AVAILABLE TO US. ACCORDINGLY, THESE STATEMENTS ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS, SUCH AS THOSE SET FORTH UNDER "RISK
FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," WHICH COULD CAUSE OUR FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY OF
THESE STATEMENTS. WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF
ANY REVISIONS TO ANY SUCH FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-K OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
BUSINESS
We develop, manufacture and market electronic products based on
High-Temperature Superconductor ("HTS") technology. The unique properties of
superconductors provide the basis for electronic products with significant
potential performance advantages over products based on competing materials such
as copper and semiconductors. Depending on the application, these advantages
include enhanced sensitivity, efficiency, speed and operating frequency, as well
as reduced power consumption, size, weight and cost.
Beginning in 1997, we focused our efforts on applications for the wireless
telecommunications market that take advantage of the superior performance and
benefits afforded by HTS technology. We have developed a line of
ClearSite-Registered Trademark- front-end receiver systems (hereinafter referred
to as "ClearSite" or "ClearSite products") for cellular and personal
communication services ("PCS") cell sites that may significantly enhance the
services provided by wireless carriers. ClearSite products can provide
significant benefits in base station performance, reduce the size of the filter
components required and enable network services providers and OEMs to deploy
new, and enhance existing, analog and digital cellular systems for increasingly
demanding carrier network environments.
In the existing wireless communications infrastructures, network service
providers must overcome problems of limited capacity, insufficient coverage, and
increasing interference. With the rollout of PCS, the transition to
second-generation digital wireless services ("2G") and the added demands of
wireless data communications, both cellular and PCS network operators face an
increasing need for cost-effective solutions that address the problems that are
developing in their rapidly-expanding infrastructure. As the wireless
communications infrastructure expands, problems associated with interference,
poor coverage and limited capacity are leading to decreased customer
satisfaction and increased customer turnover. These problems decrease a network
operator's ability to compete effectively and adversely affect their ability to
maximize billable minutes. The requirement for increased bandwidth imposed by
wireless data communications adds additional problems for network operators to
solve.
Our target wireless market is both global and growing. According to the
Cellular Telecommunications Industry Association and analyst reports, at the end
of 1998 there were over 300 million wireless subscribers worldwide and this
number is expected to exceed 1 billion subscribers by 2003. In order to support
these wireless customers, at the end of 1998 there were approximately 250,000
installed base stations worldwide, with the majority being cellular stations.
Industry analysts estimate that more than 1,000,000 cellular and PCS base
stations will be installed throughout the world by the end of 2003. The present
cellular communications network, operating at
1
<PAGE>
frequencies near 850 MHz, was established when the typical cellular phone was
capable of transmitting up to 3 watts of radio frequency power and the number of
subscribers was relatively low. Today, portable handsets that transmit only 0.2
to 0.6 watts are increasingly replacing higher-power mobile phones, thereby
decreasing the effective receiving range of existing base stations. In addition,
many carriers moving from analog to digital (2G) technology have found that the
range of the base station decreases. As a result, in rural and suburban areas
where base stations are widely separated, current cellular customers can
experience dropped calls due to "dead zones" in coverage. At the same time, the
increasing demand for cellular service in urban areas has led to the utilization
by service providers and their competitors of a greater number of channels
within their allotted frequency bands, thereby increasing the incidence of
interference. Moreover, the arrival of PCS and other competing services has
placed new emphasis upon quality of service for established cellular operators.
The evolution of wireless networks beyond voice traffic is one of the
defining elements of the unfolding Information Age. Developing the necessary
technology presents a great challenge to wireless operators and their suppliers
because it involves a merging of two industries. New markets for wireless data
are opening where information technology and telecommunications meet, bringing
the Internet and the wireless network together. At present, wireless data
applications are dominated by relatively undemanding services such as electronic
mail and fax services, Short Message Services ("SMS") and 9.6 to 14.4kbit/s
data. As succeeding generations of wireless services come on line, new
applications such as smart messaging, file transfer, videophony, wireless
imaging, e-commerce, remote healthcare and others become increasingly important
and place higher demands upon the infrastructure. Other protocols and
technologies coming on line such as HSCSD (High-Speed Circuit-Switched Data) and
GPRS (General Packet Radio Service) are all leading up to the third generation
of wireless technology ("3G"). The eventual use of wireless networks to carry
video traffic will require over a hundred-fold increase in bandwidth. The growth
of data traffic on wireless networks is expected to skyrocket over the next
several years. According to an industry report, in 1999 data accounts for less
than 2% of mobile traffic; by 2003, data is expected to account for 45% of
mobile traffic.
There are technology enablers and drivers that make it possible to
incorporate wireless solutions into data technologies. At the basic level, the
availability and advancement of handheld communications devices, smart phones
and notebook computers has opened the door for the wireless data revolution. In
this environment of rapid technology advances, there are increasing demands upon
all elements of the communications system. In particular, the performance of the
basic elements of the communication system--such as the interference filters
and preamplifiers in the base stations--plays a crucial part. It is in this area
that we believe that our technology can make a significant contribution.
The International Telecommunications Union has identified 230MHz of
spectrum in the bands 1885-2025MHz and 2110-2200MHz for 3G wireless systems
under the IMT-2000 standard, a standard aimed at allowing users to seamlessly
roam amongst the various networks and radio environments. At the present time,
portions of these same bands are being used for deployment of second-generation
wireless systems in some areas of the world. Furthermore, there are likely to be
multiple IMT-2000 standards used for different services particularly in order to
enable handover to existing cellular systems. Differing standards may well be
allocated to adjoining bands so that IMT-2000 standards must be able to co-exist
with non IMT-2000 systems. It is also expected that frequency allocations to
operators will consist of one or more 5MHz blocks within the spectrum. All of
these factors strongly suggest that various forms of adjacent band inference
will manifest themselves to a significant degree in IMT-2000 systems. We believe
that the need for high-performance filter technology will be significant.
ClearSite products offer benefits to wireless base stations of all types,
whether they are analog cellular installations, current generation digital (2G)
or future high-bandwidth (3G) digital sites. The products, which feature a
compact form factor and rugged housing, effectively improve coverage, reduce
interference and increase network capacity, thus improving the network
operators' ability to compete effectively and increase billable airtime.
ClearSite products incorporate superconducting filters and cryogenic low-noise
amplifiers to enhance receiver sensitivity and reduce interference from the
growing number of competing wireless services. The products incorporate built-in
RF diagnostics, alarm systems, remote monitoring capabilities and system failure
bypass circuitry. The ClearSite product family currently includes
omni-directional (two filter/low noise linear amplifier sets) and three-sector
(six filters/low noise linear amplifier sets) systems for both "A" and "B" band
cellular systems. These products, which are configured for installation within a
base station, are fully compatible with both analog and digital protocols for
both carriers. Additionally, we have shipped products designed for PCS and 3G
2
<PAGE>
applications for customer field and laboratory testing. Future products in the
ClearSite line are expected to include versions designed for outdoor
installation as well as for tower mounting. By late 2000, we also plan to offer
six-sector versions of the ClearSite product, particularly for 3G base stations.
We began field testing our ClearSite products in wireless base stations in
1996 with four cellular operators in the U.S. Testing progressed to the beta
stage late in that year with the initiation of an extended field trial with
Cellcom, Inc. ("Cellcom"), a service provider in Wisconsin. This trial, which
concluded in April 1997 with the first commercial order for multiple ClearSite
products, successfully demonstrated a significant reduction in the number of
dropped calls and enhanced voice quality. Commercial product shipments began in
December 1997.
In 1996 and 1997, we also began developing and delivering prototypes of
products incorporating our HTS filter and cryocooled low-noise amplifier
technology to customers in the US government for a variety of specialized
communications applications. Delivery of production products began in 1998.
These products offer similar performance benefits to those provided by ClearSite
products but are tailored to the specific needs of military and other government
customers. Many of these systems are ruggedly packaged for field deployment and
have passed rigorous environmental and other tests to qualify them for use by
the customers.
During 1998 and 1999 we made advances in both the commercial and government
wireless markets. We completed a number of trials, including trials at companies
with 400 to more than 10,000 cell sites. We conducted trials at what are
believed to be the two largest wireless carriers in the world. By the end of
fiscal 1999, we had received orders from eleven companies, including eight
United States operating companies, two major OEMs and a leading Japanese
carrier. Several placed multi-unit deployment orders. In addition, we received
formal approval for interoperability with Nortel Networks wireless systems. We
also completed a number of wireless qualification field trials in Japan, which
we feel is an important step in our attempt to penetrate the 3G market in Japan.
Our extensive field trial program is yielding important data on HTS benefits in
analog cellular systems, CDMA and TDMA digital systems and in 3G systems. We
believe that the growing body of data for all these protocols may provide an
increasingly strong argument supporting widespread deployment of HTS technology
in the wireless infrastructure. In addition to advances in the commercial
wireless sector, Conductus has continued to make progress in developing
government applications of HTS communications technology. In May 1999, we
executed a licensing and supply agreement with General Dynamics Information
Systems (GDIS) under which GDIS obtained exclusive rights within the government
markets to our technology and we obtained a strategic relationship, giving us
access to a broader range of customers and applications than we could achieve on
our own. Conductus received $5 million in cash compensation under the terms of
the agreement. In addition, this agreement provides for an on-going supply
relationship and cross-licensing agreement.
From our incorporation in 1987 to 1997, we pursued development of materials
and process technology for HTS as well as applications research. These efforts
were sponsored in part by government research and development contract funding.
We initiated commercial product shipments 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 NMR spectroscopy probe
business. In mid-1999, we licensed our remaining instrumentation business to
another firm. Research and development efforts are now focused on developing
applications in the communications market, including superconducting circuits
for high-speed telecommunications switching.
The market for products based on HTS technology is in the early stages of
development. However, this market is expected to become intensely competitive in
the future. With the continued growth of global telecommunications networks,
service providers are increasingly outsourcing critical components in an effort
to shrink time-to-market, reduce production and development costs, and
circumvent the increasing scarcity of skilled specialists in advanced
telecommunications technology. We believe that our technology, intellectual
property, manufacturing process, highly-skilled personnel and track record with
customers provide us with significant competitive advantages. Based on publicly
available data, we believe that our ClearSite products offer performance
advantages over competing thin-film HTS products for the wireless market,
particularly in the area of filter selectivity. We further believe that
thin-film HTS products in general offer significant advantages over thick-film
HTS products with respect to system size, weight and power consumption.
3
<PAGE>
Our primary competitors in the HTS filter business currently are Illinois
Superconductor, Inc. (thick film), Superconductor Technologies, Inc. (thin film)
and CryoDevices Inc. (thin film). Our current sales and marketing strategy
relies primarily on direct sales for our commercial communications products for
the domestic market and upon distributors in the foreign markets we elect to
pursue. Sales and market efforts for government products are conducted in
conjunction with GDIS, which has primary responsibility for developing the
government market for our HTS 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, our established relationships with industry leaders, and 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.
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
4
<PAGE>
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 our 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 our
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.
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 have received 28 U.S. patents and three related
foreign patents, of which six 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 the patents assigned to Bruker outside the
nuclear magnetic resonance field of use. The remaining 22 patents have unexpired
terms ranging from 10 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. We have also
licensed from Lucent Technologies, Inc. certain rights to Lucent's patents and
patent applications for yttrium barium copper oxide.
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
5
<PAGE>
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.
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.
6
<PAGE>
<TABLE>
<CAPTION>
RURAL URBAN
SUPERCONDUCTOR BENEFIT REASON CELLULAR CELLULAR PCS
---------------------- ------------------------- ------------- ----------- -------
<S> <C> <C> <C> <C>
Reduced interference......................Sharp filters - -
Increased capacity........................Sharp filters - -
Improved coverage/extended range..........Reduced system noise - -
Compact form-factor.......................Thin-film technology - -
</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 and have been a 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
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 developed a
prototype superconductive transceiver filter subsystem for the PCS market. Both
Conductus and Lucent provided technical support to the program. Initial tests of
a prototype of the receiver portion of the subsystem were conducted in April
1996. A more complex prototype subsystem containing six HTS receiver channels
and three conventional transmit filters was delivered to Lucent at the end of
that year. Under the agreement, each party retains rights to the intellectual
property it developed 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 worked with us to design interfaces between CTI
cryocoolers and our subsystems.
HIGH-TEMPERATURE SUPERCONDUCTOR THIN-FILM MANUFACTURING ALLIANCE. Conductus
was 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
which was funded in part by the Department of Defense Advanced Research Projects
Agency through 1997. Superconductor Technologies, Inc. was the other principal
member of this association. Other members included Stanford University, the
Georgia Research Corporation, Focused Research, Microelectronic Control and
Sensing Incorporated, IBIS and BDM Federal. Each member of the association has
certain access to the technology of the other parties developed under the
program.
GDIS LICENSE AGREEMENT. On May 4, 1999, we entered into a definitive
agreement with General Dynamics Information Systems, Inc. ("GDIS") to license
our high temperature superconductive ("HTS") electronics and cryoelectronics
technology. Under the license agreement, GDIS acquired rights to our HTS
thin-film technology and other intellectual property for $5,000,000 plus future
royalties and will have rights to use and sell this technology for use in U.S.
government or state, local and foreign government markets, as defined under the
agreement. Upon execution of the agreement, GDIS made an immediate payment to us
of $2,900,000. In addition, GDIS began paying us $175,000 on the first day of
each month for 12 months beginning on July 1, 1999. Conductus and GDIS also
entered into a Cross-License, Supply and Training Agreement under which
Conductus and GDIS agreed to cross-license updates, if any, to the licensed
technology developed by either party.
7
<PAGE>
Additionally, we agreed to provide product and training to GDIS in exchange for
payment at standard commercial rates from GDIS. As a result of this transaction,
we recognized revenues of $5,000,000 for the year ended December 31, 1999.
Conductus believes that the benefits to Conductus of the GDIS agreement are
that Conductus has gained a powerful strategic relationship in developing the
government market for HTS products. GDIS is well connected in the military and
intelligence community and has access to customers and applications that
Conductus alone did not. In addition, GDIS had developed its own technology to
address needs of government customers that can be combined with our technology
to provide unique system-level solutions to specific applications problems. We
expect that GDIS will benefit from the agreement by gaining exclusive access to
what it has accessed as an enabling technology for a number of applications.
Working together, the two companies plan to offer their joint technologies to a
broad range of government customers.
RESEARCH AND DEVELOPMENT
GOVERNMENT CONTRACTS
Our research and development expenses in the fiscal years 1997, 1998 and
1999 were approximately $10,626,000, $5,621,000 and $4,431,000, respectively.
Externally funded research and development programs, primarily under contracts
with the U.S. government, accounted for approximately $9,814,000, $5,661,000,
and $2,478,000 of total operating expenses in the fiscal years 1997, 1998 and
1999, respectively. The decreases in contract revenues relate primarily to the
narrowing scope of our business interests in 1997, 1998 and 1999. Our revenue
from government-related contracts represented approximately 77%, 79% and 25% of
total revenues for fiscal years 1997, 1998 and 1999, respectively. The decrease
in contract revenue as a percentage of total revenue in 1999 was due primarily
to the impact of license revenue recorded from the GDIS agreement.
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, 1999, we had received aggregate awards since our
inception of approximately $50,576,000 from U.S. government agencies, including
approximately $229,000, awarded during the year ending December 31, 1999.
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;
- 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 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
8
<PAGE>
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, of
which six 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 the patents assigned to Bruker outside the nuclear
magnetic resonance field of use. The remaining 22 patents have unexpired terms
ranging from 10 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. We have also
licensed from Lucent Technologies, Inc. certain rights to Lucent's patents and
patent applications for yttrium barium copper oxide.
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, including that of
Lucent Technologies (our licensor), are the subject of an interference
proceeding. Additionally, E. I. duPont de Nemours & Co. has notified us that it
is the exclusive licensee of 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
have obtained a license from Lucent Technologies to use yttrium barium copper
oxide in our products. Lucent has reported to us that they have prevailed in the
interference proceeding, but we do not have independent verification of such
result. Should another party prevail, we may need to obtain a license from that
party 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 our ClearSite
products depends in part on nonexclusive licenses obtained from various
licensers. There can be no assurance that such licenses will not be
9
<PAGE>
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-,"
and "ClearSite-Registered Trademarks-."
