<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2000, there were 15,540,931 shares of the Registrant's Common
Stock outstanding.
<PAGE>
CONDUCTUS, INC.
FORM 10-Q
June 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------------------------- ------
<S> <C> <C>
Item 1: Financial Statements............................................................................1
Condensed Balance Sheets at June 30, 2000 and December 31, 1999.................................1
Condensed Statements of Operations for the Three Months and Six
Months Ended June 30, 2000 and 1999.............................................................2
Condensed Statements of Cash Flows for the Six Months Ended June 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..............................................................................13
Item 6: Exhibits and Reports on Form 8-K...............................................................14
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDUCTUS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------------- --------------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 22,048 $ 11,957
Restricted cash....................................................... 514 -
Short-term investments................................................ - 2,121
Accounts receivable .................................................. 303 1,382
Inventories........................................................... 2,893 1,266
Prepaid expenses and other current assets............................. 144 306
-------------------- --------------------
Total current assets................................................ 25,902 17,032
Property and equipment, net........................................... 1,583 1,375
Other assets.......................................................... 211 190
-------------------- --------------------
Total assets........................................................ $ 27,696 $ 18,597
==================== ====================
LIABILITIES
Current liabilities:
Accounts payable...................................................... $ 750 $ 1,023
Other accrued liabilities............................................. 1,691 1,573
Current portion of long-term debt..................................... 987 752
-------------------- --------------------
Total current liabilities........................................... 3,428 3,348
Long-term debt, net of current portion................................ - 596
-------------------- --------------------
Total liabilities................................................... 3,428 3,944
-------------------- --------------------
REDEEMABLE PREFERRED STOCK
Preferred stock.......................................................... - 10,778
STOCKHOLDERS' EQUITY
Common stock............................................................. 2 1
Additional paid-in capital............................................... 86,826 52,543
Accumulated deficit...................................................... (62,560) (48,669)
-------------------- --------------------
Total stockholders' equity.......................................... 24,268 3,875
-------------------- --------------------
Total liabilities, redeemable preferred stock and stockholders' equity $ 27,696 $ 18,597
==================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONDUCTUS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Product sales........................................... $ 46 $ 142 $ 134 $ 539
Contract................................................ 191 431 442 1,348
License................................................. - 5,000 - 5,000
--------------- --------------- --------------- ---------------
Total revenues....................................... 237 5,573 576 6,887
--------------- --------------- --------------- ---------------
Costs and expenses:
Cost of product sales.................................. 1,352 597 2,053 1,167
Research and development............................... 1,207 1,033 2,288 2,154
Selling, general and administrative.................... 1,520 1,276 2,730 2,110
--------------- --------------- --------------- ---------------
Total costs and expenses............................. 4,079 2,906 7,071 5,431
--------------- --------------- --------------- ---------------
Income (loss) from operations............................. (3,842) 2,667 (6,495) 1,456
Interest income........................................... 382 23 741 49
Interest expense.......................................... (57) (91) (121) (189)
Other income.............................................. 74 9 74 12
--------------- --------------- --------------- ---------------
Income (loss) before taxes........................... (3,443) 2,608 (5,801) 1,328
Tax expense (1) (1) (1) (1)
--------------- --------------- --------------- ---------------
Net income (loss).................................... (3,444) 2,607 (5,802) 1,327
Dividend accretion and deemed dividend on preferred stock. (5,075) (100) (8,090) (311)
--------------- --------------- --------------- ---------------
Net income (loss) attributable to
common stockholders.................................... $ (8,519) $ 2,507 $ (13,892) $ 1,016
=============== =============== =============== ===============
Net income (loss) per share:
Basic.................................................. $ (0.70) $ 0.35 $ (1.28) $ 0.14
=============== =============== =============== ===============
Diluted................................................ $ (0.70) $ 0.26 $ (1.28) $ 0.10
=============== =============== =============== ===============
Shares used in per share calculations:
Basic.................................................. 12,126 7,148 10,831 7,146
=============== =============== =============== ===============
Diluted................................................ 12,126 9,749 10,831 9,686
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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CONDUCTUS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................ $ (5,802) $ 1,327
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization............................................ 303 415
Amortization of discount on long term debt............................... 20 23
Change in assets and liabilities:
Accounts receivable...................................................... 1,079 (2,014)
Inventories.............................................................. (1,627) 49
Prepaid expenses and other current assets................................ 163 72
Other assets............................................................. (37) (61)
Accounts payable and other accrued liabilities........................... (103) 109
--------------- ----------------
Net cash used in operating activities................................ (6,004) (80)
--------------- ----------------
Cash flows from investing activities:
Maturities of short-term investments..................................... 2,142 1,037
Purchases of short-term investments...................................... (21) (6)
Acquisition of property and equipment.................................... (495) (52)
--------------- ----------------
Net cash provided by investing activities............................ 1,626 979
--------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock............................... 15,364 21
Costs to register preferred stock........................................ - (58)
Principal repayments on long-term debt................................... (381) (457)
--------------- ----------------
Net cash provided by (used in) financing activities.................. 14,983 (494)
--------------- ----------------
Net increase in cash and cash equivalents................................ 10,605 405
Cash and cash equivalents at beginning of period............................ 11,957 1,547
--------------- ----------------
Cash and cash equivalents at end of period.................................. $ 22,562 $ 1,952
=============== ================
</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 June 30, 2000, and for the
three and six months ended June 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. 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.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44
clarifies the application of Opinion 25 for (a) the definition of an employee
for purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. The adoption of certain provisions of FIN 44 prior to March 31, 2000 did
not have a material impact on the financial statements. Management believes that
the impact of FIN 44 will not have a material effect on the financial position
or results of operations of the Company.
