<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
(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 28, 1997
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 0-21074
SUPERCONDUCTOR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0158076
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
460 WARD DRIVE, SUITE F
SANTA BARBARA, CALIFORNIA 93111-2310
(Address of principal executive offices & zip code)
(805) 683-7646
(Registrant's telephone number including area code)
--------------------------------------------------------
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
------ ------
As of June 28, 1997 there were 7,699,269 shares of the Registrant's Common Stock
outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 28, 1997 JUNE 30, 1996 JUNE 28, 1997
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
Government contract revenues ...... $ 1,594,000 $ 2,340,000 $ 2,894,000 $ 4,445,000
Commercial product revenues ....... 30,000 14,000 87,000 27,000
----------- ----------- ----------- -----------
Total net revenues ........... 1,624,000 2,354,000 2,981,000 4,472,000
----------- ----------- ----------- -----------
Costs and expenses:
Contract research and development . 1,092,000 1,504,000 2,289,000 2,974,000
Other research and development .... 975,000 425,000 1,748,000 777,000
Selling, general and administrative 686,000 971,000 1,376,000 1,807,000
----------- ----------- ----------- -----------
Total costs and expenses ..... 2,753,000 2,900,000 5,413,000 5,558,000
----------- ----------- ----------- -----------
Loss from operations ......... (1,129,000) (546,000) (2,432,000) (1,086,000)
Interest (expense) income, net ......... (26,000) 51,000 (57,000) 125,000
----------- ----------- ----------- -----------
Net loss ..................... ($1,103,000) ($ 495,000) ($2,375,000) ($ 961,000)
=========== =========== =========== ===========
Net loss per share ..................... ($ 0.18) ($ 0.06) ($ 0.39) ($ 0.13)
Weighted average number of
shares outstanding ..................... 6,082,871 7,715,699 6,072,279 7,672,183
=========== =========== =========== ===========
</TABLE>
(see accompanying notes)
2
<PAGE> 3
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS (UNAUDITED)
DECEMBER 31, JUNE 28,
1996 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 2,599,000 $ 671,000
Short-term investments ......................................... 4,272,000 4,488,000
Accounts receivable ............................................ 1,599,000 1,943,000
Inventory ...................................................... 502,000 544,000
Prepaid expenses and other current assets ...................... 183,000 191,000
------------ ------------
Total current assets ...................................... 9,155,000 7,837,000
Note receivable from related party .................................. 150,000 0
Property and equipment, net of accumulated depreciation
of $5,762,000 and $6,130,000 respectively ......................... 1,799,000 1,968,000
Patents and licenses, net of accumulated amortization
of $835,000 and $946,000 respectively ............................ 2,204,000 2,189,000
Other assets, net of accumulated
amortization of $86,000 and $86,000 respectively .................. 36,000 41,000
------------ ------------
Total assets .............................................. $ 13,344,000 $ 12,035,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 935,000 $ 474,000
Accrued compensation ........................................... 313,000 485,000
Long-term debt --current ....................................... 423,000 245,000
Billings in excess of cost and earnings on uncompleted contracts 306,000 42,000
------------ ------------
Total current liabilities ................................. 1,977,000 1,246,000
Long-term debt ...................................................... 77,000 45,000
------------ ------------
Total liabilities ......................................... 2,054,000 1,291,000
------------ ------------
Stockholders' equity:
Preferred Stock, $.001 par value, 2,000,000 shares authorized,
none issued ................................................... 0 0
Common Stock, $.001 par value, 15,000,000 shares authorized,
7,575,660 and 7,699,269 shares issued and outstanding ....... 8,000 8,000
Capital in excess of par value ................................. 34,794,000 35,210,000
Deficit accumulated during development stage ................... (23,512,000) (24,474,000)
------------ ------------
Total stockholders' equity ................................ 11,290,000 10,744,000
------------ ------------
Total liabilities and stockholders' equity ................ $ 13,344,000 $ 12,035,000
============ ============
</TABLE>
(see accompanying notes)
3
<PAGE> 4
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, JUNE 28,
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... ($2,375,000) ($ 962,000)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation, and patent/license amortization ................ 579,000 479,000
Compensation expense associated with stock options granted ... 8,000 0