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 total, 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 that 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. We currently obtain certain
ClearSite product components, including cryocoolers, 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 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
10
<PAGE>
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. Our current sales and
marketing strategy relies primarily on direct sales for our communications
products in the United States and distributors abroad. During 1999, we added
sales and sales support personnel and appointed a distributor for the Japan
market.
We intend to add additional 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, 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.
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, 1999, we had a total of 57 full-time equivalent
employees of which 19 hold advanced degrees. Of the total full-time employees,
25 were engaged in research and product development, 15 in manufacturing, 8 in
sales and marketing, and 9 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.
11
<PAGE>
Our executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles E. Shalvoy........................ 51 President, Chief Executive Officer and Director
Ron Wilderink............................. 41 Vice President of Finance, Chief Financial Officer and
Secretary
Jim Simmons............................... 50 Vice President, Sales and Marketing
Randy W. Simon, Ph.D...................... 46 Vice President, Technology Programs
Larry Burgess............................. 54 Vice President, Engineering
</TABLE>
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 and Secretary
in 1999. From 1995 until 1998, he was with Oak Technology, Inc., a multinational
semiconductor manufacturer where he was Vice President, Corporate Controller.
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 and is a Certified
Public Accountant in California.
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.
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 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. BURGESS joined the Company as Vice President, Engineering in April
1999. He has 27 years experience in the wireless communications industry, during
which he directed numerous projects involving the development of new products,
systems, and processes, and has recent in-depth experience at companies
designing and manufacturing radio equipment for cellular and PCS applications.
Dr. Burgess came to Conductus from interWAVE Communications, a Redwood City,
California based manufacturer of compact wireless base stations. Prior to
interWAVE, Dr. Burgess was Systems Engineering Manager for the Wireless Group at
Zilog, Inc. in Campbell, California. He has also been Vice President of
Engineering at Flam & Russell, Inc., a design-engineering firm in Pennsylvania,
and Senior Staff Engineer for Magnavox Corporation. He received his SB, SM, and
EE degrees in Electrical Engineering at the Massachusetts Institute of
Technology, and his Ph.D. in Systems Engineering at the University of
Pennsylvania.
12
<PAGE>
RISK FACTORS
THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAVE BEEN,
AND IN THE FUTURE MAY BE, AFFECTED BY A VARIETY OF FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS REPORT. 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.
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, 1999, we had accumulated net losses of approximately $48.7 million. We
expect to incur substantial additional losses at least through 2000 as we expand
our operations. Continued development of our products may require us to commit
substantial resources to:
- research and development,
- the establishment of additional pilot and commercial-scale fabrication
processes and facilities, and
- enhanced quality control, marketing, sales and administrative
capabilities.
In order to 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.
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 funded 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, 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 and marketing, and
research and development efforts, in significant part on our expectations of
future revenues. These expenses and expansion plans are relatively fixed in the
short-term.
13
<PAGE>
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 Annual Report on Form 10-K. 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 2000 compared to 1999, 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%, 79% and 25% of total
revenue for fiscal years 1997, 1998 and 1999, respectively. The decrease was due
primarily to an increase in revenues from a licensing transaction with General
Dynamics Information Systems, Inc. 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;
- 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
14
<PAGE>
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 government 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 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.
15
<PAGE>
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.
YEAR 2000 ISSUES MAY GIVE RISE TO POTENTIAL PROBLEMS
As of the date of this Annual Report on Form 10-K, our systems have
operated without any apparent Year 2000 related problems and appear to be Year
2000 compliant. We are not aware that any of our primary vendors or systems
maintained by third parties have experienced significant Year 2000 compliance
problems. However, while no such problem has been discovered as of yet, Year
2000 issues may not become apparent immediately and, therefore, we may be
affected in the future. We will continue to monitor the issue and work to
remediate any Year 2000 issues that may arise.
OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE AND 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;
- 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
- an inability to develop alternative sources or to meet customer
demand,
16
<PAGE>
- a prolonged interruption in supply, or
- 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
- may require us to share control over our development, manufacturing
and marketing programs and relinquish rights to our technology,
- may be subject to termination at the discretion of our collaborative
partners and
- may restrict our ability to engage in certain areas of product
development, manufacturing and marketing.
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
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.
17
<PAGE>
We cannot assure you that we can develop the enhanced processing technology
necessary to develop more advanced superconducting devices and circuits or that
we will be able to attain commercial yields in the future. Even if we can attain
commercial yields, we may suffer recurring yield problems caused by mask
defects, impurities in materials and other factors. While we have established
limited production facilities for our electronics products, we may not be able
to expand our processing, production control, assembly, testing and quality
assurance capabilities to produce existing or planned superconductive electronic
products in adequate commercial quantities.
OUR 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 SUPERCONDUCTORS
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.
18
<PAGE>
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.
19
<PAGE>
ITEM 2. PROPERTIES
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 were due to expire in August 2000
and 2001. In January 2000, we exercised our option to extend the lease on both
buildings through February 28, 2006.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material litigation and are not aware of any
pending or threatened litigation against us that could have a material adverse
effect upon our business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to our stockholders during our fourth quarter of
1999.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq National Market under the
trading symbol "CDTS" on August 5, 1993, and moved to the Nasdaq SmallCap Market
on November 10, 1998. 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.
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>
HIGH LOW
---- ---
<S> <C> <C>
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
1999
First Quarter.................................................................... $2 1/16 $ 31/32
Second Quarter................................................................... 2 7/16 1 1/4
Third Quarter.................................................................... 2 1 7/8
Fourth Quarter................................................................... 11 3/4 2
</TABLE>
As of March 3, 2000, the closing sale price of our common stock was $54 3/8
per share.
On March 3, 2000, we had 71 holders of record of our common stock.
On December 10, 1999, we sold and on December 22, 1999 issued an aggregate
of 375,000 shares of our Series C Preferred Stock at a price per share of $40.00
and issued warrants to purchase 750,000 shares of Common Stock at an exercise
price of $4.00 per share in a private placement of our equity. The offering was
not underwritten and raised $15,000,000. Certain of our investors and other
institutional and accredited investors purchased shares of
20
<PAGE>
Series C Preferred Stock and warrants in such offering, which sales were exempt
from the requirements of the Securities Act of 1933, as amended (the "Act")
pursuant to Rule 506 of Regulation D under the Act.
The shares of Series C Preferred Stock are convertible on a 1-to-10 basis
into Common Stock subject to anti-dilution protections. In addition, the shares
of Series C Preferred Stock have a cumulative dividend of 6% and certain
liquidation preferences over the shares of Common Stock as set forth in the
Certificate of Designation of Series C Preferred Stock.
ITEM 6. 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, 1997, 1998 and
1999 and the balance sheet data at December 31, 1998 and 1999 are derived from
and are qualified by reference to, the audited financial statements included
elsewhere in this Annual Report on Form 10-K. The statement of operations data
for the years ended December 31, 1995 and 1996 and the balance sheet data at
December 31, 1995, 1996 and 1997 are derived from audited financial statements
not included in this Annual Report on Form 10-K. The results of operations for
the year ended December 31, 1999 or any other period are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1996 1997 1998 1999
------------ ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Contract......................................... $ 8,148 $ 9,691 $ 7,266 $ 3,698 $ 1,915
Product sales.................................... 2,434 2,852 2,188 991 872
Other............................................ - - - - 5,011
------------ ----------- ----------- ----------- ---------------
Total revenues $ 10,582 $ 12,543 $ 9,454 $ 4,689 $ 7,798
============ =========== =========== =========== ===============
Loss from operations................................ $ (4,423) $ (5,109) $ (7,499) $ (7,132) $ (3,116)
============ =========== =========== =========== ===============
Net loss attributable to common stockholders........ $ (4,422) $ (5,004) $ (7,543) $ (7,829) $ (4,070)
============ =========== =========== =========== ===============
Basic and diluted net loss per common share
attributable to common stockholders.............. $ (0.80) $ (0.80) $ (1.09) $ (1.10) $ (0.57)
============ =========== =========== =========== ===============
Shares used in per share calculations............... 5,543 6,263 6,897 7,088 7,155
============ =========== =========== =========== ===============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS)
1995 1996 1997 1998 1999
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital................................. $ 4,287 $ 9,135 $ 1,822 $ 2,656 $ 13,684
Total assets.................................... 10,128 16,081 8,762 7,035 18,597
Long-term debt, less current portion............ 1,146 1,022 310 1,341 596
Total liabilities............................... 4,315 4,898 4,460 3,671 3,944
Redeemable preferred stock...................... - - - 5,683 10,778
Stockholders' equity............................ 5,814 11,183 4,301 (2,320) 3,875
</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.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We develop, manufacture and market electronic components and systems based
on superconductors for applications in the worldwide telecommunications markets.
As of December 31, 1999, we had accumulated losses of approximately $48,669,000
and we expect to incur significant additional losses during 2000. 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, 1997, 1998, AND 1999
Our total revenues increased to $7,798,000 in 1999 from $4,689,000 in 1998
after decreasing from $9,454,000 in 1997.
Revenue under U.S. government research and development contracts
represented approximately 77%, 79% and 25% of total revenue in 1997, 1998 and
1999, respectively. Contract revenue decreased to $1,915,000 in 1999 from
$3,698,000 in 1998 and from $7,266,000 in 1997. The decreases in contract
revenue relate primarily to the narrowing scope of our business interests in
1997, 1998 and 1999. 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 1999, 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 1997, 21% in
1998 and 11% in 1999. Product revenue decreased to $872,000 in 1999 from
$991,000 in 1998 and $2,188,000 in 1997. 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. We recognized revenue on our wireless
telecommunications products of $96,000, $762,000 and $762,000 in 1997, 1998 and
1999, respectively. Future sales of these products are subject to numerous
technical and market risks.
On May 4, 1999, we entered into a definitive agreement with General
Dynamics Information Systems, Inc. ("GDIS") to license our high temperature
superconductive ("HTS") electronics and cryoelectronics technology. Under the
license agreement, GDIS acquired rights to Conductus' HTS thin-film technology
and other intellectual property for $5,000,000 plus future royalties and will
have rights to use and sell this technology for use in U.S. government or state,
local and foreign government markets, as defined under the agreement. Upon
execution of the agreement, GDIS made an immediate payment to the Company of
$2,900,000. In addition, GDIS began paying the Company $175,000 on the first day
of each month for 12 months beginning on July 1, 1999. Conductus and GDIS also
entered into a Cross-License, Supply and Training Agreement under which
Conductus and GDIS agreed to cross-license updates, if any, to the licensed
technology developed by either party. Additionally, the Company agreed to
provide product and training to GDIS in exchange for payment at standard
commercial rates from GDIS. As a result of this transaction, Conductus
recognized revenues of $5,000,000 for the year ended December 31, 1999.
Cost of product sales were $1,845,000, $2,685,000 and $2,508,000 for 1997,
1998 and 1999, respectively. The 1997 cost of products 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 and
1999 were
22
<PAGE>
primarily composed of costs of the wireless telecommunications products. 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. Cost of product sales
decreased in 1999 compared to 1998 and 1997 due to lower direct costs.
Gross margins on product sales were 16%, (171%) and (188%) for 1997, 1998
and 1999, respectively. 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. The 1999 gross margin decrease resulted from lower revenue partially
offset by lower direct cost of product. The costs of the business are primarily
fixed costs; therefore, gross margins are adversely impacted by lower product
revenue. 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 $10,626,000, $5,621,000 and
$4,431,000; and represented 112%, 120% and 57% of our revenues in 1997, 1998 and
1999, respectively. The decreases from 1997 to 1999 are primarily related to the
impact of decreases in contract revenues during the comparison periods. These
decreases were offset somewhat by increased spending on new wireless
communication and development activities.
Research and development expenses include approximately $9,814,000,
$5,661,000 and $2,478,000 in 1997, 1998 and 1999, respectively, attributable to
contracts with agencies of the United States government. These decreases reflect
the narrower scope of our business interests. 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 1999.
Selling, general and administrative expenses include costs associated with
marketing, sales, and various administrative activities. Selling, general and
administrative expenses were $4,330,000, $3,514,000 and $3,976,000 in 1997, 1998
and 1999, respectively. 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. The 1999 increase compared to
1998 was primarily the result of increases in the sales and marketing
department. 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 $267,000, $97,000 and $89,000 in 1997, 1998 and 1999,
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 $202,000, $530,000 and
$338,000 in 1997, 1998 and 1999, respectively. The increase in interest expense
in 1998 compared to 1997 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. The reduction of
interest payments in 1999 compared to 1998 was due to the repayment of term
loans and reduced borrowing against our line of credit.
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.
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.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through:
- $13,251,000 in net proceeds from our initial public offering of common
stock in August 1993,
- $9,892,000 in net proceeds from our follow-on public offering of
common stock in June 1996,
- $49,565,000 raised in private placement financings, including net
proceeds of $14,906,000 raised in December 1999 and $13,670,000 in
January 2000,
- $45,885,000 from U.S. government contracts,
- $1,348,000 in outstanding borrowings under various lease and bank loan
arrangements, and
- $3,873,000 in interest income.
In December 1999, we issued a total of 375,000 shares of Series C preferred
stock convertible into 3,750,000 shares of common stock, and issued warrants to
purchase 750,000 shares of common stock, for a total of $15,000,000. In January
2000, we issued 1,000,000 shares of common stock for $13,670,000.
We allocated the net proceeds of $14,906,000 after issuance costs of
$94,000 from the sale of the Series C preferred stock, based on their relative
fair value. Accordingly we allocated $4,856,000 to preferred stock, $2,339,000
to warrants and $7,812,000 to the beneficial conversion feature. The beneficial
conversion feature is amortized over six months, which is the minimum beneficial
conversion period. Hence we expect to record as a deemed dividend an expense of
$2,790,000 and $4,836,000, in the quarters ended March 31, 2000 and June 30,
2000, respectively.
As of December 31, 1999, our aggregate cash, cash equivalents and short
term investments totaled $14,078,000 compared to $2,888,000 as of December 31,
1998. 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, 1999, there were no amounts outstanding under the bank line of
credit facility.
Net cash used in operations was $4,702,000, $7,258,000 and $2,634,000 for
1997, 1998 and 1999, respectively. 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. 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 movements in the allowance for doubtful accounts
was primarily due to a fluctuation in the proportion of accounts greater than 90
days old relative to the total outstanding balance in 1998 compared to 1997. In
1999, $53,000 was credited to the statement of operations as this reserve amount
was no longer considered necessary based on the level of aged accounts
receivable as of December 31, 1999. The increase in the level of inventory from
1997 to 1998 was primarily due to an increase in the level of 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. The decrease
in cash used in 1999 compared to 1998 was the result of a decrease in our
operating loss primarily due to the General Dynamics license agreement fees. We
anticipate that we will incur significant additional net losses during 2000 and
anticipate that our accounts receivable and inventories may increase during 2000
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 2000.
Net cash provided by (used in) investing activities was $5,848,000 in 1997,
compared to ($1,035,000) in 1998 and ($1,081,000) in 1999. The year to year
changes, during the comparison period of 1997 to 1998 and 1998 to
24
<PAGE>
1999 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 while in 1999 we
purchased $780,000 more of short term investments than we sold with a
corresponding decrease in cash in both years. In addition, capital expenditures
decreased by $438,000 in 1998 compared to 1997 and $100,000 in 1999 compared to
1998 due to lower spending on laboratory and manufacturing equipment. In 1999 we
paid licensing fees that reduced cash by an additional $150,000. We anticipate
that our capital expenditures will increase slightly in 2000 as we continue our
transition to manufacture greater volumes of commercial products.
Net cash provided by financing activities was $14,124,000 in 1999 compared
to $7,229,000 in 1998 and $345,000 in 1997. 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. Net cash provided by financing activities in 1999 was
primarily attributable to the issuance of preferred Series C stock and related
warrants partially offset by principal payments on long term debt of $938,000.
