<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 0-11915
CONDUCTUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0162388
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
969 W. MAUDE AVE.
SUNNYVALE, CA 94086
(Address of principal executive offices)
(408) 523-9950
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
--- ---
As of October 31, 2000 there were 15,788,625 shares of the Registrant's Common
stock outstanding.
<PAGE>
CONDUCTUS, INC.
FORM 10-Q
September 30, 2000
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
------------------------------------ ----
<S> <C> <C>
Item 1: Financial Statement.............................................................................1
Condensed Balance Sheets at September 30, 2000 and December 31, 1999............................1
Condensed Statements of Operations for the Three Months and Nine
Months Ended September 30, 2000 and 1999........................................................2
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999.....................................................................3
Notes to Condensed Financial Statements.........................................................4
Item 2 : Management's Discussion and Analysis of Financial Condition and Results of Operations...........7
Item 3: Quantitative and Qualitative Disclosures About Market Risk.....................................11
PART II: OTHER INFORMATION
--------------------------------
Item 1: Legal Proceedings..............................................................................12
Item 2: Changes in Securities..........................................................................12
Item 3: Default upon Senior Securities.................................................................12
Item 4: Submission of Matters to a Vote of Security Holders............................................12
Item 5: Other Information..............................................................................12
Item 6: Exhibits and Reports on Form 8-K...............................................................13
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDUCTUS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------ ------------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents............................................. $ 19,459 $ 11,957
Short-term investments................................................ 293 2,121
Accounts receivable .................................................. 599 1,382
Inventories........................................................... 2,330 1,266
Prepaid expenses and other current assets............................. 145 306
------------------ ------------------
Total current assets................................................ 22,826 17,032
Property and equipment, net........................................... 1,942 1,375
Other assets.......................................................... 223 190
------------------ ------------------
Total assets........................................................ $ 24,991 $ 18,597
================== ==================
LIABILITIES
Current liabilities:
Accounts payable...................................................... $ 793 $ 1,023
Other accrued liabilities............................................. 1,600 1,573
Current portion of long-term debt..................................... 796 752
------------------ ------------------
Total current liabilities........................................... 3,189 3,348
Long-term debt, net of current portion................................ - 596
------------------ ------------------
Total liabilities................................................... 3,189 3,944
------------------ ------------------
REDEEMABLE PREFERRED STOCK
Preferred stock.......................................................... - 10,778
STOCKHOLDERS' EQUITY
Common stock............................................................. 2 1
Additional paid-in capital............................................... 87,738 52,543
Accumulated deficit...................................................... (65,938) (48,669)
------------------ ------------------
Total stockholders' equity.......................................... 21,802 3,875
------------------ ------------------
Total liabilities and stockholders' equity.......................... $ 24,991 $ 18,597
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
CONDUCTUS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Product sales............................... $ 288 $ 196 $ 422 $ 735
Less non-cash charge for warrants vesting
upon commercial product sales............... (96) - (96) -
--------------- --------------- --------------- ---------------
Net product revenues..................... 192 196 326 735
Contract.................................... 397 294 839 1,642
License and other revenue................... - 11 - 5,011
--------------- --------------- --------------- ---------------
Total net revenues....................... 589 501 1,165 7,388
--------------- --------------- --------------- ---------------
Costs and expenses:
Cost of product sales...................... 1,467 734 3,520 1,900
Research and development................... 1,490 996 3,778 3,150
Selling, general and administrative........ 1,335 963 4,065 3,074
--------------- --------------- --------------- ---------------
Total costs and expenses................. 4,292 2,693 11,363 8,124
--------------- --------------- --------------- ---------------
Loss from operations.......................... (3,703) (2,192) (10,198) (736)
Interest income............................... 342 14 1,083 72
Interest expense.............................. (49) (81) (170) (269)
Other income net.............................. 33 20 107 22
--------------- --------------- --------------- ---------------
Loss before taxes........................ (3,377) (2,239) (9,178) (911)
Tax expense - - (1) (1)
--------------- --------------- --------------- ---------------
Net loss................................. (3,377) (2,239) (9,179) (912)
Dividend accretion and deemed dividend on
preferred stock............................ - (100) (8,090) (411)
--------------- --------------- --------------- ---------------
Net loss attributable to
common stockholders........................ $ (3,377) $ (2,339) $ (17,269) $ (1,323)
=============== =============== =============== ===============
Net loss per share:
Basic and diluted.......................... $ (0.22) $ (0.33) $ (1.39) $ (0.19)