4
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CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
---------------------------------------
2000 1999
------------------- -------------------
(in thousands)
<S> <C> <C>
Conversion of preferred shares to common stock.......................... $ 18,417 $ --
Conversion of preferred dividend to common stock........................ 517 --
---------------- ----------------
Total............................................................ $ 18,934 --
================ ================
---------------- ----------------
Dividend accretion and deemed dividend on preferred stock............... $ 8,090 $ 311
================ ================
</TABLE>
3. BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
A reconciliation of the numerator and denominator of the basic and
diluted net income (loss) per share is provided as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator - basic and diluted net income
(loss) per share:
Net income (loss) attributable to common
stockholders................................ $ (8,519) $ 2,507 $(13,892) $ 1,016
================== ================== ================== ==================
Denominator - basic and diluted net income
(loss) per share:
Weighted average common shares
outstanding................................. 12,126 7,148 10,831 7,146
------------------ ------------------ ------------------ ------------------
Shares used in computing basic earnings
(loss) per share............................ 12,126 7,148 10,831 7,146
------------------ ------------------ ------------------ ------------------
Weighted average number of dilutive common
equivalent shares used in computing diluted
income (loss) per share:
Series B preferred........................ - 2,461 - 2,461
Stock options............................. - 140 - 79
------------------ ------------------ ------------------ ------------------
Shares used in computing
diluted net income (loss) per share......... 12,126 9,749 10,831 9,686
================== ================== ================== ==================
Net income (loss) per share:
Basic....................................... $ (0.70) $ 0.35 $ (1.28) $ 0.14
================== ================== ================== ==================
Diluted..................................... $ (0.70) $ 0.26 $ (1.28) $ 0.10
================== ================== ================== ==================
</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
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CONDUCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
preferred stock that could potentially dilute basic earnings per share in the
future and that were not included in the computations of diluted loss per share
because the effect is anti-dilutive were approximately 5,235,000 and 6,494,000
for the three and six month periods ended June 30, 2000 respectively.
4. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------------- -------------------
(Unaudited) (Audited)
<S> <C> <C>
Raw materials........................................................... $ 1,913 $ 574
Work in process......................................................... 384 401
Finished goods.......................................................... 596 291
------------------- -------------------
$ 2,893 $ 1,266
=================== ===================
</TABLE>
5. STOCKHOLDERS EQUITY:
On January 18, 2000 the Company entered into an agreement with the
Nevis Fund and Snowden LP. Under the terms of the agreement, the Company
issued 1,000,000 shares of common stock at $13.67 per share.
During the six months ended June 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 EVENT:
In August 2000 the Company entered into a transaction with Dobson
Communications Corporation 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. However, in order to earn the entire 500,000 shares
under the warrant Dobson would be required to purchase significantly more
than the minimum commitment of 200 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 July 2000, General Dynamics, Inc. authorized the Company to start
work on a cost plus fixed fee sub-contract under a government funded DARPA
program.
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 June 30, 2000, we had accumulated losses of approximately $62.6
million 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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Total revenues consist of contract revenue, product revenue, and
license revenue. Total revenues decreased by 96% to $237,000 for the quarter
ended June 30, 2000 from $5,573,000 in the comparable period of 1999.
Revenues for the six months ended June 30, 2000 were $576,000, which
represents a decrease of 92% over the comparable period of 1999. The decrease
in total revenues from the prior year is primarily due to the decreases in
license revenue, and to a lesser extent, decreases in revenues from
government contracts and government product sales which resulted from the
completion of several contracts and delays in the anticipated start date on
new contracts in 2000.