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. 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 $1,750,000 during
2000. We anticipate that existing sources of liquidity and anticipated revenue,
primarily from government contracts, will satisfy our projected working capital
and other cash requirements through at least the next twelve months. 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 such time.
RECENT ACCOUNTING PRONOUNCEMENTS
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
25
<PAGE>
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.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in the
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in the financial statements filed with the SEC. SAB
101 outlines the basic criteria that must be met to recognize revenue and
provide guidance for disclosures related to the revenue recognition policies.
We are currently in the process of assessing the implications of these
statements and have not yet determined the impact of their adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Conductus' general policy is to limit the risk of principal loss and ensure
the safety of invested funds by limiting market and credit risk. Our exposure to
financial market risks relates primarily to our exposure to the impact of
changes in interest rates on our fixed income investment portfolio and long-term
debt obligations.
FIXED INCOME INVESTMENTS
The primary objective of our investment activities is to preserve our
principal while maximizing yields without significantly increasing risk. To
achieve this objective, we maintain a portfolio that consists primarily of
short-term, high-quality commercial paper and foreign debt. All of our fixed
income investments have maturities of less than one year. Hence, our exposure
related to changes in interest rates is somewhat limited due to the short-term
nature of our portfolio. We do not use derivative financial instruments in our
investment portfolio.
DEBT OBLIGATIONS
Conductus' outstanding debt consists of term loan obligations that are
primarily based on fixed rates. Therefore, our exposure to changes in interest
rates is limited because any increase or decrease in interest rates would not
significantly increase or decrease interest expense on our debt obligations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Registrant and auditor's report
are included in pages 33-55:
Report of Independent Accountants
Balance Sheets--as of December 31, 1998 and 1999
Statements of Operations and Comprehensive Loss--years ended December 31,
1997, 1998 and 1999
Statements of Stockholders' Equity--years ended December 31, 1997, 1998 and
1999
Statements of Cash Flows--years ended December 31, 1997, 1998 and 1999
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information required by this item
relating to our directors and nominees and disclosure relating to compliance
with Section 16(a) of the Securities Exchange Act of 1934 that is included under
the captions "Election of Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement for the 2000 Annual
Meeting of Stockholders to be held on May 25, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information required by this item
that is included under the caption "Executive Compensation and Related
Information" in our 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information required by this item
that is included under the caption "Ownership of Securities" in our 2000 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information required by this item
that is included under the caption "Certain Transactions" in our 2000 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
1. Financial Statements
Report of Independent Accountants.................................................................. 32
Balance Sheets--as of December 31, 1998 and 1999................................................... 33
Statements of Operations and Comprehensive Loss--years ended December 31, 1997, 1998 and 1999...... 34
Statements of Stockholders' Equity and Redeemable Preferred Stock--years ended December 31, 1997,
1998 and 1999...................................................................................... 35
Statements of Cash Flows--years ended December 31, 1997, 1998 and 1999............................. 36
Notes to Financial Statements...................................................................... 37
2. Financial Statement Schedule
Report of Independent Accountants.................................................................. S-1
Schedule II--Valuation and Qualifying Accounts..................................................... S-2
3. See Exhibits
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1(1) Stock Exchange Agreement dated as of May 28, 1993, between the Company and Tristan Technologies, Inc.
3.1(2) Restated Certificate of Incorporation.
3.2(3) Restated Bylaws.
3.3(4) Certificate of Designation of Series B Preferred Stock.
3.4 Certificate of Designation of Series C Preferred Stock.
4.1(5) Stockholder Rights Plan.
10.1(1) 1987 Stock Option Plan.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.2(1) Amended 1989 Stock Option Plan.
10.3(6) 1992 Stock Option/Stock Purchase Plan.
10.4(7) 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(8) 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(9) Collaboration Agreement between Registrant and CTI dated September 19, 1995.
10.12(9) 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(10)+ 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(8) Lease Agreement dated December 8, 1994 between Registrant and Mozart-McKee Limited Partnership for
Sunnyvale facilities.
10.20(8) Business Loan Agreement dated August 15, 1994 between Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
10.21(11) Loan Modification Agreement dated June 30, 1997, between Registration and Silicon Valley Bank modifying the
Business Loan Agreement dated August 15, 1994.
10.22(11) Loan Modification Agreement dated November 12, 1997, between Registrant and Silicon Valley Bank modifying the
Business Loan Agreement dated August 15, 1994.
10.23(11) Loan Modification Agreement dated December 23, 1997, between Registrant and Silicon Valley Bank modifying the
Business Loan Agreement dated August 15, 1994.
10.24(12) Business Loan Agreement dated March 8, 1996 between Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
10.25(13) 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(14) Silicon Valley Bank Loan Agreement.
10.29(14) Collateral Assignment, Patent Mortgage and Security Agreement between the Company and Silicon Valley
Bank.
10.30(11)+ 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(11) Asset Purchase Agreement dated August 15, 1997 between Registrant and Neocera, Inc. for sale of Registrant's assets
related to its temperature controller business.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.32(11) Asset Purchase Agreement dated September 3, 1997, between Registrant and Niki Glass Ltd. for sale of Registrant's
assets related to portions of its instruments business.
10.33(15)+ License Agreement with General Dynamics, dated May 4, 1999.
10.34(16) Cross-License, Supply and Training Agreement with General Dynamics, dated May 4, 1999.
10.35 Form of Series C Preferred Stock and Warrant Purchase Agreement, dated December 10, 1999, between the
Company and Series C Investors.
10.36 Form of Warrant to Purchase Common Stock between the Company and Series C Investors.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (See Page 31).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------------------------
+ Confidential treatment granted or requested as to certain portions of these
exhibits.
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (Number 33-64020), filed with the SEC on May 15, 1996, as amended.
(2) Incorporated herein by reference to the Company's 1993 Annual Report on
Form 10-K.
(3) Incorporated herein by reference to the Company's Report 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 8-A (Number 000-19915), filed with the SEC on January 29, 1998.
(6) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 (Number 333-41099), filed with the SEC on November 26, 1997.
(7) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 (Number 033-82454), filed with the SEC on August 5, 1994.
(8) Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-K.
(9) 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.
(10) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (Number 333-3815), filed with the SEC on May 15, 1996, as amended.
(11) Incorporated herein by reference to the Company's 1997 Annual Report on
Form 10-K.
(12) Incorporated herein by reference to the Company's 1995 Annual Report on
Form 10-K.
(13) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-K.
(14) Incorporated herein by reference to the Company's Form 10-Q, filed with the
SEC on May 14, 1998.
(15) Incorporated herein by reference to the Company's Form 10-Q/A, filed with
the SEC on May 27, 1999.
(16) Incorporated herein by reference to the Company's Form 10-Q, filed with the
SEC on May 17, 1999.
29
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Form 10-K Annual Report.
(c) Exhibits
See responses to Item 14(a)(3) above.
(d) Financial Statement Schedules
None required, except as indicated in response to Item 14(a)(2) above.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
29, 1999.
CONDUCTUS, INC.
By: /s/ CHARLES E. SHALVOY
-------------------------------------------
Charles E. Shalvoy
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles E. Shalvoy and Ronald Wilderink,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President, Chief Executive Officer and Director March 29, 2000
/s/ CHARLES E. SHALVOY (Principal Executive Officer)
- ----------------------------------------
Charles E. Shalvoy
/s/ RON WILDERINK Chief Financial Officer (Principal Accounting Officer) March 29, 2000
- ----------------------------------------
Ron Wilderink
/s/ JOHN SHOCH Chairman of the Board of Directors March 29, 2000
- ----------------------------------------
John F. Shoch, Ph.D.
/s/ MARTIN COOPER Director March 29, 2000
- ----------------------------------------
Martin Cooper
/s/ ROBERT JANOWIAK Director March 29, 2000
- ----------------------------------------
Robert Janowiak
/s/ MARTY KAPLAN Director March 29, 2000
- ----------------------------------------
Marty Kaplan
</TABLE>
31
<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 redeemable
preferred stock and of cash flows, after the restatement described in Note 3,
present fairly, in all material respects, the financial position of Conductus,
Inc. at December 31, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles in the United States.
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
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
February 15, 2000
32
<PAGE>
CONDUCTUS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1999
------------------- ------------------
(Restated - Note 3)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 1,547,169 $ 11,956,508
Short-term investments................................................ 1,341,014 2,121,274
Accounts receivable (net of allowance for doubtful accounts of $292,635
and $102,918 for 1998 and 1999)....................................... 1,109,794 1,381,724
Inventories........................................................... 842,384 1,266,200
Prepaid expenses and other current assets............................. 145,470 306,339
------------------- ------------------
Total current assets................................................ 4,985,831 17,032,045
Property and equipment, net........................................... 2,020,324 1,374,354
Other assets.......................................................... 28,800 190,383
------------------- ------------------
Total assets........................................................ $ 7,034,955 $ 18,596,782
=================== ==================
LIABILITIES
Current liabilities:
Current portion of long-term debt..................................... $ 892,139 $ 752,419
Accounts payable...................................................... 658,982 1,022,993
Other accrued liabilities............................................. 778,758 1,572,897
------------------- ------------------
Total current liabilities........................................... 2,329,879 3,348,309
Long-term debt, net of current portion................................ 1,341,407 595,665
------------------- ------------------
Total liabilities................................................... 3,671,286 3,943,974
------------------- ------------------
Commitments (Note 11)
REDEEMABLE PREFERRED STOCK:
Preferred stock, no par value:
Authorized: 5,000,000 shares
Series B, no par value; Designated: 4,500,000; Issued and outstanding:
2,461,227 in 1998 and 1999 (Liquidation value: $7,161,615 at
December 31, 1999).................................................. 5,683,461 5,736,124
Series C, no par value; Designated: 4,000,000; Issued and outstanding:
none in 1998 and 375,000 in 1999 (Liquidation value: $15,038,500 at
December 31, 1999).................................................. -- 5,041,551
STOCKHOLDERS' EQUITY
Common stock, $0.0001 par value:
Authorized: 20,000,000 shares;
Issued: 7,144,120 and 7,256,518 in 1998 and 1999; Outstanding:
7,144,120 and 7,256,518 in 1998 and 1999............................ 714 726
Additional paid-in capital............................................... 42,278,423 52,543,129
Accumulated deficit...................................................... (44,598,929) (48,668,722)
------------------- ------------------
Total stockholders' equity (deficit)................................ (2,319,792) 3,875,133
------------------- ------------------
Total liabilities, redeemable equity and stockholders' equity....... $ 7,034,955 $ 18,596,782
=================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Contract................................................ $ 7,266,157 $ 3,698,049 $ 1,914,809
Product sales........................................... 2,187,383 990,737 872,370
Other .................................................. -- -- 5,010,684
---------------- ---------------- ----------------
Total revenues........................................ 9,453,540 4,688,786 7,797,863
---------------- ---------------- ----------------
Costs and expenses:
Cost of product sales................................... 1,845,413 2,684,994 2,507,883
Research and development................................ 10,626,133 5,621,284 4,430,572
Selling, general and administrative..................... 4,329,739 3,514,295 3,975,736
Write-off of property and equipment..................... 100,000 -- --
Loss on asset sale...................................... 51,741 -- --
---------------- ---------------- ----------------
Total costs and expenses.............................. 16,953,026 11,820,573 10,914,191
---------------- ---------------- ----------------
Loss from operations....................................... (7,499,486) (7,131,787) (3,116,328)
Interest income............................................ 267,492 97,149 89,133
Other income (expense)..................................... (108,992) (36,391) 30,076
Interest expense........................................... (202,395) (529,961) (338,461)
---------------- ---------------- ----------------
Net loss................................................ (7,543,381) (7,600,990) $ (3,335,580)
Dividend accretion and deemed dividend on preferred stock.. -- (227,752) (734,213)
---------------- ---------------- ----------------
Net loss attributable to common stockholders............... $ (7,543,381) $ (7,828,742) $ (4,069,793)
================ ================ ================
Other comprehensive income, net of tax:
Unrealized (loss) on investments........................ (3,808) -- --
================ ================ ================
Comprehensive loss......................................... $ (7,547,189) $ (7,600,990) $ (3,335,580)
================ ================ ================
Basic and diluted net loss per share....................... $ (1.09) $ (1.10) $ (0.57)
================ ================ ================
Shares used in per share calculations...................... 6,896,649 7,088,339 7,154,826
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
REDEEMABLE ACCUMULATED
PREFERRED STOCK ADDITIONAL OTHER
------------------------ COMMON PAID-IN COMPREHENSIVE ACCUMULATED
SERIES B SERIES C STOCK CAPITAL INCOME (LOSS) DEFICIT TOTAL
------------- ---------- ------------ ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 -- -- -- -- -- --
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) (227,752)
Net loss............................ -- -- -- -- -- (7,600,990) (7,600,990)
------------- ---------- ------------ ------------- --------------- ------------- -------------
Balance, December 31, 1998..........5,683,461 -- 714 $42,278,423 -- (44,598,929) (2,319,792)
Issuance of 29,387 shares of
common stock to employees under
the employee stock purchase plan. -- -- 3 48,160 -- -- 48,163
Preferred B issuance costs.......... (58,337) -- -- -- -- -- --
Issuance of 375,000 shares of
preferred stock net of $93,734
issuance costs................... -- 4,855,558 -- 7,811,691 -- -- 7,811,691
Issuance of common stock warrants 2,239,017 2,239,017
Issuance of 30,136 shares of
common stock upon exercise of
warrants......................... -- -- 3 -- -- -- 3
Issuance of 52,875 shares of
common stock to employees........ -- -- 6 165,838 -- -- 165,844
Dividend accretion on preferred
stock............................ 111,000 185,993 -- -- -- (734,213) (734,213)
Net loss............................ -- -- -- -- -- (3,335,580) (3,335,580)
------------- ---------- ------------ ------------- --------------- ------------- -------------
Balance, December 31, 1999.........$5,736,124 $5,041,551 $ 726 $52,543,129 $ -- $(48,668,722) $3,875,133
============= ========== ============ ============= =============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (7,543,381) $ (7,600,990) $ (3,335,580)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 827,071 931,215 813,124
Compensation associated with stock options granted...... 36,001 35,659 --
Amortization of discount on long term debt.............. -- (107,913) 52,084
Loss on disposal of equipment........................... 51,741 -- --
Provision for allowance for doubtful accounts........... 273,232 53,744 (53,000)
(Increase) decrease in:
Accounts receivable..................................... 1,528,099 891,717 (218,930)
Inventories............................................. (19,172) (232,017) (423,816)
Prepaid expenses and other current assets............... 258,077 (5,991) (160,869)
Other assets............................................ 40,001 58,962 (28,083)
Increase (decrease) in:
Accounts payable and other accrued liabilities.......... (153,367) (1,282,323) 720,930
---------------- ---------------- ----------------
Net cash used in operating activities............... (4,701,698) (7,257,937) (2,634,140)
---------------- ---------------- ----------------
Cash flows from investing activities:
Maturities of short-term investments.................... 39,401,345 556,633 1,349,880
Purchases of short-term investments..................... (33,445,385) (1,341,014) (2,130,140)
Acquisition of property and equipment................... (689,286) (250,945) (150,654)
Acquisition of license.................................. (150,000)
Net proceeds from sales of assets....................... 581,243 -- --
---------------- ---------------- ----------------
Net cash (used in) provided by investing activities. 5,847,917 (1,035,326) (1,080,914)
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings................................ 910,132 4,500,000 --
Net proceeds from issuance of common stock.............. 629,273 131,469 214,010
Net proceeds from issuance of preferred stock........... -- 5,572,461 12,608,912
Net proceeds from issuance of common stock warrants..... -- 772,000 2,239,017
Principal payments on long-term debt.................... (1,194,055) (3,747,058) (937,546)
---------------- ---------------- ----------------
Net cash provided by financing activities........... 345,350 7,228,872 14,124,393
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents.... 1,491,569 (1,064,391) 10,409,339
Cash and cash equivalents at beginning of period........... 1,119,991 2,611,560 1,547,169
---------------- ---------------- ----------------
Cash and cash equivalents at end of period................. $ 2,611,560 $ 1,547,169 $ 11,956,508
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<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 (including short-term investments) of approximately $14,078,000 as
of December 31, 1999. We raised an additional $13,670,000 from the sale of
common stock in January 2000 (See - Footnote 18). Conductus anticipates that
existing sources of liquidity and anticipated revenue will satisfy projected
working capital and other cash requirements through at least the next twelve
months. 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 such time.