=============== =============== =============== ===============
Shares used in per share calculations:
Basic and diluted.......................... 15,656 7,157 12,452 7,150
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
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CONDUCTUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $ (9,179) $ (912)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............................................ 454 614
Amortization of discount on long term debt............................... 30 34
Gain on the disposal of equipment........................................ (108) -
Non-cash charge for warrants vesting upon commercial product sales....... 96 -
Change in operating assets and liabilities:
Accounts receivable...................................................... 783 (1,627)
Inventories.............................................................. (1,064) (110)
Prepaid expenses and other current assets................................ 161 39
Other assets............................................................. (57) (64)
Accounts payable and other accrued liabilities........................... (115) 226
--------------- ----------------
Net cash used in operating activities................................ (8,999) (1,800)
--------------- ----------------
Cash flows from investing activities:
Maturities of short-term investments..................................... 2,142 1,350
Purchases of short-term investments...................................... (314) (9)
Acquisition of other assets.............................................. - (75)
Proceeds from the sale of assets......................................... 58 -
Acquisition of property and equipment.................................... (997) (100)
--------------- ----------------
Net cash provided by investing activities............................ 889 1,166
--------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock............................... 16,696 21
Costs to register preferred stock........................................ - (58)
Preferred dividend payments.............................................. (502) -
Principal repayments on long-term debt................................... (582) (694)
--------------- ----------------
Net cash provided by (used in) financing activities.................. 15,612 (731)
--------------- ----------------
Net increase (decrease) in cash and cash equivalents..................... 7,502 (1,365)
Cash and cash equivalents at beginning of period............................ 11,957 1,547
--------------- ----------------
Cash and cash equivalents at end of period.................................. $ 19,459 $ 182
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL INFORMATION:
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
unaudited financial statements as of September 30, 2000 and for the three and
nine months ended September 30, 2000 and 1999 include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial information set forth herein. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for an entire year. The December 31, 1999 balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
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. In July 1999,
the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133". SFAS No. 137 deferred the effective date until the
year beginning after June 30, 2000. In June 2000, the Financial Accounting
Standards Board issued SFAS No. 138, "Accounting for Derivative Instruments and
Hedging Activities An Amendment of FASB Statement No. 133". SFAS 138 amends the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency transactions and
intercompany derivatives. The Company will adopt SFAS No. 133 in its quarter
ending March 31, 2001.
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. In
October 2000 the SEC issued guidance on frequently asked questions with respect
to the implementation with regards to SAB 101.
4
<PAGE>
CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2000 1999
------------------- -------------------
(in thousands)
<S> <C> <C>
---------------- ----------------
Expense related to warrants issued in connection with commercial product
sales............................................................... $ 96 $ --
================ ================
Conversion of preferred shares to common stock.......................... $ 18,417 $ --
Conversion of preferred dividend to common stock........................ 517 --
---------------- ----------------
Total............................................................ $ 19,030 --
================ ================
---------------- ----------------
Dividend accretion and deemed dividend on preferred stock............... $ 8,090 $ 411
================ ================
</TABLE>
3. BASIC AND DILUTED NET LOSS PER SHARE:
A reconciliation of the numerator and denominator of the basic and
diluted net loss per share is provided as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator - basic and diluted net loss per share:
Net loss attributable to common stockholders.. $ (3,377) $ (2,339) $ (17,269) $ (1,323)
================== ================== ================== ==================
Denominator - basic and diluted net loss
Weighted average common shares
outstanding................................. 15,656 7,157 12,452 7,150
------------------ ------------------ ------------------ ------------------
Shares used in computing basic loss .......... 15,656 7,157 12,452 7,150
------------------ ------------------ ------------------ ------------------
Net loss per share:
Basic and diluted........................... $ (0.22) $ (0.33) $ (1.39) $ (0.19)
================== ================== ================== ==================
</TABLE>
In the above computations, common equivalent shares are excluded from the
diluted loss per share, as their effect is anti-dilutive. Common equivalent
shares including common stock options, warrants and convertible
5
<PAGE>
CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
preferred stock that could potentially dilute basic net income (loss) per share
in the future and that were not included in the computations of diluted loss per
share because the effect is anti-dilutive were approximately 1,790,000 and
4,925,000 for the three and nine month periods ended September 30, 2000
respectively and 2,710,000 and 2,592,000 for the three and nine month periods
ended September 30, 1999 respectively.
4. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
Raw materials........................................................... $ 1,196 $ 574
Work in process......................................................... 699 401
Finished goods.......................................................... 435 291
------------------- -------------------
$ 2,330 $ 1,266
=================== ===================
</TABLE>
5. STOCKHOLDERS' EQUITY:
During the nine months ended September 30, 2000, all of the Preferred
Series B and Preferred Series C Shares were converted to 2,461,230 and
3,750,000 common shares, respectively.
6. SUBSEQUENT EVENTS:
In August 2000 the Company entered into a transaction with Dobson Cellular
Systems, Inc. to sell a minimum of 200 ClearSite systems to be deployed
nationwide over the next two years. Under the terms of the contract the
Company issued a warrant to purchase up to 500,000 shares of common stock
at $13.43 per share. In order to earn the 500,000 shares, Dobson would be
required to purchase significantly more than the minimum number of systems.
The warrant vests based on the amount of product purchased by Dobson. The
value of the warrants issued will be recorded as a sales discount up to the
amount of revenue recognized and the remainder, if any, as cost of goods
sold in our financial statements.
In October 2000 the Company entered into a lease line of credit
providing for borrowings of up to $2,000,000 for the purchase of
capital equipment. This transaction has an effective date of September 1,
2000. This line of credit is collateralized by equipment purchases and
has an effective interest rate of 9.31%. The Company also granted the
leasing company warrants to purchase up to 10,000 shares of the
Company's common stock at a price equal to $18.75 per share. This line
of credit expires on June 30, 2001, with final payment obligations due
36 months after the final borrowing.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. CONDUCTUS, INC.'S (THE "COMPANY" OR
"CONDUCTUS") ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" IN PART 1 OF
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT ON FORM 10-Q.
OVERVIEW
We develop, manufacture and market electronic components and systems
based on superconductors for applications in the worldwide telecommunications
markets. As of September 30, 2000, we had accumulated losses of approximately
$65,938,000 and we expect to incur significant additional losses during the
remainder of 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 FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999
Total revenues consist primarily of contract revenue, product revenue,
and license revenue. Total gross revenues increased by 37% to $685,000 for the
quarter ended September 30, 2000 from $501,000 in the comparable period of 1999.
Revenues for the nine months ended September 30, 2000 were $1,261,000, which
represents a decrease of 83% over the comparable period of 1999. Net revenues
for the quarter ended September 30, 2000 increased by 18% to $589,000 from
$501,000 for the quarter ended September 30, 1999. Net revenues for the nine
months ended September 30, 2000 were $1,165,000, a decrease of 84% compared to
the net revenues of $7,388,000 for the comparable period in 1999. Excess product
revenues in 2000 have been reduced by a non-cash charge for warrants which vest
upon the sale of commercial products. The decrease in September 30, 2000 year to
date revenues was primarily attributable to the one time recognition of revenue
in 1999 from a General Dynamics licensing transaction and lower product and
contract revenues during the first six months of 2000.
Revenue under U.S. government research and development contracts
represented approximately 58% and 67%, respectively, of total revenue for the
three month and nine month periods ended September 30, 2000 compared to 59% and
22% for the same periods of 1999. The year to date increase in contract revenues
as a percent of the total revenues was primarily due to the impact of license
revenues on total revenues recognized in the comparative periods and to a lessor
extent a reduction in contract revenue during the first six months of the
comparison periods. Contract revenues for the quarter ended September 30, 2000
were $397,000, a $103,000 increase from the comparable period in 1999. This
increase resulted from revenue recognized on two new government contracts
related to our core wireless business, including a subcontract from General
Dynamics under a government funded Defense Advanced Research Projects Agency
program. Contract revenues for the nine months ended September 30, 2000 were
$839,000, a 49% decrease from $1,642,000 in the comparable nine months in 1999.