Revenue under U.S. government research and development contracts
represented approximately 80% and 77%, respectively of total revenue for the
three month and six month periods ended June 30, 2000, compared to 8% and 20%
for the comparable periods of 1999. The increase in contract revenues as a
percent of total revenues was primarily due to the impact of the license
revenues on total revenue recognized in the comparative period and, to a
lessor extent, a reduction of contract revenues during the comparison
periods. Contract revenues decreased by 56% to $191,000 and by 67% to
$442,000, respectively, for the three and six-month periods ended June 30,
2000, from the comparable periods of 1999. This decrease is primarily
attributable to a decrease in government contracts and government product
sales, 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.
Product sales for the three months ended June 30, 2000, decreased by
67% to $46,000 from $142,000 in the comparable period of 1999. For the six
months ended June 30, 2000, product sales decreased by 75% to $134,000 from
$539,000 in the comparable period of 1999. This decrease is primarily due to
a reduction in the sales of government and commercial telecommunication
products.
Cost of product sales was primarily composed of costs of products
related to our wireless telecommunications products. Cost of product sales
was $1,352,000 for the quarter ended June 30, 2000, compared to $597,000 for
the comparable period of 1999. For the six months ended June 30, 2000, cost
of product sales was $2,053,000 compared to $1,167,000 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.
Research and development includes both externally and internally funded
projects. Research and development expenses were $1,207,000 in the quarter ended
June 30, 2000 compared to $1,033,000 in the comparable period of the prior year.
For the six-month period ended June 30, 2000, research and development expenses
were $2,288,000 compared to $2,154,000 in the first six months of 1999. Research
and development, as a
7
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percentage of revenue, represented 509% and 397%, respectively for the three and
six month periods ended June 30, 2000. This compares to research and development
expenses representing 19% and 31% 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 $1,520,000 and $1,276,000 in the quarters ended
June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000 and
1999, selling, general and administrative expenses were $2,730,000 and
$2,110,000 respectively. The increase in spending during the comparison periods
was primarily due to the increases in sales, marketing, and administrative
headcount compared to the prior year. We expect sales and marketing expenses to
continue to increase during 2000 to the extent we increase sales of commercial
products.
Interest expense was $57,000 and $91,000 for the three months ended
June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000,
and 1999 interest expense was $121,000 and $189,000, respectively. The
decrease in interest expense was primarily due to lower average debt during
the comparison periods.
Interest and other income was $456,000 and $815,000 for the three
and six month periods ended June 30, 2000, respectively. This compared to
$32,000 and $61,000 for the three and six month periods ended June 30, 1999.
The increase in interest income was primarily the result of higher cash
balances and yields on investments in 2000 compared to 1999.
The net loss recorded for the second quarter and year to date of 2000
includes $239,000 and $464,000, respectively, in dividends recorded for Series C
Preferred Stock. In addition, $4,836,000 and $7,626,000 was recognized for the
three and six months ended June 30, 2000, respectively 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.
We do not believe that inflation has had a material effect on our
financial condition or results of operations during the past two fiscal years.
However, we cannot assure you that our business will not be affected by
inflation in the future.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through:
- $13,251,000 in net proceeds from our initial public offering of
common stock in August 1993.
- $9,892,000 in net proceeds from our follow-on public offering of
common stock in June 1996,
- $49,565,000 raised in private placement financings,
- $46,327,000 from U.S. government contracts,
- $987,000 in outstanding borrowings under various lease and bank
loan arrangements, and
- $4,687,000 in interest income.
As of June 30, 2000 our aggregate cash, cash equivalents and short term
investments totaled $22,562,000. 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 June 30, 2000, there are no amounts
outstanding under the bank line of credit facility.
Net cash used in operations was $6,004,000 during the six months
ended June 30, 2000. Net cash used in operations was primarily the result of
a net loss of $5,802,000 and an increase in inventory partially offset by the
effect of non-cash depreciation and amortization of $323,000 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 $1,626,000 during the six
months ended June 30, 2000. The balance was primarily related to the proceeds
from sales of short-term investments during the period partially offset by
investments in additional property and equipment.
Net cash provided by financing activities was $14,983,000 during the
six months ended June 30, 2000 and was primarily the result of the financing
transaction completed in January, 2000.
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,
9
<PAGE>
- 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. 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.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44
clarifies the application of Opinion 25 for (a) the definition of an employee
for purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. The adoption of certain provisions of FIN 44 prior to March 31, 2000 did
not have a material impact on the financial statements. Management believes that
the impact of FIN 44 will not have a material effect on the financial position
or results of operations of the Company.
10
<PAGE>
SUBSEQUENT EVENT
In August 2000 the Company entered into a transaction with Dobson
Communications Corporation 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 July 2000, General Dynamics, Inc. authorized the Company to start
work on a cost plus fixed fee subcontract under a government funded DARPA
program.