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 calendar 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%, 79% and 25% of its total revenues for each of the
fiscal years 1997, 1998, and 1999 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.
37
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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, 1997, 1998, and 1999 was $9,814,000, $5,661,000, and $2,478,000
respectively, allocated between research and development, and selling, general
and administrative expenses. Costs include direct engineering and development
costs and applicable overhead. The company accrues contract losses when they
become reasonably estimable.
RESEARCH AND DEVELOPMENT:
Internally funded research and development expenditures are charged to
operations as incurred.
38
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
The Company accounts for equity instruments issued to non employees in
accordance with the provisions of Statement of Financial Accounting Standards
No. 123 and Emerging Issues Task Force ("EITF") 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services.
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,
-----------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Numerator-basic and diluted net loss per share:
Net loss attributable to common shareholders........ $ (7,543,381) $ (7,828,742) $ (4,069,793)
Denominator-basic and diluted net loss per share:
Weighted average common shares...................... 6,896,649 7,088,339 7,154,826
Basic and diluted net loss per share................ $ (1.09) $ (1.10) $ (0.57)
</TABLE>
In the 1997, 1998 and 1999 computations, common equivalent shares are excluded
from the diluted loss per share as their effect is antidilutive. Common
equivalent shares, including common stock options, warrants and preferred stock,
that could potentially dilute basic earnings per share in the future and that
were not included in the computation of diluted loss per share because of
antidilution were approximately 1,101,000, 4,074,000 and 2,797,000 for the years
ended 1997, 1998 and 1999, 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 loss that is excluded
from net income for 1999 and prior years. Conductus' comprehensive loss has been
39
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 and 1999
presentation.
RECENT PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes new standards of accounting
and reporting for derivative instruments and hedging activities. This statement
requires that all derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. Statement No. 133
will be effective for fiscal years beginning after June 15, 2000. Conductus does
not currently hold derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in the
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in the financial statements filed with the SEC. SAB
101 outlines the basic criteria that must be met to recognize revenue and
provide guidance for disclosures related to the revenue recognition policies.
Conductus is currently studying the implications of these statements and
has not yet determined the impact of their adoption.
3. EFFECTS OF RESTATEMENTS:
As described in Note 13, the Company issued 2,461,227 shares of Series B
convertible preferred stock on September 11, 1998 and September 22, 1998.
The Series B convertible preferred stock is subject to redemption
requirements that are outside of the control of the Company under certain
limited circumstances as defined in the Series B certificate of designation.
Those circumstances include a change in control of the Company in which 50% or
more of the voting power of the Company is disposed of or a sale of all or
substantially all of the assets of the Company. Under such circumstances, the
holders of Series B convertible preferred stock are entitled to receive, prior
to and in preference to any distribution of any of the assets of the Company to
the holders of common stock, an amount per share equal to $2.70 plus any unpaid
dividends for each share of Series B convertible preferred stock.
Although the Company believes that the likelihood of redemption
occurring is remote, it has restated its 1998 financial statements to account
for the redemption features of the Series B convertible preferred stock. The
carrying value of the Series B convertible preferred stock, which was
previously presented as a component of stockholders' equity, has been
reclassified outside of stockholders' equity at December 31, 1998.
40
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. EFFECTS OF RESTATEMENTS: (CONTINUED)
The restatement of the 1998 financial statements for the matter described
above had no effect on the Company's net loss, total assets or total
liabilities. The Company's redeemable equity, total stockholders' equity at
December 31, 1998, as previously reported and as restated, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Redeemable equity - previously reported $ --
Adjustment related to the presentation of the Series B
convertible preferred stock as redeemable 5,683,461
---------
As restated $5,683,461
----------
Stockholders' equity - previously reported $3,363,669
Adjustment related to the presentation of the Series B
convertible preferred stock as redeemable (5,683,461)
-----------
As restated ($2,319,792)
==========-
</TABLE>
4. SUPPLEMENTAL CASH FLOW DISCLOSURE:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.............................. $ 173,571 $ 374,713 $ 297,055
============= ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FUNDING ACTIVITIES:
Unrealized gain (loss) on investments, net.......................... $ 3,808 $ -- $ --
============= ============ ============
OTHER NONCASH EXPENSES:
Compensation associated with stock options granted.................. $ 36,001 $ 35,639 $ --
============= ============ ============
Dividend accretion and deemed dividend on preferred stock........... $ -- $ 227,752 $ 734,213
============= ============ ============
Amortization of discount on long term debt.......................... $ -- $ 107,913 $ 52,084
============= ============ ============
Amortization of License Agreement................................... $ -- $ -- $ 16,500
============= ============ ============
Value of warrants issued in association with long term debt......... $ -- $ 268,671 $ --
============= ============ ============
</TABLE>
5. INVESTMENTS:
Investments, all of which are classified as available-for-sale, are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------- ------------------------------
COST MARKET VALUE COST MARKET VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Debt securities:
Foreign debt.................................. $ 248,126 $ 248,126 $ -- $ --
Commercial paper.............................. 792,215 792,215 294,950 294,950
Other......................................... 298,468 298,468 1,822,783 1,822,783
Accrued interest.............................. 2,205 2,205 3,541 3,541
-------------- -------------- -------------- --------------
Total......................................... $ 1,341,014 $ 1,341,014 $2,121,274 $ 2,121,274
============== ============== ============== ==============
</TABLE>
At December 31, 1999, all scheduled maturities of investments are within
one year. Investments consisted primarily of United States government agencies
debt and commercial paper bearing interest between 5.82% to 6.0% per annum,
which are due to mature in March 2000.
41
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS: (CONTINUED)
For the years ended December 31, 1997, 1998, and 1999 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.
6. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1999
---------------- -----------------
<S> <C> <C>
U.S. government contract:
Unbilled
Recoverable costs and accrued profit on progress completed--
not billed.................................................... $ 726,342 $ 148,088
Billed............................................................ 297,525 192,254
Commercial........................................................... 378,562 94,300
License Fee Receivable............................................... -- 1,050,000
Allowance for doubtful accounts...................................... (292,635) (102,918)
---------------- -----------------
$ 1,109,794 $ 1,381,724
================ =================
</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, 1999 will be billed over the next 120 days as incremental increases
to the contract are funded by the contract administrator.
7. INVENTORIES:
Inventories, net, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1998 1999
------------------ -------------------
<S> <C> <C>
Raw materials.............................................. $ 281,139 $ 573,526
Work in process............................................ 169,650 401,335
Finished goods............................................. 391,595 291,339
------------------ -------------------
$ 842,384 $ 1,266,200
================== ===================
</TABLE>
42
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Equipment.................................................. $ 7,286,069 $ 7,396,924
Leasehold improvements..................................... 1,715,096 1,715,096
Furniture and fixtures..................................... 431,861 431,861
Construction in process.................................... -- 39,799
------------------ ------------------
9,433,026 9,583,680
Accumulated depreciation and amortization.................. (7,412,702) (8,209,326)
------------------ ------------------
$ 2,020,324 $ 1,374,354
================== ==================
</TABLE>
9. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Accrued consulting and professional....................... $ 111,022 $ 193,998
Accrued compensation...................................... 395,313 696,663
Preferred dividend payable................................ 116,752 553,972
Other accrued liabilities................................. 155,671 128,264
----------------- -----------------
$ 778,758 $ 1,572,897
================= =================
</TABLE>
10. LONG-TERM DEBT AND OTHER BORROWINGS:
Our credit facilities consist of a loan from a leasing company and a bank
line of credit. Obligations related to our credit facilities as of December 31,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Loan payable to leasing company........................... $ 1,978,366 $ 1,348,084
Bank equipment term loan payable.......................... 255,180 --
----------------- -----------------
Total.................................................. 2,233,546 1,348,084
Less: current portion.................................... 892,139 752,419
----------------- -----------------
Long term debt......................................... $ 1,341,407 $ 595,665
================= =================
</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 average
closing bid price for the five days immediately preceding and including April
22, 1998, $4.11. The effective interest rate, including
43
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM DEBT AND OTHER BORROWINGS: (CONTINUED)
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.
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, 1999, 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, 1999.
The line of credit is subject to renewal on April 23, 2000.
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 expired 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, 1999, Conductus was in compliance with all financial
covenants.
11. COMMITMENTS:
Conductus leases its administrative, sales, marketing, manufacturing,
research and development facilities under noncancelable operating leases which
were previously due to expire in August 2000 and 2001. On January 31, 2000
Conductus renegotiated the leases. Under the terms of the renegotiation, the
leases were extended for approximately 5 1/2 years and now both have terms
ending on February 28, 2006. Conductus also leases a sales office in Schaumburg,
Illinois. This lease expires on January 31, 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>
2000........................................................ $ 449,668
2001........................................................ 774,643
2002........................................................ 1,007,036
2003........................................................ 1,037,699
2004........................................................ 1,069,976
Thereafter.................................................. 1,287,844
-----------------
$ 5,626,866
=================
</TABLE>
44
<PAGE>
11. COMMITMENTS: (CONTINUED)
Rent expense was $385,432, $316,583 and $353,492 for the years ending
December 31, 1997, 1998 and 1999, respectively.
12. 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 $714,000 was recognized under this
contract for 1997. 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 prototype for screening of
breast cancer. Revenue of $920,000 and $100,000 was recognized under the
contract for 1997 and 1998 respectively. Work on this contract was completed in
1998.
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 $1,080,000 and $152,000
was recognized under the agreement for 1997 and 1998, respectively. This
contract was completed in 1998.
45
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. RESEARCH AND DEVELOPMENT ARRANGEMENTS: (CONTINUED)
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 $847,000, $1,491,000
and $495,000 was recognized under this contract for 1997, 1998 and 1999,
respectively. Work on this contract was completed in 1998.
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 that 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 and $606,903 was recognized under this contract in 1998 and 1999,
respectively.
FREQUENCY AGILE MATERIALS FOR ELECTRONICS:
In August, 1998 Conductus entered into a contract with the Office of Naval
Research to develop, test, characterize and improve dielectric materials
prepared by reactive evaporation for the purpose of developing high performance
tunable RF components. Revenue of $228,667 and $469,049 was recognized under
this contract for 1998 and 1999, respectively.
13. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK:
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 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.
46
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK: (CONTINUED)
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.
SERIES C PREFERRED STOCK:
On December 10, 1999, Conductus sold and issued 375,000 shares of its
Series C preferred stock at a price per share of $40.00 and issued warrants to
purchase 750,000 shares of common stock at an exercise price of $4.00 per share
in a private placement of its equity securities. Each preferred share is
convertible into ten shares of common stock and has a cumulative stock dividend
of 6%. The offering was not underwritten and raised net proceeds of $14,906,266.
Certain affiliates of Conductus and other institutional and accredited
individual investors purchased shares of Series C 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 to be $2,239,017 using the Noreen-Wolfson valuation
model. The warrants have a term of five years and are exercisable beginning in
June 2000 at a price of $4.00 per share.
47
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK: (CONTINUED)
The issuance resulted in a beneficial conversion feature of approximately
$7,811,691, calculated in accordance with Emerging Task Force No. 98-5, which
resulted in an allocation to additional paid-in capital. In determining the
accounting for the beneficial conversion feature, the Company allocated the net
proceeds of $14,906,266 to the Series C convertible preferred stock and the
warrants based on their respective fair values at the Issuance Date. This
resulted in $4,855,558 assigned to the Series C convertible preferred shares,
$2,239,017 assigned to the warrants and $7,811,691 to the beneficial conversion
feature as of December 31, 1999. The beneficial conversion feature is being
recognized as a deemed dividend to the preferred shareholders over the six-month
period prior to the earliest date at which the preferred shareholders can
realize that return. As a result, using the interest method, $185,993 of the
beneficial conversion feature has been recognized through December 31, 1999.
DIVIDENDS. The holders of the Series C 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 C preferred stock at
the rate of $2.40 per year. Cumulative dividends shall be paid upon conversion
of the Series C 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 C preferred stock
shall be entitled to receive prior and in preference to the holders of the
common stock, a per share amount equal to $40.00. After the payment of the
liquidation preferences to the holders of the Series C 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 C preferred stock will have the right
beginning in June 2000 to convert their Series C 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 ten shares
of common stock, at the then applicable conversion price at the election of
holders of two-thirds of such Series C preferred stock.
ANTI-DILUTION ADJUSTMENTS. Each share of Series C preferred stock shall
initially be convertible into ten shares 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:
- until June 10, 2000, 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 C 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 C 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 C 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.
48
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK: (CONTINUED)
1992 STOCK OPTION/STOCK ISSUANCE PLAN:
Under Conductus' stock option/stock issuance plan, as amended, a total of
2,580,000 shares of common stock are authorized for issuance under the plan as
of December 31, 1999.
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.
49
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK: (CONTINUED)
A summary of the status of Conductus' stock option plans as of December 31,
1997, 1998 and 1999 and changes during the periods ending on these dates is
presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------
AVAILABLE WEIGHTED
FOR GRANT AVG.
UNDER OPTION EXERCISE
PLAN SHARES PRICE PER SHARE PRICE
-------------- -------------- ----------------------- --------------
<S> <C> <C> <C> <C>
Balance, January 1,1997.................. 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
Granted.................................. (919,296) 919,296 $0.00 -- 4.25 3.26
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
Additional shares authorized............. 500,000 -- -- -- --
Granted.................................. (1,012,489) 1,012,489 $1.13 -- 5.50 3.52
Exercised................................ -- (52,875) $0.56 -- 3.81 3.42
Canceled................................. 180,207 (180,207) $0.56 -- 6.56 3.72
-------------- -------------- ----------------------- --------------
Balance, December 31, 1999............... 157,708 1,784,497 $0.45 -- 8.00 $ 3.52
============== ============== ======================= ==============
</TABLE>
At December 31, 1997, 1998 and 1999, vested options to purchase 797,925,
221,521 and 550,423, respectively, were unexercised and the weighted average
prices for the vested options were $4.68, $4.23 and $3.81 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.
50
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK: (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN:
In July 1994, the Employee Stock Purchase Plan was adopted by the board of
directors. A total of 550,000 shares of common stock are authorized for issuance
under the plan as of December 31, 1999. The purpose of the plan was to provide
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 1997, 1998 and
1999 employees purchased 50,686, 28,070 and 29,387 shares for a total of
approximately $247,667, $65,661 and $48,163, respectively. At December 31, 1999,
282,219 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, 1999, Conductus had reserved the following shares of common
stock:
<TABLE>
<S> <C>
Conversion of Series C Preferred..................................... 3,750,000
Conversion of Series B Preferred..................................... 2,461,227
Employee Stock Purchase Plan......................................... 282,219
Warrants............................................................. 1,302,716
Option Plan.......................................................... 1,957,205
------------------
9,753,367
------------------
</TABLE>
51
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK: (CONTINUED)
STOCK BASED COMPENSATION PLANS--VALUATION:
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
NUMBER REMAINING --------------------------------------
RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
PRICES 12/31/99 (YEARS) EXERCISE PRICE 12/31/99 EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.45 -- $0.88 57,170 $ 2.53 $ 0.61 57,170 $ 0.61
$1.13 -- $5.25 1,131,407 7.68 $ 2.53 402,095 $ 3.65
$5.38 -- $6.50 572,420 9.45 $ 5.60 63,575 $ 6.24
$6.56 -- $8.00 38,500 7.05 $ 7.07 27,583 $ 7.19
------------------ ------------------
$0.45 -- $8.00 1,799,497 8.07 $ 3.54 550,423 $ 3.81
================== ==================
</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 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 1997, 1998 and 1999.