This decrease was primarily attributable to the decrease in government contracts
and government product sales during the first six months of 2000, which resulted
from the completion of several contracts and delays in the anticipated start
date of new contracts in 2000. We have submitted, or are in the process of
preparing, several proposals related to prospective contracts associated with
our core wireless business and we will continue to submit proposals as
additional programs become available. We believe we will be able to participate
in several of the contracts for which proposals have been submitted or are in
preparation. However, we cannot assure you that we will receive the level of
awards we anticipate. Additionally, the recognition of revenue and receipt of
payment pursuant to these contracts and awards are subject to numerous risks.
Gross product revenues for the three months ended September 30, 2000
increased by 47% to $288,000 from $196,000 in the comparable period of 1999.
This increase is due to an increase in revenues from the Company's wireless
telecommunications products, including initial product shipments to Dobson
Cellular Systems, Inc. For the nine months ended September 30, 2000, product
revenues decreased by 43% to $422,000 from
7
<PAGE>
$735,000 in the comparable period of 1999. This decrease in product revenues was
primarily the result of a decrease in revenue from the sale of the Company's
wireless telecommunications products during the first six months of the
comparison periods and by a 100% decrease in revenue from sales of the Company's
government wireless products.
Cost of product sales was primarily composed of costs of products
related to our wireless telecommunications products. Cost of product sales was
$1,467,000 for the quarter ended September 30, 2000 compared to $734,000 for the
comparable period of 1999. For the nine months ended September 30, 2000, cost of
product sales was $3,520,000 compared to $1,900,000 for the comparable period of
1999. These increases and corresponding decreases in gross margins are primarily
attributable to increases in direct and indirect costs associated with the
buildup of the manufacturing infrastructure necessary to meet future demand.
Research and development includes both externally and internally funded
projects. Research and development expenses were $1,490,000 in the quarter ended
September 30, 2000 compared to $996,000 in the comparable period of the prior
year. For the nine-month period ended September 30, 2000, research and
development expenses were $3,778,000 compared to $3,150,000 in the first nine
months of 1999. Research and development, as a percentage of gross revenue,
represented 217% and 300%, respectively for the three and nine month periods
ended September 30, 2000. This compares to research and development expenses of
199% and 43% as a percentage of revenue for the comparable periods of 1999. The
increase in research and development expense was primarily attributable to an
increase in spending on internally funded projects related to new product
development partially offset by a decrease in externally funded contract
activities during the comparison periods. 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 both as a percentage of revenue and compared to the
prior year during the remainder of 2000.
Selling, general and administrative expenses include costs associated
with marketing, sales, and various administrative activities. Selling, general
and administrative expenses were $1,335,000 and $963,000 in the quarters ended
September 30, 2000 and 1999, respectively. For the nine months ended September
30, 2000 and 1999, selling, general and administrative expenses were $4,065,000
and $3,074,000, respectively. The increase in spending during the comparison
periods was primarily due to increases in expenses related to an overall
increase in headcount as well as increases in legal and administrative
expenses, compared to the prior year. As we continue to focus on the
expansion of the wireless products business, we expect sales and marketing
expenses to continue to increase during 2000.
Interest and other income was $375,000 and $1,190,000 for the three and
nine month periods ended September 30, 2000, respectively. This compared to
$34,000 and $94,000 for the three and nine month periods ended September 30,
1999. The increase in interest income was primarily the result of higher cash
balances and yields on investments in 2000 compared to 1999.
Interest expense was $49,000 and $81,000 for the three months ended
September 30, 2000 and 1999, respectively. For the nine months ended
September 30, 2000, and 1999 interest expense was $170,000 and $269,000,
respectively. The decrease in interest expense was primarily due to lower
average debt balances during the comparison periods.