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.
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 -- NOT APPLICABLE
ITEM 3: DEFAULT UPON SENIOR SECURITIES -- NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 25, 2000.
(a) The meeting included the election of the Board of Directors,
submitted as Proposal No. 1, whose names are as follows:
John F. Shoch, Ph.D.
Charles E. Shalvoy
Martin Cooper
Robert M. Janowiak
Martin J. Kaplan
(b) Other matters voted upon at the stockholders meeting were:
Proposal No. 2: Approval of amendment to and restatement of the
Company's Restated Certificate of Incorporation
to increase the number of shares of Common Stock
authorized to be issued from 20,000,000 to
25,000,000;
Proposal No. 3: Approval of amendment to the Company's 1992 Stock
Option / Stock Issuance Plan to increase number
of shares available for issuance thereunder from
2,580,000 to 4,580,000.
Proposal No. 4: Approval of amendment to the Company's 1992 Stock
Option / Stock Issuance Plan to provide for an
automatic annual increase in the number of shares
available for issuance.
Proposal No. 5: Approval of amendment to the Company's 1992 Stock
Option / Stock Issuance Plan to amend the
automatic grant program.
Proposal No. 6: Approval of amendment to the Company's Employee
Stock Purchase Plan to increase the number of
shares available for issuance thereunder from
550,000 to 750,000.
Proposal No. 7: Ratification of the selection of
PricewaterhouseCoopers LLP as the Company's
independent auditors for the year ended
December 31, 2000.
Shares of Common Stock and Preferred Stock voted as follows:
<TABLE>
<CAPTION>
Proposal No. 1
(Election of Board of Directors) Common Stock Series C Preferred Stock
--------------------------------- ---------------------------------
Total Vote Total Vote
Total Vote Withheld Total Vote Withheld
For each From Each For each From Each
Director Director Director Director
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
John F. Shoch, Ph.D. 10,353,396 158,937 275,000 0
Charles E. Shalvoy 10,353,196 159,137 275,000 0
Martin Cooper 10,220,562 291,771 275,000 0
Robert M. Janowiak 10,350,796 161,537 275,000 0
Martin J. Kaplan 10,222,751 289,582 275,000 0
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
For (Common/ Against Abstain Non Vote
Preferred C) (Common/ (Common/ (Common/
Preferred C) Preferred C) Preferred C)
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Proposal No. 2
(Approval of amendment
and restatement of the
Company's restated Certificate
of Incorporation to increase the
number of shares of common stock
authorized to be issued from 10,220,562 214,071 18,335
20,000,000 to 25,000,000.) 275,000 0 0 0
Proposal No. 3
(Approval of amendment to
the Company's 1992 Stock
Option / Stock Issuance Plan to
increase the number of shares
available for issuance thereunder 4,421,598 901,745 28,284 5,160,706
from 2,580,000 to 4,580,000.) 275,000 0 0 0
Proposal No. 4
(Approval of amendment to the
Company's 1992 Stock Option/
Stock Issuance Plan to provide
for an automatic annual
increase in the number of shares 4,393,617 931,095 26,915 5,160,706
available for issuance 247,500 27,500 0 0
Proposal No. 5
(Approval of amendment to the
Company's 1992 Stock Option/
Stock Issuance Plan to amend 4,622,504 698,609 30,514 5,160,706
the automatic grant program 247,500 27,500 0 0
Proposal No. 6
(Approval of amendment to the
Company's Employee Stock
Purchase Plan to increase the
number of shares available for
issuance thereunder from 5,160,356 167,328 23,374 5,161,275
550,000 to 750,000.) 272,500 0 2,500 0
Proposal No. 7
(Ratification of the selection of
PricewaterhouseCoopers LLP
as the Company's independent
auditors for the year ended 10,475,164 27,045 10,124
December 31, 2000) 272,500 0 2,500 0
</TABLE>
ITEM 5: OTHER INFORMATION -- NOT APPLICABLE.
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<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------------- -----------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation.
10.3* 1992 Stock Option/Stock Purchase Plan, as amended
10.4* 1994 Employee Stock Purchase Plan, as amended
27.1 Financial Data Schedule.
---------------------
* Management compensatory plan or arrangement
</TABLE>
(B) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
14
<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: Aug 11, 2000 /s/ Ron Wilderink
------------------------------------
Ron Wilderink, Vice President of Finance
Principal Financial Officer and Duly
Authorized Signatory
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------------- -----------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation.
10.3* 1992 Stock Option/Stock Purchase Plan, as amended
10.4* 1994 Employee Stock Purchase Plan, as amended
27.1 Financial Data Schedule.
---------------------
* Management compensatory plan or arrangement.
</TABLE>
16