<TABLE>
<CAPTION>
GROUP A GROUP B GROUP A GROUP B GROUP A GROUP B
------------- ------------ ------------ ------------ ------------ -------------
1997 1998 1999
-------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rates............ 6.23% 5.50% 5.36% 5.17% 5.92% 5.47%
Expected life....................... 4.4 years 6 months 3.9 years 6 months 5 years 6 months
Volatility.......................... 0.83 0.76 1.05 1.05 1.04 1.04
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 1997, 1998 and
1999 was $4.10, $3.26 and $2.75. The weighted average fair value of those
purchase rights granted in 1997, 1998 and 1999 was $2.71, $2.34 and $0.73.
Had compensation cost for these plans been determined based on fair value
of the options at that grant date in 1997, 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>
1997 1998 1999
---------------- ------------------ -------------
<S> <C> <C> <C>
Net loss attributable to common stockholders --As reported..... $ (7,543,000) $ (7,829,000) $ (4,070,000)
--Proforma........ $ (8,746,000) $ (9,067,000) $ (4,651,000)
Basic and diluted net loss per share --As reported............. $ (1.09) $ (1.10) $ (0.57)
--Proforma................ $ (1.27) $ (1.28) $ (0.65)
</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 1996 or additional
future grants.
52
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK: (CONTINUED)
On March 8, 1996 Conductus issued warrants to acquire 15,000 shares of
common stock at a price of $11.25 per share. On May 29, 1998 and July 15, 1998
Conductus issued warrants to purchase 30,414 and 15,060 shares of common stock
at prices of $4.11 and $3.32 respectively.
14. 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 1999.
15. 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. In the third quarter of 1999, the company sold the remaining,
fully reserved, inventory and fully depreciated assets of the Squid product
line. The following table summarizes the financial impact of the transactions:
<TABLE>
<S> <C>
Proceeds form 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>
16. INCOME TAXES:
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Property and equipment, principally due to differences in depreciation... $ 342,000 $ 366,000
Accrued liabilities and other............................................ 441,000 565,000
Tax credit carryforwards................................................. 1,006,000 1,531,000
Capitalized research and development expense............................. 380,000 691,000
Net operating loss carryforward.......................................... 15,411,000 15,621,000
Valuation allowance...................................................... (17,580,000) (18,774,000)
------------------ ------------------
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, 1999, Conductus had approximately $44,106,000 and
$10,732,000 in net operating loss carryforwards for federal and state income
purposes, respectively. These expire in the years 2000 through 2019. The
Company also had approximately $913,000 and $618,000 in research and
development credits against future federal and state income taxes,
respectively. The federal tax credits expire in years 2004 through 2015. The
state tax credits may be carried forward to succeeding years until exhausted.
53
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. INCOME TAXES: (CONTINUED)
The utilization of Conductus' net operating loss and tax credit
carryforwards may be subject to limitations upon certain changes in ownership,
as defined by Sec 382 of the Internal Revenue Code.
17. 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.
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 9%
($896,000), 2% ($76,000) and 0% ($0), in 1997, 1998 and 1999, respectively.
Receivables from this customer totaled $183,000 at December 31, 1997. There were
no outstanding receivables from this customer at December 31, 1998 and 1999.
On May 4, 1999, Conductus entered into a definitive agreement with General
Dynamics Information Systems, Inc. ("GDIS") to license its high temperature
superconductive ("HTS") electronics and cryoelectronics technology. Under the
license agreement, GDIS acquired rights to Conductus' HTS thin-film technology
and other intellectual property for $5,000,000 plus future royalties and will
have rights to use and sell this technology for use in U.S. government or state,
local and foreign government markets, as defined under the agreement. Upon
execution of the agreement, GDIS made an immediate payment to the Company of
$2,900,000. In addition, GDIS began paying the Company $175,000 on the first day
of each month for 12 months beginning on July 1, 1999. Conductus and GDIS also
entered into a Cross-License, Supply and Training Agreement under which
Conductus and GDIS agreed to cross-license updates, if any, to the licensed
technology developed by either party. Additionally, the Company agreed to
provide product and training to GDIS in exchange for payment at standard
commercial rates from GDIS. As a result of this transaction, Conductus
recognized revenues of $5,000,000 for the year ended December 31, 1999.
Conductus' revenues by geographic area are summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------- --------------- ----------------
<S> <C> <C> <C>
USA........................................................ $ 8,318,000 $ 4,485,000 $ 7,525,863
Japan...................................................... 896,000 146,000 272,000
Rest of the world.......................................... 240,000 58,000 --
--------------- --------------- ----------------
$ 9,454,000 $ 4,689,000 $ 7,797,863
=============== =============== ================
</TABLE>
18. SUBSEQUENT EVENT:
On January 20, 2000, the Company entered into an agreement with The
Nevis Fund and Snowdon LP. Under the terms of the agreement, the Company
issued 1,000,000 shares of common stock at $13.67 per share.
54
<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 15, 2000 appearing on page 32 also included an audit of the financial
statement schedule listed in Item 14[a]2 of this Form 10-K. 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 15, 2000
S-1
<PAGE>
SCHEDULE II
CONDUCTUS, INC. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COST AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------- ------------- ------------- ------------- ------------- --------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ------------- --------------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts.......... $ 50,000 $ 273,232 $ -- $ (75,000) $ 248,232
Year ended December 31, 1998:
Allowance for doubtful accounts.......... $ 248,232 $ 53,744 $ -- $ (9,341) $ 292,635
Year ended December 31, 1999:
Allowance for doubtful accounts.......... $ 292,635 $ (53,000) $ -- $ (136,717) $ 102,918
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
---------- -----------
<S> <C>
2.1(1) Stock Exchange Agreement dated as of May 28, 1993, between the Company and Tristan Technologies, Inc.
3.1(2) Restated Certificate of Incorporation.
3.2(3) Restated Bylaws.
3.3(4) Certificate of Designation of Series B Preferred Stock.
3.4 Certificate of Designation of Series C Preferred Stock.
4.1(5) Stockholder Rights Plan.
10.1(1) 1987 Stock Option Plan.
10.2(1) Amended 1989 Stock Option Plan.
10.3(6) 1992 Stock Option/Stock Purchase Plan.
10.4(7) 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(8) 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(9) Collaboration Agreement between Registrant and CTI dated September 19, 1995.
10.12(9) 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(10)+ 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(8) Lease Agreement dated December 8, 1994 between Registrant and Mozart-McKee Limited Partnership for
Sunnyvale facilities.
10.20(8) Business Loan Agreement dated August 15, 1994 between Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
10.21(11) Loan Modification Agreement dated June 30, 1997, between Registration and Silicon Valley Bank modifying the
Business Loan Agreement dated August 15, 1994.
10.22(11) Loan Modification Agreement dated November 12, 1997, between Registration and Silicon Valley Bank modifying the
Business Loan Agreement dated August 15, 1994.
10.23(11) Loan Modification Agreement dated December 23, 1997, between Registration and Silicon Valley Bank modifying the
Business Loan Agreement dated August 15, 1994.
10.24(12) Business Loan Agreement dated March 8, 1996 between Registrant and Silicon Valley Bank for working capital credit
facility and term loan facility.
10.25(13) 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
---------- -----------
<S> <C>
10.27(4) Stock Subscription Warrant Agreement between the Company and Transamerica Business Credit Corporation, dated June
26, 1998.
10.28(14) Silicon Valley Bank Loan Agreement.
10.29(14) Collateral Assignment, Patent Mortgage and Security Agreement between the Company and Silicon Valley
Bank.
10.30(11)+ 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(11) 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(11) Asset Purchase Agreement dated September 3, 1997, between Registrant and Niki Glass Ltd. for sale of Registrant's
assets related to portions of its instruments business.
10.33(15)+ License Agreement with General Dynamics, dated May 4, 1999.
10.34(16) Cross-License, Supply and Training Agreement with General Dynamics, dated May 4, 1999.
10.35 Form of Series C Preferred Stock and Warrant Purchase Agreement, dated December 10, 1999, between the
Company and Series C Investors.
10.36 Form of Warrant to Purchase Common Stock between the Company and Series C Investors.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (See Page 32).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------------------------
+ Confidential treatment granted or requested as to certain portions of these
exhibits.
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (Number 33-64020), filed with the SEC on May 15, 1996, as amended.
(2) Incorporated herein by reference to the Company's 1993 Annual Report on
Form 10-K.
(3) Incorporated herein by reference to the Company's Report 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 8-A (Number 000-19915), filed with the SEC on January 29, 1998.
(6) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 (Number 333-41099), filed with the SEC on November 26, 1997.
(7) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 (Number 033-82454), filed with the SEC on August 5, 1994.
(8) Incorporated herein by reference to the Company's 1994 Annual Report on
Form 10-K.
(9) 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.
(10) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (Number 333-3815), filed with the SEC on May 15, 1996, as amended.
(11) Incorporated herein by reference to the Company's 1997 Annual Report on
Form 10-K.
<PAGE>
(12) Incorporated herein by reference to the Company's 1995 Annual Report on
Form 10-K.
(13) Incorporated herein by reference to the Company's 1996 Annual Report on
Form 10-K.
(14) Incorporated herein by reference to the Company's Form 10-Q, filed with the
SEC on May 14, 1998.
(15) Incorporated herein by reference to the Company's Form 10-Q/A, filed with
the SEC on May 27, 1999.
(16) Incorporated herein by reference to the Company's Form 10-Q, filed with the
SEC on May 17, 1999.
<PAGE>
Exhibit 3.4
CERTIFICATE OF DESIGNATION
OF
SERIES C PREFERRED STOCK
OF
CONDUCTUS, INC.
(PURSUANT TO SECTION 151 OF THE
DELAWARE GENERAL CORPORATION LAW)
Conductus, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolutions were adopted by
unanimous written consent of the Board of Directors in accordance with
Section 141(f) of the General Corporation Law of Delaware on December 9, 1999:
WHEREAS, the Amended and Restated Certificate of Incorporation of the
Corporation authorizes the Preferred Stock (the "Preferred Stock") of the
Corporation to be issued in series and authorizes its board of directors (the
"Board") to determine the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock and to
fix the number of shares and designation of any such series; and
WHEREAS, the Board has designated an initial series of Preferred Stock
designated as Series A Junior Participating Preferred Stock (the "Series A
Preferred");
WHEREAS, the Board has designated a series of preferred Stock
designated as Series B Preferred Stock (the "Series B Preferred");
RESOLVED, that a series of Preferred Stock shall be designated
Series C Preferred Stock (the "Series C Preferred");
RESOLVED FURTHER, that the number of shares constituting Series C
Preferred shall be Four Hundred Thousand (400,000) shares; and
RESOLVED FURTHER, that the Board hereby fixes and determines the
rights, preferences, privileges and restrictions relating to the Series C
Preferred as follows:
1. DIVIDEND RIGHTS OF SERIES C PREFERRED. Subject to the rights of
additional series of Preferred Stock that may be designated by the Board from
time to time, including the rights of Series A Preferred, and the Series B
Preferred, the holders of shares of Series C Preferred shall be entitled to
receive dividends, at a six percent (6%) annual rate, which annual rate shall be
$2.40 per share of Series C Preferred, or $0.60 per share per quarter (as such
dollar amount shall be appropriately adjusted for stock dividends, stock
combinations, recapitalization
<PAGE>
or the like, the "Quarterly Accrual Amount") on each March 31, June 30,
September 30 and December 31 (each, a "quarterly Accrual Date") after the
date on which such share of Series C Preferred was issued (the "Original
Issue Date" for such share), provided that the amount of dividends on the
first Quarterly Accrual Date after the Original Issue Date shall equal the
Quarterly Accrual Amount multiplied by a fraction (A) the numerator of which
shall equal the number of days from and including the Original Issue Date for
such share to and including such first Quarterly Accrual Date, and (B) the
denominator of which is ninety (90). Such dividends shall be cumulative and
shall accrue, whether or not earned or declared. Any accumulation of
dividends on the Series C Preferred shall not bear interest. Cumulative
dividends with respect to a share of Series C Preferred which are accrued,
shall be paid (A) in shares of Common Stock of the Corporation ("Common
Stock"), upon conversion of such share of Series C Preferred into Common
Stock pursuant to Section 3 below, or (B) if such share of Series C Preferred
is not so converted, upon the liquidation, dissolution or winding up of the
Corporation as provided in Section 2(a).
Any dividend or distribution which is declared by the Corporation and
payable with assets of the Corporation other than cash shall be governed by the
provisions of Subsection 2(d) below.
2. LIQUIDATION PREFERENCE.
(a) Subject to the rights of additional series of Preferred
Stock that may be designated by the Board from time to time, in the event of any
liquidation, dissolution or winding up of the Corporation, either voluntarily or
involuntarily, the holders of the Series C Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Corporation to the holders of Common Stock, an amount per share equal to $40.00
(the "Original Series C Purchase Price") plus any accrued by unpaid dividends
for each share of Series C Preferred then held by them, such amounts being
adjusted to reflect stock dividends, stock splits, combinations,
recapitalizations or the like after the Original Series C Issue Date. After
payment to the holders of the Series C Preferred of the amounts set forth in
this Section 2, the entire remaining assets and funds of the Corporation legally
available for distribution, if any, shall be distributed among the holders of
the Common Stock in proportion to the shares of Common Stock then held by them.
If, upon the occurrence of such event, the assets thus distributed among the
holders of the Series C Preferred shall be insufficient to permit the payment to
such holders of the full aforesaid preferential amount, then the entire assets
and funds of the Corporation legally available for distribution shall be
distributed among the holders of the Series C Preferred in proportion to the
number of shares of Series C Preferred then held by them.
(b) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of the Corporation shall, unless holders of a majority
of the then outstanding shares of Series C Preferred elect otherwise, be deemed
to be occasioned by, or to include, (A) the acquisition of the Corporation by
another entity by means of any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation but,
excluding any merger effected exclusively for the purpose of changing the
domicile of the Corporation) that results in the transfer of fifty percent (50%)
or more of the outstanding voting power of the Corporation; or (B) a sale of all
or substantially all of the assets of the Corporation.
2
<PAGE>
(ii) In any of such event, if the consideration received
by the Corporation is other than cash, its value will be deemed its fair market
value. Any securities to be delivered to the holders of the Series C Preferred
or Common Stock, as the case may be, shall be valued as follows:
(1) If traded on a securities exchange or through
the Nasdaq National Market, the value shall be deemed to be the average of
the closing prices of the securities on such exchange over the thirty-day
period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending three (3) days
prior to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of at least a majority of the then outstanding
shares of Series C Preferred.
(iv) The Corporation shall give each holder of record of
Series C Preferred written notice of such impending transaction not later than
twenty (20) days prior to the stockholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the Corporation has given the first notice
provided for herein or sooner than ten (10) days after the Corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the Corporation's receipt of written consent of
the holders of at least a majority of the then outstanding shares of Series C
Preferred entitled to such notice rights or similar notice rights.
3. CONVERSION. The holders of the Series C Preferred shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series C Preferred shall be
convertible, at the option of the holder thereof, at any time after the date six
(6) months following the Original Issue Date of such share, at the office of the
Corporation or any transfer agent for such stock, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing the
Original Series C Purchase Price plus any accrued but unpaid dividends by the
Conversion Price (as defined below) applicable to such share, determined as
hereafter provided, in effect on the date the certificate is surrendered for
conversion. The initial "Conversion Price" per share for shares of Series C
Preferred shall be $4.00; provided, however, that the Conversion Price for the
Series C Preferred shall be subject to adjustment as set forth in subsection
3(d).
3
<PAGE>
(b) AUTOMATIC CONVERSION. Each share of Series C Preferred
shall be automatically converted into shares of Common Stock at the Conversion
Price in effect at the time upon the date specified by written consent or
agreement of the holders of two-thirds of the then outstanding shares of
Series C Preferred.
(c) MECHANICS OF CONVERSION.