The net loss recorded for the nine months ended September 30, 2000
includes $464,000 in dividends recorded for Series C Preferred Stock which
were paid in April and August 2000. In addition, $7,626,000 was recognized
for the nine months ended September 30, 2000 for the beneficial conversion
feature on the Series C Preferred Stock, which was recognized as a deemed
dividend to preferred shareholders over a six month period that ended in June
2000.
As a result of incurring losses, we have not incurred any income tax
liability. We have established a valuation allowance against our deferred tax
assets (principally the tax benefit of our net operating losses) and review this
allowance on a periodic basis. At such time that we believe that it is more
likely than not that the deferred tax asset will be realized, the valuation
allowance will be reduced.
8
<PAGE>
We do not believe that inflation has had a material effect on our
financial condition or results of operations during the past two fiscal years.
However, we cannot assure you that our business will not be affected by
inflation in the future.
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,
- $46,724,000 from U.S. government contracts,
- $796,000 in outstanding borrowings under various lease and bank loan
arrangements, and
- $5,029,000 in interest income.
As of September 30, 2000 our aggregate cash, cash equivalents and short
term investments totaled $19,752,000. Additionally, we have a bank line of
credit under which we may borrow up to a maximum of $2,000,000 based on a
limitation of 80% of certain eligible receivables. As of September 30, 2000,
there are no amounts outstanding under the bank line of credit facility.
Net cash used in operations was $8,999,000 during the nine months ended
September 30, 2000. Net cash used in operations was primarily the result of a
net loss of $9,179,000, a reduction in accounts payable and an increase in
inventory partially offset by the effect of non-cash depreciation and
amortization of $454,000, a non-cash charge for warrants that vest upon
commercial product sales of $96,000, and a reduction in accounts receivable. We
anticipate that we will incur significant additional net losses during the
remainder of 2000 and anticipate that our accounts receivable and inventories
may increase as a result of increased working capital requirements to support
wireless telecommunications products. As a result, we anticipate the use of
additional cash in operating activities during the remainder of 2000.
Net cash provided by investing activities was $889,000 during the nine
months ended September 30, 2000. The balance was primarily related to the net
proceeds received from short-term investments during the period partially offset
by investments in additional property and equipment.
Net cash provided by financing activities was $15,612,000 during the
nine months ended September 30, 2000 and was primarily the result of the
financing transaction completed in January, 2000, the exercise of common stock
warrants, and the exercise of stock options partially offset by repayment of
principal on long term debt.
In October 2000 the Company entered into a lease line of credit
providing for borrowings of up to $2,000,000 for the purchase of capital
equipment. This transaction has an effective date of September 1, 2000. This
line of credit is collateralized by equipment purchases and has an effective
interest rate of 9.31%. The Company also granted the leasing company warrants
to purchase up to 10,000 shares of the Company's common stock at a price
equal to $18.75 per share. This line of credit expires on June 30, 2001, with
the final payment obligations due 36 months after the final borrowing.
All of our credit arrangements contain reporting and financial
covenants, which we are required to satisfy. We cannot assure you that we will
satisfy all such covenants in the future. We cannot assure you that if we
default on any of the covenants, we could obtain a waiver of the default from
the lender. In the event of default on any of these covenants, no further
amounts would be advanced to us under any facility, the entire amounts
outstanding could become due and payable immediately upon default, and those
assets that are collateral could be seized, unless such default is waived by the
lender.
9
<PAGE>
To date we have received limited revenues from product sales. The
continued development of our products will require a commitment of substantial
funds to conduct further research and development and testing, to establish
commercial-scale manufacturing and to market these products. We expect to use
significant amounts of cash for capital equipment and to support operations
until product revenues increase. 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 that existing sources of liquidity and anticipated
revenue, primarily from government contracts will satisfy our projected working
capital and other cash requirements through 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 then.
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." 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. In July 1999,
the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133". SFAS No. 137 deferred the effective date until the
year beginning after June 30, 2000. In June 2000, the Financial Accounting
Standards Board issued SFAS No. 138, "Accounting for Derivative Instruments and
Hedging Activities An Amendment of FASB Statement No. 133". SFAS 138 amends the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency transactions and
intercompany derivatives. The Company will adopt SFAS No. 133 in its quarter
ending March 31, 2001.