(i) CONVERSION PURSUANT TO SECTION 3(a). Before any
holder of Series C Preferred shall be entitled to convert the same into shares
of Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation of any transfer agent
for the Series C Preferred, and shall give written notice to the Corporation at
such office that he/she elects to convert the same, and shall state therein the
name or names which he/she wishes the certificate or certificates for shares of
Common Stock to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to each holder of Series C
Preferred, or to his nominee or nominees, a certificate or certificates for the
number of shares of Common Stock to which he/she shall be entitled. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series C Preferred to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(ii) CONVERSION PURSUANT TO SECTION 3(b). If shares of
Series C Preferred are automatically converted, written notice shall be
delivered to the holder of such shares of Series C Preferred at the address last
shown on the records of the Corporation for such holder or given by such holder
to the Corporation for the purpose of notice or, if no such address appears or
is given, at the place where the principal executive office of the Corporation
is located, notifying such holder of the conversion to be effected, specifying
the date on which such conversion is expected to occur, the number of shares of
Series C Preferred to be converted and calling upon such holder to surrender to
Corporation, in the manner and at the place designated, the certificate or
certificates therefor. Upon such conversion of the shares of Series C
Preferred, holders shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for the
Series C Preferred, and shall state therein the name or names which he/she
wishes the certificate or certificates for shares of Common Stock to be issued.
The Corporation shall, as soon as practicable thereafter, issue and deliver at
such office to each holder of Series C Preferred, or to his nominee or nominees,
a certificate or certificates for the number of shares of Common Stock to which
he/she shall be entitled. Any conversion of Series C Preferred pursuant to
Section 3(b) shall be deemed to have been made immediately prior to the closing
of the issuance and sale of shares as described in Section 3(b).
(iii) FRACTIONAL SHARES. No fractional shares shall be
issued upon conversion of the Series C Preferred. In lieu of Corporation
issuing any fractional shares to holders upon the conversion of the Series C
Preferred, Corporation shall pay to such holders an amount equal to the product
obtained by multiplying the Conversion Price by the fraction of a share not
issued pursuant to the previous sentence.
4
<PAGE>
(d) ADJUSTMENT OF CONVERSION RATE. The number of shares of
Common Stock into which the Series C Preferred may be converted shall be subject
to adjustment from time to time as follows:
(i) (A) If the Corporation shall issue, after the
date upon which any shares of Series C Preferred were first issued (the
"Purchase Date") and prior to June 10, 2000, any Additional Stock (as defined
below) without consideration or for a consideration per share less than the
Conversion Price for such series in effect immediately prior to the issuance of
such Additional Stock, the Conversion Price for such series in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this clause (i)) be adjusted to a price equal to the price paid per
share for such Additional Stock.
(B) No adjustment of the Conversion Price for the
Series C Preferred shall be made in an amount less than one cent per share,
provided that any adjustments that are not required to be made by reason of this
sentence shall be carried forward and shall be either taken into account in any
subsequent adjustment made prior to three (3) years from the date of the event
giving rise to the adjustment being carried forward, or shall be made at the end
of three (3) years from the date of the event giving rise to the adjustment
being carried forward. Except to the limited extent provided for in subsections
(E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this
subsection3(d)(i) shall have the effect of increasing the Conversion Price above
the Conversion Price in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock
for cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions or other
expenses allowed, paid or incurred by the Corporation for any underwriting or
otherwise in connection with the issuance and sale thereof.
(D) In the case of the issuance of the Common
Stock for consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair value thereof as determined by
the Board irrespective of any accounting treatment.
(E) In the case of the issuance (whether before,
on or after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this subsection 3(d)(i) and subsection 3(d)(ii):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise
(assuming the satisfaction of any conditions
to exercisability, including without
limitation, the passage of time, but without
taking into account potential antidilution
adjustments) of such options to purchase or
rights to subscribe for Common Stock shall be
deemed to have been issued at the
5
<PAGE>
time such options or rights were issued and for a
consideration equal to the consideration
(determined in the manner provided in
subsections 3(d)(i)(C) and (d)(i)(D)), if
any, received by the Corporation upon the
issuance of such options or rights plus the
minimum exercise price provided in such
options or rights for the Common Stock
covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of,
or in exchange (assuming the satisfaction of
any conditions to convertibility or
exchangeability, including, without
limitation, the passage of time, but without
taking into account potential antidilution
adjustments) for, any such convertible or
exchangeable securities or upon the exercise
of options to purchase or rights to subscribe
for such convertible or exchangeable
securities and subsequent conversion or
exchange thereof shall be deemed to have been
issued at the time such securities were
issued or such options or rights were issued
and for a consideration equal to the
consideration, if any, received by the
Corporation for any such securities and
related options or rights (excluding any cash
received on account of accrued interest or
accrued dividends), plus the minimum
additional consideration, if any, to be
received by the Corporation upon the
conversion or exchange of such securities or
the exercise of any related options or rights
(the consideration in each case to be
determined in the manner provided in
subsections 3(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the
consideration payable to the Corporation upon
exercise of such options or rights or upon
conversion of or in exchange for such
convertible or exchangeable securities,
including, but not limited to, a change
resulting from the antidilution provisions
thereof (unless such options or rights or
convertible or exchangeable securities were
merely deemed to be included in the numerator
and denominator for purposes of determining
the number of shares of Common Stock
outstanding for purposes of subsection
3(d)(i)(A)), the Conversion
6
<PAGE>
Price of the Series C Preferred, to the extent in
any way affected by or computed using such
options, rights or securities, shall be
recomputed to reflect change, but no further
adjustment shall be made for the actual
issuance of Common Stock or any payment of
such consideration upon the exercise of any
such options or rights or the conversion or
exchange of such securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to
convert or exchange or the expiration of any
options or rights related to such convertible
or exchangeable securities, the Conversion
Price of the Series C Preferred, to the
extent in any way affected by or computed
using such options, rights or securities or
options or rights related to such securities
(unless such options or rights were merely
deemed to be included in the numerator and
denominator for purposes of determining the
number of shares of Common Stock outstanding
for purposes of subsection 3(d)(i)(A)), shall
be recomputed to reflect the issuance of only
the number of shares of Common Stock (and
convertible or exchangeable securities that
remain in effect) actually issued upon the
exercise of such options or rights, upon the
conversion or exchange of such securities or
upon the exercise of the options or rights
related to such securities.
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid
therefor pursuant to subsections
3(d)(i)(E)(1) and (2) shall be appropriately
adjusted to reflect any change, termination
or expiration of the type described in either
subsection 3(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 3(d)(i)(E))
by the Corporation after the Purchase Date other than:
(A) Common Stock issued pursuant to a transaction
described in subsection 3(d)(iii) hereof;
(B) Common Stock issued in a transaction or
series of transactions resulting in gross proceeds to the Company of no more
than $1,000,000;
7
<PAGE>
(C) Shares of Common Stock issuable or issued to
employees, consultants, directors or vendors (if in transactions with primarily
non-financing purposes) of the Corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the Board of the Corporation;
(D) The issuance of securities pursuant to the
conversion or exercise of convertible or exercisable securities, except as
provided in Section 3(d)(i)(E); or
(E) The issuance of securities in connection with
a bona fide business acquisition of or by the Corporation, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise.
(iii) ADJUSTMENTS FOR STOCK SPLITS AND SUBDIVISIONS. In
the event the Corporation should at any time or from time to time after the
date of issuance hereof fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such
holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise hereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price shall be appropriately decreased so that the number of
shares of Common Stock issuable upon conversion of the Series C Preferred
shall be increased in proportion to such increase of outstanding shares.
(iv) ADJUSTMENTS FOR REVERSE STOCK SPLITS. If the number
of shares of Common Stock outstanding at any time after the date hereof is
decreased by a combination of the outstanding shares of Common Stock, then,
following the record date of such combination, the Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion hereof shall be decreased in proportion to such decrease in
outstanding shares.
(v) RECAPITALIZATIONS. If at any time or from time to
time there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction provided for
elsewhere in this Section 3 or Section 2) provision shall be made so that the
holders of the Series C preferred shall thereafter be entitled to receive upon
conversion of the Series C Preferred the number of shares of stock of other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3 with respect to the rights of
the holders of the Series C Preferred after the recapitalization to the end that
the provisions of this Section 3 (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of the
Series C Preferred) shall be applicable after that event as nearly equivalent as
may be practicable.
8
<PAGE>
(e) NO IMPAIRMENT. Except for taking the actions contemplated
by Section 6 below upon obtaining the vote or consent set forth therein, the
Corporation will not, by amendment of its Certificate of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but it will at all times in good
faith assist in the carrying out of all of the provisions of this Section 3 and
in the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series C Preferred against
impairment.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of the Series C Preferred
pursuant to this Section 3, the Corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such Series C Preferred a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Series C Preferred,
furnish or cause to be furnished to such holder a like certificate setting forth
(A) such adjustment and readjustment, (B) the Conversion Price at the time in
effect, and (C) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of a
share of Series C Preferred.
(g) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of the record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the Corporation
shall mail to each holder of Series C Preferred, at least twenty (20) days prior
to the date specified herein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend or distribution.
(h) RESERVATION OF STOCK. The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock solely for the purpose of effecting the conversion of the shares of the
Series C Preferred such number of its shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all outstanding shares of
Series C Preferred; and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
the then outstanding shares of the Series C Preferred, the Corporation will take
such corporate action as may be necessary, in the opinion of its counsel, to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(i) NOTICES. Any notice required by the provisions of this
Section 3 to be given to the holders of shares of Series C Preferred shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his or her address appearing on the books
of the Corporation.
4. REDEMPTION. The Series C Preferred shall not be redeemable.
9
<PAGE>
5. VOTING MATTERS. Except as otherwise required by law, each share
of Series C Preferred issued and outstanding shall have the number of votes
equal to the number of shares of Common Stock into which the Series C Preferred
is convertible pursuant to Section 3 hereof. The holder of each share of Series
C Preferred shall be entitled to notice of any stockholders' meeting in
accordance with the bylaws of the Corporation, and shall vote with the holders
of the Common Stock upon any matter submitted to a vote of stockholders, except
those matters required by law to be submitted to a class vote.
6. COVENANT. In addition to any other rights provided by law, so
long as any Series C Preferred shall be outstanding, the Corporation shall not,
without first obtaining the affirmative written consent of the holders of not
less than seventy-five percent (75%), or two-thirds following the sale by the
Company or shares of Series C Preferred having an aggregate purchase price of at
least $6,000,000,of the then outstanding shares of all series of Preferred Stock
voting together as a single class:
(a) alter or change the rights, preferences or privileges of the
shares of the Series C Preferred;
(b) increase or decrease the authorized number of shares of
Series C Preferred;
(c) authorize or create any new class of shares or additional
series of Preferred Stock having rights, preferences or privileges prior to
shares of the Series C Preferred,
if such Series C Preferred would be adversely affected by such
amendment in a manner different from other than outstanding shares of Preferred
Stock (it being understood that, without limiting the foregoing, different
shares of Preferred Stock shall not be affected differently because of
differences in the amounts of their respective issue prices, liquidation
preferences and redemption prices).
7. RESIDUAL RIGHTS. All rights accruing to the outstanding shares
of the Corporation not expressly provided for to the contrary herein shall be
vested in the Common Stock.
10
<PAGE>
IN WITNESS WHEREOF, said Conductus, Inc. has caused this Certificate
of Designation to be signed by the undersigned on this 22nd day of December,
1999.
CONDUCTUS, INC.
/s/ Charles Shalvoy
--------------------------------------
Charles E. Shalvoy, President
Attest:
/s/ Brooks Stough
- ----------------------------
Brooks Stough, Secretary
11
<PAGE>
Exhibit 10.35
SERIES C PREFERRED STOCK AND WARRANT
PURCHASE AGREEMENT
This SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (the
"Agreement") dated December 10, 1999 is entered into by and between
Conductus, Inc., a Delaware corporation (together with its successors, the
"Company"), and the investor set forth on the signature page attached hereto
("Investor").
Unless otherwise defined herein, capitalized terms used herein and
not defined herein shall have the meanings given to them under the Securities
Act of 1933, as amended (the "Securities Act").
The parties hereto agree as follows:
1. PURCHASE AND SALE. In consideration of and upon the basis of
the representations, warranties and agreements and subject to the terms and
conditions set forth in this Agreement:
a. Investor agrees to purchase from the Company, and the
Company agrees to sell to Investor, on the Closing Date specified in Section
2 hereof, the number of shares of the Company's Series C Preferred Stock (the
"Preferred Shares") set forth on the signature page attached hereto for a
price per share equal to $40.00 (the "Purchase Price") and a warrant, in the
form attached hereto as EXHIBIT A, to purchase that number of shares of
Common Stock of the Company equal to 200% of the Preferred Shares purchased
hereunder (rounded to the nearest whole number) at an exercise price per
share equal to $4.00 (the "Warrant"). Each Preferred Share shall be
convertible into ten shares of Common Stock as set forth in the Certificate
of Designation attached hereto as EXHIBIT B. (the "Certificate of
Designation"). On or before the Closing Date (as defined below), the Company
will have authorized the sale and issuance to Investor of the Preferred
Shares, having the rights, preferences and priviledges set forth in the
Certificate of Designation. The Company and Investor acknowledges and agrees
that the aggregate value of the Warrants and the portion of the purchase
price hereunder to be allocated to the Warrants shall be a total amount equal
to $0.03 per share.
b. The term "Conversion Stock" shall mean any shares of the
Company's common stock, par value $0.0001 per share (the "Common Stock"),
issued or to be issued to Investor upon conversion of the Preferred Shares
pursuant to the terms of this Agreement and the Certificate of Designation or
upon the exercise of the Warrant.
2. CLOSING.
a. The closing of the sale of the Preferred Shares and the
Warrant (the "Closing") shall take place on December 20, 1999 upon
satisfaction or, if applicable, waiver of the conditions set forth in
Sections 6 and 7 hereof, or at such other date and time as the Investor and
the Company shall mutually agree (such date and time and any subsequent
closing pursuant to Section being referred to herein as the "Closing Date").
<PAGE>
b. At the Closing, the Company shall deliver to Investor (i) a
certificate representing the Preferred Shares that Investor is purchasing and
(ii) the Warrant, duly registered on the books of the Company in the name of
Investor, against payment by Investor of the Purchase Price by check or wire
transfer of immediately available funds.
c. The Company may sell up to the balance of the authorized
number of shares of Series C Preferred Stock not sold at the Closing to such
purchasers as it shall select, such new purchasers to become parties hereto by
executing a signature page hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Investor as follows:
a. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to carry on its business as now
conducted and as proposed to be conducted. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its business or
properties.
b. All corporate action on the part of the Company, its
officers and directors necessary for the authorization, execution and delivery
of this Agreement, the performance of all obligations of the Company hereunder
and thereunder, and the authorization, issuance (or reservation for issuance),
sale and delivery of the Preferred Shares and the Warrant being sold hereunder
and the Conversion Stock has been taken or will be taken prior to the Closing,
and this Agreement constitutes a valid and legally binding obligation of the
Company, enforceable in accordance with their respective terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
c. The Company is not in violation or default of any provision
of its Amended and Restated Certificate of Incorporation or bylaws, or of any
judgment, order, writ, or decree by which it is bound. The Company is not in
violation or default in any material respect of any instrument or contract to
which it is a party or by which it is bound, or, to its knowledge, of any
provision of any federal or state statute, rule or regulation applicable to the
Company, which violation or default would have a material adverse effect on its
business or properties. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
assets of the Company or the suspension, revocation, impairment, forfeiture, or
nonrenewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations or any of its assets or
properties.
d. No consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the consummation of the
2
<PAGE>
transactions contemplated by this Agreement, except (i) the filing of the
Certificate of Designation with the Secretary of State of Delaware; and (ii)
the filing pursuant to Regulation D promulgated by the Securities and
Exchange Commission under the Securities Act, which filing will be effected
within 15 days of the sale of the Preferred Shares hereunder, or such other
post-closing filings as may be required.
e. Except as disclosed in the SEC Filings (as defined below)
(i) there is no action, suit, proceeding or investigation pending or, to the
Company's knowledge, currently threatened against the Company that questions the
validity of this Agreement or the right of the Company to enter into such
agreements, or to consummate the transactions contemplated hereby, and (ii)
there is no action, suit, proceeding or investigation pending or, to the
knowledge of the Company, currently threatened in writing against the Company,
or against any executive officer or director of the Company which might result,
either individually or in the aggregate, in any material adverse change in the
business, properties, financial condition or operating results of the Company,
as such business is presently conducted.
f. The Company has filed all filings with the United States
Securities and Exchange Commission (the "SEC") under the Securities Act or under
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or under the rules and regulations promulgated by the SEC (any
such filing, an "SEC Filing") required to be filed by the Company pursuant to
such acts and no SEC Filing contained, on the date on which such document was
filed with the SEC, any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements, in the light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in SEC Filings
(including any similar documents filed after the date of this Agreement) comply
as to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto), and fairly present the consolidated financial position of
Company and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).
g. Since the date of the Company's most recent quarterly report
on Form 10-Q or most recent periodic report on Form 8-K filed with the SEC,
there has not been any development that has not otherwise been publicly
disclosed that is reasonably likely to result in any material adverse change in
the financial condition or results of operations of the Company.
h. Except as disclosed in the SEC Filings and as contemplated
hereby, the Company has not granted or agreed to grant any registration rights,
including piggy-back rights, to any person or entity.
i. As of December 10, 1999, the authorized capital stock of the
Company consisted of 5,000,000 shares of Preferred Stock, 50,000 of which have
been
3
<PAGE>
designated Series A Junior Participating Preferred Stock ("Series A Preferred
Stock"), none of which are issued and outstanding, 4,500,000 of which have
been designated Series B Preferred Stock ("Series B Preferred Stock"),
2,461,227 shares of which are issued and outstanding, 400,000 of which have
been designated Series C Preferred Stock, none of which are issued and
20,000,000 shares of Common Stock, 7,156,716 shares of which are issued and
outstanding (the "Series A Preferred Stock", "Series B Preferred Stock",
"Series C Preferred Stock" and the "Common Stock" are collectively referred
to herein as the "Capital Stock"). All of the issued and outstanding shares
of Capital Stock have been duly authorized, validly issued and are fully paid
and nonassessable.
j. The Preferred Shares and the Warrant that are being
purchased by the Investor hereunder, when issued, sold or delivered in
accordance with the terms hereof, for the consideration expressed herein, and
the Conversion Stock, upon issuance in accordance with the terms of the
Certificate of Designation, will be duly and validly issued, fully paid and
nonassessable and will be free of any liens and encumbrances created by the
Company and, subject to the accuracy of the representations of the Investor in
this Agreement, will be issued in compliance with all applicable federal and
state securities laws.
4. REPRESENTATIONS AND WARRANTIES OF INVESTOR. Investor hereby
represents and warrants to the Company on the date hereof, and agrees with the
Company (unless otherwise specified as provided in the paragraphs below), as
follows:
a. Investor understands that no United States federal or state
agency has passed on, reviewed or made any recommendation or endorsement of the
Preferred Shares, the Warrant or the Conversion Stock.
b. Investor has full power and authority to enter into this
Agreement and such Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
c. This Agreement is made with Investor in reliance upon
Investor's representation to the Company, which by Investor's execution of this
Agreement Investor hereby confirms, that the Preferred Shares to be received by
Investor, the Warrant and the Conversion Stock (collectively, the "Securities")
will be acquired for investment for Investor's own account, not as a nominee or
agent, and not with a present view to the resale or distribution of any part
thereof, and that Investor has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, Investor further represents that Investor does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
d. Investor is an investor in securities of companies in the
development stage and acknowledges that it can bear the economic risk of its
investment, and has
4
<PAGE>
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the
Securities. Investor also represents it has not been organized for the
purpose of acquiring the Securities.
e. Investor is an "accredited investor" within the meaning of
SEC Rule 501(a) of Regulation D, as presently in effect and all representations
made by Investor in that certain Investor Questionnaire completed by Investor
and delivered to the Company are true and correct in all respects as if made on
the date hereof.
f. Investor understands that the Securities are being offered
and sold in reliance on a transactional exemption from the registration
requirements of Federal and state securities laws and that the Company is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings of the Investor set forth herein
in order to determine the applicability of such exemptions and the suitability
of the Investor to acquire the Securities.
g. Investor understands that the Securities it is purchasing
are characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act,
only in certain limited circumstances. In this connection, Investor represents
that it is familiar with SEC Rule 144, as presently in effect, and understands
the resale limitations imposed thereby and by the Securities Act.
h. Without in any way limiting the representations set forth
above, Investor further agrees not to make any disposition of all or any portion
of the Securities unless and until the transferee has agreed in writing for the
benefit of the Company to be bound by the terms of this Agreement provided and
to the extent such terms are then applicable, and:
(1) There is then in effect a Registration Statement
under the Securities Act covering such proposed disposition and such disposition
is made in accordance with such Registration Statement; or
(2) (i) Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, Investor shall have furnished the Company
with an opinion of counsel, reasonably satisfactory to the Company that such
disposition will not require registration of such shares under the Securities
Act. It is agreed that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144 except in circumstances that require a
designation of an entity's status as an "affiliate".
i. It is understood that the certificates evidencing the
Securities will bear the following legends:
5
<PAGE>
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT."
j. The execution, delivery and performance of this Agreement
and the consummation by Investor of the transactions contemplated hereby do not
and will not (i) result in a violation of Investor's charter documents or bylaws
or (ii) conflict with any material agreement, indenture or instrument to which
Investor is a party, or (iii) result in a violation of any order, judgment or
decree of any court or governmental agency applicable to Investor or, to the
Investor's knowledge, of any law, rule, or regulation. Investor is not required
to obtain any consent or authorization of any governmental agency in order for
it to perform its obligations under this Agreement.
5. COVENANTS.
a. The Company covenants and agrees with Investor as follows:
(1) For so long as any of the Preferred Shares are
outstanding, and in any case for a period of 40 calendar days thereafter, the
Company will cause its Common Stock to continue to be registered under Sections
12(b) or 12(g) of the Exchange Act, will comply in all respects with its
reporting and filing obligations under said act, and will not take any action or
file any document (whether or not permitted by the Securities Act or the
Exchange Act or the rules thereunder) to terminate or suspend its reporting and
filing obligations under said acts, except as permitted herein. For so long as
any of the Preferred Shares are outstanding, and in any case for a period of 40
calendar days thereafter, the Company will use commercially reasonable efforts
to continue the listing or trading of its Common Stock on the Nasdaq Stock
Market ("Nasdaq") or on a national securities exchange (as defined in the
Exchange Act) and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the National
Association of Securities Dealers and Nasdaq. Notwithstanding the foregoing,
the provisions of this subsection shall not in any way restrict the Company's
ability to negotiate and consummate the consolidation, reorganization or merger
of the Company with or into any other corporation or corporations or a sale,
conveyance, or other disposition of all or substantially all of the Company's
property or business.
(2) The Company will (i) comply with the terms and
conditions of the Preferred Shares as set forth in the Certificate of
Designation and (ii) not amend the Certificate of Designation without the
express written consent of holders of 66 2/3% of the then outstanding Series C
Preferred Stock.
(3) For so long as any of the Preferred Shares and the
Warrant are outstanding, the Company shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Stock, for issuance upon conversion of such
6
<PAGE>
Preferred Shares or upon exercise of such Warrant, not less than the maximum
number of shares of Conversion Stock then so issuable.
b. The Investor covenants and agrees with the Company that (i)
neither Investor nor any of Investor's affiliates nor any person acting on its
or their behalf will at any time offer or sell any Preferred Shares, the Warrant
or any Conversion Stock other than pursuant to registration under the Securities
Act or pursuant to an available exemption therefrom, and (ii) that such Investor
shall report to the Company Sales made pursuant to a registration statement
under Section 6 below.
c. The covenants contained in this Section 5 shall terminate
upon the consummation of any consolidation, reorganization or merger of the
Company with or into any other corporation or corporations or a sale,
conveyance, or other disposition of all or substantially all of the Company's
property or business.
d. With a view to making available the benefits of certain
rules and regulations of the SEC that may at any time permit the sale of the
restricted securities to the public without registration, the Company agrees to:
(1) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date of the first registration under the Securities
Act filed by the Company for an offering of its securities to the general
public;
(2) Use its best efforts to then file with the SEC in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(3) So long as Investor owns any Preferred Shares, to
furnish to the Investor upon request, a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 and of the
Securities Act and of the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as the Investor may reasonably request in availing itself of any rule or
regulation of the SEC allowing the Investor to sell any such securities without
registration.
6. REGISTRATION RIGHTS.
a. REGISTRATION OF SHARES. The Company shall file with the
SEC, as promptly as practicable following the Closing and in any event within
120 days after the Closing, a registration statement under the Securities Act
covering the resale to the public by the Investor of the Conversion Stock (the
"Registration Statement"). The Company shall use its best efforts to cause the
Registration Statement to be declared effective by the SEC as soon as
practicable and in any event within 180 days after the Closing. The Company
shall cause the Registration Statement to remain effective until the later of 2
years from the Closing Date or such time as all Conversion Stock may be sold
under Rule 144 within a ninety (90) day period (assuming
7
<PAGE>
exercise of all Warrants and conversion of all Preferred Shares) or such
earlier time as all of the Conversion Stock covered by the Registration
Statement have been sold pursuant thereto.
b. LIMITATIONS ON REGISTRATION RIGHTS.
(1) The Company may, by written notice to the Investor,
(x) delay the filing or effectiveness of the Registration Statement (for up to a
total of sixty (60) days) or (y) suspend (for up to a total of seventy-five (75)
days within any twelve-month period) the Registration Statement after
effectiveness and require that the Investor immediately cease sales of shares
pursuant to the Registration Statement, in the event and during such period as
the Company determines that the existence of any fact or the happening of any
event (including without limitation pending negotiations relating to, or the
consummation of, a transaction or the occurrence of any other event) would
require additional disclosure of material information by the Company in the
Registration Statement the confidentiality of which the Company has a business
purpose to preserve or which fact or event would render the Company unable to
comply with SEC requirements (in either case, a "Suspension Event"). In the
case of any Suspension Event occurring prior to and delaying the filing of the
Registration Statement, the Company shall file the Registration Statement, the
Company shall be required to keep the Registration Statement effective until the
earlier of (x) such time as all of the shares offered thereby have been disposed
of in accordance with the intended methods of distribution set forth in the
Registration Statement or (y) the period required by Section 6.a above plus an
extended period equal to the number of days during which any such suspension was
in effect.
(2) If the Company delays or suspends the Registration
Statement or requires the Investor to cease sales of shares pursuant to
paragraph (1) above, the Company shall, as promptly as practicable following the
termination of the circumstance which entitled the Company to do so, take such
actions as may be necessary to file or reinstate the effectiveness of the
Registration Statement and/or give written notice to all Investors authorizing
them to resume sales pursuant to the Registration Statement. If as a result
thereof the prospectus included in the Registration Statement has been amended
to comply with the requirements of the Securities Act, the Company shall enclose
such revised prospectus with the notice to Investor given pursuant to this
paragraph 2, and the Investor shall make no offers or sales of shares pursuant
to the Registration Statement other than by means of such revised prospectus.
c. REGISTRATION PROCEDURES.
(1) In connection with the filing by the Company of the
Registration Statement, the Company shall furnish to each Investor a copy of the
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act and such additional copies as are reasonably
requested by the Investor.
8
<PAGE>
(2) The Company shall use its best efforts to register
or qualify the Conversion Stock covered by the Registration Statement under the
securities laws of such states as the Investor shall reasonably request;
PROVIDED, HOWEVER, that the Company shall not be required in connection with
this paragraph (ii) to qualify as a foreign corporation or execute a general
consent to service of process in any jurisdiction.
(3) If the Company has delivered final prospectuses to
the Investor and after having done so the prospectus is amended to comply with
the requirements of the Securities Act, the Company shall promptly notify the
Investor and, if requested by the Company, the Investor shall immediately cease
making offers or sales of shares under the Registration Statement and return all
prospectuses to the Company. The Company shall promptly provide the Investor
with revised prospectuses and, following receipt of the revised prospectuses,
the Investor shall be free to resume making offers and sales under the
Registration Statement.
(4) The Company shall pay the expenses incurred by it in
complying with its obligations under this Section 6, including all registration
and filing fees, exchange listing fees, fees and expenses of counsel for the
Company, and fees and expenses of accountants for the Company, but excluding (x)
any brokerage fees, selling commissions or underwriting discounts incurred by
the Investor in connection with sales under the Registration Statement and (y)
the fees and expenses of any counsel retained by Investor.
d. REQUIREMENTS OF INVESTOR. The Company shall not be required
to include any Conversion Stock in the Registration Statement unless the
Investor owning such shares furnishes to the Company in writing such information
regarding such Investor and the proposed sale of Conversion Stock by such
Investor as the Company may reasonably request in writing in connection with the
Registration Statement or as shall be required in connection therewith by the
SEC or any state securities law authorities.
e. ASSIGNMENT OF RIGHTS. An Investor may not assign any of its
rights under this Section 6 except in connection with the transfer of some or
all of his or her Preferred Shares or Conversion Stock to a child or spouse, an
affiliated entity, charitable trust or trust for their benefit or to the limited
or general partner of a Investor, PROVIDED each such transferee agrees in a
written instrument delivered to the Company to be bound by the provisions of
this Section 6.
f. INDEMNIFICATION.
(1) To the extent permitted by law, the Company shall
indemnify and hold each
9
<PAGE>
Investor, the partners or officers, directors and stockholders of each
Investor, legal counsel and accountants for each Investor, any underwriter
(as defined in the Securities Act) for such Investor and each person, if any,
who controls such Investor or underwriter within the meaning of the
Securities Act or the Exchange Act, against any losses, claims, damages or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or any state securities laws, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations in connection with the Registration Statement (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities laws or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities laws; and the Company will
reimburse each such Investor, underwriter or controlling person for any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this subsection
6.f(1) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such ase for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based
upon a Violation that occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration
by any such Investor, underwriter or controlling person; provided further,
however, that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any Investor or
underwriter, or any person controlling such Investor or underwriter, from
whom the person asserting any such losses, claims, damages or liabilities
purchased shares in the offering, if the Company shall have furnished to the
Investor a revised prospectus (by amendment or supplement) which cures the
defect giving rise to such loss, claim, damage or liability and if a copy of
such revised prospectus (as then amended or supplemented) was not sent or
given by or on behalf of such Investor or underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the shares to such person.
(2) To the extent permitted by law, each selling
Investor shall indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the registration statement, each person, if
any, who controls the Company within the meaning of the Securities Act, legal
counsel and accountants for the Company, any underwriter, any other Investor
selling securities in such registration statement and any controlling person of
any such underwriter or other Investor, against any losses, claims, damages or
liabilities (joint or several) to which any of the foregoing persons may become
subject, under the Securities Act, the Exchange Act or any state securities
laws, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with
10
<PAGE>
written information furnished by such Investor expressly for use in
connection with such registration; and each such Investor will reimburse any
person intended to be indemnified pursuant to this subsection 6.f(2), for any
legal or other expenses reasonably incurred by such person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this subsection
6.f(2) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the
consent of the Investor (which consent shall not be unreasonably withheld),
provided that in no event shall any indemnity under this subsection 6.f(2)
exceed the gross proceeds from the offering received by such Investor.
(3) Promptly after receipt by an indemnified party under
this Section 6.f of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6.f, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be inappropriate due to
actual or potential differing interests between such indemnified party and any
other party represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 6.f, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 6.f.