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. In
October 2000 the SEC issued guidance on frequently asked questions with respect
to the implementation with regards to SAB 101.
10
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Conductus' general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. Our
exposure to financial market risks relates primarily to our exposure to the
impact of changes in interest rates on our fixed income investment portfolio and
long-term debt obligations.
FIXED INCOME INVESTMENTS
The primary objective of our investment activities is to preserve our
principal while maximizing yields without significantly increasing risk. To
achieve this objective, we maintain a portfolio that consists primarily of
short-term, high-quality commercial paper and foreign debt. All of our fixed
income investments have maturities of less than one year. Hence, our exposure
related to changes in interest rates is somewhat limited due to the short-term
nature of our portfolio. We do not use derivative financial instruments in our
investment portfolio.
DEBT OBLIGATIONS
Conductus' outstanding debt consists of term loan obligations that are
primarily based on fixed rates. Therefore, our exposure to changes in interest
rates is limited because any increase or decrease in interest rates would not
significantly increase or decrease interest expense on our debt obligations.
11
<PAGE>
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS - NOT APPLICABLE
ITEM 2: CHANGES IN SECURITIES
On August 7, 2000 the Company issued a warrant to Dobson Communications
Corporation to purchase up to 500,000 shares of common stock at $13.43 per share
in connection with a transaction with Dobson Cellular Systems, Inc. (See Note 6
to the Condensed Financial Statements above). The warrant was issued pursuant to
an exemption from registration provided under Section 4(2) of the Securities Act
of 1933. The warrant holder is a sophisticated investor that obtained the
warrants for investment purposes.
Effective September 1, 2000 the Company issued a warrant to Pentech Financial
Services, Inc. to purchase up to 10,000 shares of common stock at $18.75 per
share in connection with a lease line of credit. The warrant was issued
pursuant to an exemption from registration provided under Section 4(2) of the
Securities Act of 1933. The warrant holder is a sophisticated investor that
obtained the warrants for investment purposes.
ITEM 3: DEFAULT UPON SENIOR SECURITIES - NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NOT APPLICABLE
ITEM 5: OTHER INFORMATION - NOT APPLICABLE
12
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
----------------- ------------------------------------------------------------------------------------------------
<S> <C>
10.39+ Purchase Contract, dated as of August 7, 2000, between the Company and Dobson Cellular Systems,
Inc.
10.40+ Warrant to Purchase Common Stock, dated August 7, 2000, issued by the Company to Dobson
Communications Corporation.
10.41 Master Equipment Lease Commitment, dated as of September 1, 2000, between Pentech Financial
Services, Inc. and the Company.
10.42 Master Equipment Lease, dated as of September 1, 2000, between Pentech Financial Services, Inc.
and the Company.
10.43 Warrant to Purchase Common Stock, dated as of September 1, 2000, issued by the Company to
Pentech Financial Services, Inc.
27.1 Financial Data Schedule.
</TABLE>
---------------------------
+ Confidential treatment requested as to certain portions of
these exhibits.
(B) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONDUCTUS, INC.
Dated: November 14, 2000 /s/ Ron Wilderink
----------------------------------------
Ron Wilderink, Vice President of Finance
Principal Financial Officer and Duly Authorized
Signatory
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
----------------- ------------------------------------------------------------------------------------------------
<S> <C>
10.39+ Purchase Contract, dated as of August 7, 2000, between the Company and Dobson Cellular Systems,
Inc.
10.40+ Warrant to Purchase Common Stock, dated August 7, 2000, issued by the Company to Dobson
Communications Corporation.
10.41 Master Equipment Lease Commitment, dated as of September 1, 2000, between Pentech Financial
Services, Inc. and the Company.
10.42 Master Equipment Lease, dated as of September 1, 2000, between Pentech Financial Services, Inc.
and the Company.
10.43 Warrant to Purchase Common Stock, dated as of September 1, 2000, issued by the Company to
Pentech Financial Services, Inc.
27.1 Financial Data Schedule.
</TABLE>
---------------------------
+ Confidential treatment requested as to certain portions of
these exhibits.
(B) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
15