(4) If the indemnification provided for in this Section
6.f is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or expense
referred to herein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relevant intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(5) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
11
<PAGE>
7. CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS. The obligations
of Investor under subsection 1.a of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, unless
expressly waived in writing by the Investor:
a. The representations and warranties of the Company contained
in Section 3 shall be true on and as of the Closing with the same effect as
though such representations and warranties had been made on and as of the date
of such Closing, except for representations and warranties made as of a
particular date, which shall be true and correct as of such date.
b. The Company shall have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
c. The President of the Company shall deliver to Investor at
the Closing a certificate stating that the conditions specified in Sections 7.a
and 7.b have been fulfilled and stating that there shall have been no material
adverse change in the business, affairs, operations, properties, assets or
financial condition of the Company since the date of this Agreement.
d. The Company shall have caused the Certificate of Designation
to be filed with the Secretary of State of the State of Delaware in accordance
with the laws thereof.
e. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement.
f. The Company shall have delivered to Investor a certificate
representing the Preferred Shares, duly registered on the books of the Company
in the name of the Investor.
g. The Company shall have delivered to Investor the Warrant.
h. Investor shall have received from Orrick, Herrington &
Sutcliffe, LLP, counsel for the Company, an opinion, dated as of the Closing
Date, in substantially the form attached hereto as EXHIBIT C.
i. The Company shall have received aggregate proceeds from the
sale of the Preferred Shares and Warrants in the amount of not less than
$6,000,000.
8. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS. The
obligations of the Company to Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by the
Investor, unless expressly waived in writing by the Company:
12
<PAGE>
a. The representations and warranties of the Investor contained
in Section 4 shall be true on and as of the Closing with the same effect as
though such representations and warranties had been made on and as of the date
of such Closing, except for representations and warranties made as of a
particular date, which shall be true and correct as of such date.
b. The Investor shall have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
c. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement.
d. The Investor shall have delivered the aggregate Purchase
Price for the Preferred Shares and the Warrant.
e. The Company shall have caused the Certificate of Designation
to be filed with the Secretary of State of the State of Delaware in accordance
with the laws thereof.
9. FEES AND EXPENSES. Each of Investor and the Company agrees to
pay its own expenses incident to the performance of its obligations hereunder,
including, but not limited to the fees, expenses and disbursements of such
party's counsel, except as is otherwise expressly provided in this Agreement.
10. SURVIVAL OF THE REPRESENTATIONS, WARRANTIES, ETC. The respective
representations, warranties, and agreements made herein by or on behalf of the
parties hereto shall remain in full force and effect for a period of two years
from the Closing Date, regardless of any investigation made by or on behalf of
the other party to this Agreement or any officer, director or employee of, or
person controlling or under common control with, such party and will survive
delivery of and payment for the Preferred Shares and any Conversion Stock
issuable hereunder.
11. TERMINATION.
a. This Agreement may be terminated and the transactions
contemplated by this Agreement may be abandoned at any time prior to the Closing
as follows:
(i) by mutual written consent of the Company and the
Investor; or
(ii) by either the Company or the Investor if the Closing
shall not have occurred on or before January 31, 2000 (the "Termination Date");
provided, however, that the right to terminate this Agreement under this
Section 11 shall not be available to any party
13
<PAGE>
whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Closing to occur on or before
the Termination Date.
b. In the event of termination of this Agreement by either the
Company or Investor as provided in this Section 11, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of the Company or Investor, other than the provisions of this
Section 11 and Section 13, and except to the extent that such termination
results from the willful and material breach by a party of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
12. NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon delivery by confirmed facsimile or reliable international
courier service or upon personal delivery to the party to be notified.
13. MISCELLANEOUS.
a. This Agreement may be executed in one or more counterparts
and it is not necessary that signatures of all parties appear on the same
counterpart, but such counterparts together shall constitute but one and the
same agreement.
b. This Agreement shall inure to the benefit of and be binding
upon the parties hereto, their respective successors and assigns.
c. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California without regard to
principles of conflict of laws.
d. The provisions of this Agreement are severable, and if any
clause or provision hereof shall be held invalid, illegal or unenforceable in
whole or in part, such invalidity or unenforceability shall not in any manner
affect any other clause or provision of this Agreement.
e. The headings of the sections of this document have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement.
f. This Agreement (including the terms and conditions of the
Certificate of Designation relating to the Preferred Shares) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, between the parties hereto with respect to the subject matter
of this Agreement and is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder or under the terms of the term
sheets between such parties.
g. The term "affiliate" is used herein as defined in Rule
144(a)(1) under the Securities Act.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement, all as of the day and year first above written.
CONDUCTUS, INC.
By: ________________________________
Name:
Title:
No. of Preferred Shares _____________ INVESTOR
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.36
THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON THE EXERCISEHEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, OR AN OPINON OF COUNSEL SATISFACTORY
TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR
UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT.
WARRANT TO PURCHASE COMMON STOCK
OF
CONDUCTUS, INC.
VOID AFTER DECEMBER 10, 2004
No. ___
This Warrant is issued to ______________ or its registered assigns
("Holder") by CONDUCTUS, INC., a Delaware corporation (the "Company"), on
December 10, 1999 (the "Warrant Issue Date"). This Warrant is issued pursuant
to the terms of that certain Series C Preferred Stock and Warrant Purchase
Agreement dated as of December 10, 1999 (the "Purchase Agreement") by and
between the Company and Holder.
1. PURCHASE SHARES. Subject to the terms and conditions hereinafter
set forth, the Holder is entitled, upon surrender of this Warrant at the
principal office of the Company (or at such other place as the Company shall
notify the Holder in writing), to purchase from the Company up to _____________
(_______) fully paid and nonassessable share of Common Stock of the Company, as
constituted on the Warrant Issue Date (the "Common Stock"). The number of
shares of Common Stock issuable pursuant to this Section 1 (the "Shares") shall
be subject to adjustment pursuant to Section 8 hereof.
2. EXERCISE PRICE. The purchase price for the Shares shall be
$4.00, as adjusted from time to time pursuant to Section 8 hereof (the "Exercise
Price").
3. EXERCISE PERIOD. This Warrant shall be exercisable, in whole or
in part, during the term commencing on the date six months following the Warrant
Issue Date and ending at 5:00 p.m. on December 10, 2004; provided, however, that
in the event of (a) the closing of the Company's sale or transfer of all or
substantially all of its assets, or (b) the closing of the acquisition of the
Company by another entity by means of merger, consolidation or other transaction
or series of related transactions, resulting in the exchange of the outstanding
shares of the Company's capital stock such that at least 50% of the voting power
of the Company is transferred, this Warrant shall, on the date of such event, no
longer be exercisable and become null and void. In the event of a proposed
transaction of the kind described above, the Company
<PAGE>
shall notify Holder at least fifteen (15) business days prior to the
consummation of such event or transaction.
4. METHOD OF EXERCISE. While this Warrant remains outstanding and
exercisable in accordance with Section 3 above, the Holder may exercise, in
whole or in part, the purchase rights evidenced hereby. Such exercise shall be
effected by:
(a) the surrender of the Warrant, together with a duly executed
copy of the form of Notice of Election attached thereto, to the Secretary of the
Company at its principal offices; and
(b) the payment to the Company of an amount equal to the
aggregate Exercise Price for the number of Shares being purchased.
5. NET EXERCISE. In lieu of exercising this Warrant pursuant to
Section 4, the Holder may elect to receive, without payment by the Holder of any
additional consideration, shares of Common Stock equal to the value of this
Warrant (or the portion thereof being canceled) by surrender of this Warrant at
the principal office of the Company together with notice of such election, in
which event the Company shall issue to the Holder a number of shares of Common
Stock computed using the following formula:
X = Y (A - B)
---------
A
Where: X = The number of shares of Common Stock to be issued to the
Holder pursuant to this net exercise;
Y = The number of Shares in respect of which the net issue
election is made;
A = The fair market value of one share of the Common Stock at
the time the net issue election is made;
B = The Exercise Price (as adjusted to the date of the net
issuance).
For purposes of this Section 5, the fair market value of one share of Common
Stock as of a particular date shall be determined as follows: (i) if traded on
a securities exchange or through the Nasdaq National Market, the value shall be
deemed to be the average of the closing prices of the securities on such
exchange over the thirty (30) day period ending three (3) days prior to the net
exercise election; (ii) if traded over-the-counter, the value shall be deemed to
be the average of the closing bid or sale prices (whichever is applicable) over
the thirty (30) day period ending three (3) days prior tot he net exercise; and
(iii) if there is no active public market, the value shall be the fair market
value thereof, as determined in good faith by the Board of Directors of the
Company.
6. CERTIFICATES FOR SHARES. Upon the exercise of the purchase
rights evidenced by this Warrant, one or more certificates for the number of
Shares so purchased shall
2
<PAGE>
be issued as soon as practicable thereafter (with appropriate restrictive
legends, if applicable), and in any event within thirty (30) days of the
delivery of the subscription notice.
7. ISSUANCE OF SHARES. The Company covenants that the Shares, when
issued pursuant to the exercise of this Warrant, will be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens, and charges
with respect to the issuance thereof.
8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES. The number
of and kind of securities purchasable upon exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time as follows:
(a) SUBDIVISIONS, COMBINATIONS OR OTHER ISSUANCES. If the
Company shall at any time prior to the expiration of this Warrant subdivide its
Common Stock, by split-up or otherwise, or combine its Common Stock, or issue
additional shares of its Common Stock as a dividend with respect to any shares
of its Common Stock, the number of Shares issuable on the exercise of this
Warrant shall forthwith be proportionately increased in the case of a
subdivision or stock dividend, or proportionately decreased in the case of a
combination. Appropriate adjustments shall also be made to the purchase price
payable per share, but the aggregate purchase price payable for the total number
of Shares purchasable under this Warrant (as adjusted) shall remain the same.
Any adjustment under this Section 8(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective, or as of
the record date of such dividend, or in the event that no record date is fixed,
upon the making of such dividend.
(b) RECLASSIFICATION, REORGANIZATION AND CONSOLIDATION. In case
of any reclassification, capital reorganization, or change in the Common Stock
of the Company (other than as a result of a subdivision, combination, or stock
dividend provided for in Section 8(a) above), then, as a condition of such
reclassification, reorganization, or change, lawful provision shall be made, and
duly executed documents evidencing the same from the Company or its successor
shall be delivered to the Holder, so that the Holder shall have the right at any
time prior to the expiration of this Warrant to purchase, at a total price equal
to that payable upon the exercise of this Warrant, the kind and amount of shares
of stock and other securities and property receivable in connection with such
reclassification, reorganization, or change by a holder of the same number of
shares of Common Stock as were purchasable by the Holder immediately prior to
such reclassification, reorganization, or change. In any such case appropriate
provisions shall be made with respect to the rights and interest of the Holder
so that the provisions hereof shall thereafter be applicable with respect to any
shares of stock or other securities and property deliverable upon exercise
hereof, and appropriate adjustments shall be made to the purchase price per
share payable hereunder, provided the aggregate purchase price shall remain the
same.
(c) NOTICE OF ADJUSTMENT. When any adjustment is required to be
made in the number or kind of shares purchasable upon exercise of the Warrant,
or in the Warrant Price, the Company shall promptly notify the Holder of such
even and of the number of shares of Common Stock or other securities or property
thereafter purchasable upon exercise of this Warrant.
3
<PAGE>
9. NO FRACTIONAL SALE OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon exercise of this Warrant,
but in lieu of such fractional shares the Company shall make a cash payment
therefor on the basis of the Exercise Price then in effect.
10. NO STOCKHOLDER RIGHTS. Prior to exercise of this Warrant, the
Holder shall not be entitled to any rights of a stockholder with respect to the
Shares, including (without limitation) the right to vote such Shares, receive
dividends or other distributions thereon, exercise preemptive rights or be
notified of stockholder meetings, and such Holder shall not be entitled to any
notice or other communication concerning the business affairs of the Company.
However, nothing in this Section 10 shall limit the right of the Holder to be
provided any notices required under this Warrant or the Purchase Agreement.
11. TRANSFERS OF WARRANT. Subject to compliance with federal and
state securities laws, this Warrant and all rights hereunder are transferrable
in whole or in part by the Holder to any person or entity upon written notice to
the Company. The transfer shall be recorded on the books of the Company upon
the surrender of this Warrant, properly endorsed, to the Company at its
principal offices, and the payment to the Company of all transfer taxes and
other governmental charges imposed on such transfer. In the event of a partial
transfer, the Company shall issue to the holders one or more appropriate new
warrants.
12. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant
and the Purchase Agreement shall inure to the benefit of, and be binding upon,
the Company and the Holders hereof and their respective successors and assigns.
13. AMENDMENTS AND WAIVERS. Any term of this Warrant may be amended
and the observance of any term of this Warrant may be waived (either generally
or in a particular instance and either retroactively or prospectively), with the
written consent of the Company and the Holder. Any waiver or amendment effected
in accordance with this Section shall be binding upon each holder of any Shares
purchased under this Warrant at the time outstanding (including securities into
which such Shares have been converted), each future holder of all such Shares,
and the Company.
14. NOTICES. All notices required under this Warrant and shall be
deemed to have been given or made for all purposes (i) upon personal delivery,
(ii) upon confirmation receipt that the communication was successfully sent to
the applicable number if sent by facsimile, (iii) one day after being sent, when
sent by professional overnight courier service, or (iv) five days after posting
when sent by registered or certified mail. Notices to the Company shall be sent
to the principal office of the Company (or at such other place as the Company
shall notify the Holder hereof in writing). Notices to the Holder shall be sent
to the address of the Holder on the books of the Company (or at such other place
as the Holder shall notify the Company hereof in writing).
15. ATTORNEY'S FEES. If any action or law or equity is necessary to
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to its reasonable attorneys' fees, costs and disbursements in addition
to any other relief to which it may be entitled.
4
<PAGE>
16. CAPTIONS. The section and subsection headings of this Warrant
are inserted for convenience only and shall not constitute a part of this
Warrant in construing or interpreting any provision hereof.
17. GOVERNING LAW. This Warrant shall be governed by the laws of the
State of California as applied to agreements among California residents made and
to be performed entirely within the State of California.
5
<PAGE>
IN WITNESS WHEREOF, the Company caused this Warrant to be executed by
an officer thereunder duly authorized.
CONDUCTUS, INC.
By:
------------------------------------
Charles E. Shalvoy, President and Chief
Executive Officer
6
<PAGE>
NOTICE OF EXERCISE
To: Chief Executive Officer
Conductus, Inc.
969 W. Maude Avenue
Sunnyvale, CA 94086
The undersigned hereby elects to [CHECK APPLICABLE SUBSECTION]:
___ (a) Purchase ______________________ shares of Common Stock of
Conductus, Inc., pursuant to the terms of the attached Warrant
and payment of the Exercise Price per share required under such
Warrant accompanies this notice;
OR
___ (b) Exercise the attached Warrant for [all of the shares]
[ of the shares] [CROSS OUT INAPPLICABLE PHRASE]
purchasable under the Warrant pursuant to the net exercise
provisions of Section 5 of such Warrant.
WARRANTHOLDER:
By:
-------------------------------------
Name:
-----------------------------------
Title:
---------------------------------
Address:
----------------------------------------
----------------------------------------
Date:
----------------------
Name in which shares should be registered:
- ----------------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements of Conductus, Inc. on Form S-1 (File No. 333-70373) and on Form S-8
(File Nos. 333-30086, 333-41099, 333-04672, 033-82454, 033-79946 and 033-74478)
of our reports dated February 15, 2000, on our audits of the financial
statements and financial statement schedule which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,956,508
<SECURITIES> 2,121,274
<RECEIVABLES> 1,381,724
<ALLOWANCES> 0
<INVENTORY> 1,266,200
<CURRENT-ASSETS> 17,032,045
<PP&E> 9,583,680
<DEPRECIATION> 8,209,326
<TOTAL-ASSETS> 18,596,782
<CURRENT-LIABILITIES> 3,348,309
<BONDS> 0
10,777,675
0
<COMMON> 726
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,596,782
<SALES> 0
<TOTAL-REVENUES> 7,797,863
<CGS> 0
<TOTAL-COSTS> 10,914,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 338,461
<INCOME-PRETAX> (3,335,580)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,335,580)
<EPS-BASIC> (.57)
<EPS-DILUTED> (.57)
</TABLE>