Changes in assets and liabilities:
Accounts receivable ..................................... (212,000) (344,000)
Inventory ............................................... (194,000) (42,000)
Prepaid expenses and other current assets ............... 23,000 (8,000)
Patents and licenses .................................... (80,000) (96,000)
Other assets ............................................ 0 145,000
Accounts payable and accrued expenses ................... (77,000) (289,000)
Billings in excess of costs and earnings on
uncompleted contracts ............................... 140,000 (264,000)
----------- -----------
Net cash used for operating activities ............. (2,188,000) (1,381,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term investments ............................. 1,381,000 (216,000)
Purchases of property and equipment .......................... (85,000) (537,000)
----------- -----------
Net cash provided by (used for) investing activities 1,296,000 (753,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ..................................... 39,000 0
Principal payments on long-term obligations .................. (205,000) (210,000)
Proceeds from sale of common stock ........................... 24,000 416,000
----------- -----------
Net cash (used for) provided by financing activities (142,000) 206,000
----------- -----------
Net (decrease) increase in cash and cash equivalents .............. (1,034,000) (1,928,000)
Cash and cash equivalents at beginning of period .................. 2,430,000 2,599,000
----------- -----------
Cash and cash equivalents at end of period ........................ $ 1,396,000 $ 671,000
=========== ===========
</TABLE>
(see accompanying notes)
4
<PAGE> 5
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
A. GENERAL
The unaudited financial information furnished herein reflects all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management, are necessary to fairly state the Company's financial position, the
results of its operations and its cash flows for the periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates and such differences may
be material to the financial statements. This quarterly report on Form 10-Q
should be read in conjunction with the Company's Form 10-K for the year ended
December 31, 1996. The results of operations for the three months and six months
ended June 28, 1997 are not necessarily indicative of results for the entire
fiscal year ending December 31, 1997.
The Company reports on a 13-week quarter period ending on the Saturday nearest
the calendar quarter end. The Company's fiscal year-end is December 31.
B. INVENTORIES
Inventories are stated at the lower of cost (first-in, first out) or market and
consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 June 28, 1997
<S> <C> <C>
Raw Materials $200,000 $154,000
Work-in-Progress 281,000 365,000
Finished Goods 21,000 25,000
-------- --------
Total Inventory $502,000 $544,000
======== ========
</TABLE>
C. PER SHARE INFORMATION
Net loss per common share has been computed using the weighted average number of
common and common equivalent shares (when dilutive) outstanding during each
period. The difference between primary and fully diluted net loss per common
share is not significant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are in paragraph two under
"Results of Operations for the three-month and six-month periods ended June 28,
1997 and June 30, 1996" and paragraph three under "Liquidity and Capital
Resources". Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth herein.
RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 28,
1997 AND JUNE 30, 1996
Total net revenues increased by $730,000, or 45%, from $1,624,000 in the second
quarter of 1996 to $2,354,000 in the second quarter of 1997. Net revenues
increased by $1,491,000, or 50%, from $2,981,000 in the first six months of 1996
to $4,472,000 in the first six months of 1997. These changes are mainly due to
increases in government contract revenues. Government contract revenues
increased by $746,000, or 47%, from $1,594,000 in the second
5
<PAGE> 6
quarter of 1996 to $2,340,000 in the second quarter of 1997. This increase is
partially attributable to revenues associated with a government contract which
the Company was awarded in the third quarter of fiscal 1996.
As the Company continues to focus on its commercial products, commercial
revenues are expected to increase as a percentage of revenues over the next
several quarters; however, there can be no assurance that such commercial
revenue will increase. In July 1997, the Company's commercial product focus
resulted in the receipt of an order of 8 SuperFilter(TM) systems from a rural
service provider, subject to acceptance testing. The first system is scheduled
for delivery in August. As the Company attempts to achieve commercialization of
products, it could encounter seasonality or other currently unforeseen factors
causing additional variability in its results.
Commercial product revenue decreased by $16,000, or 53%, from $30,000 in the
second quarter of 1996 to $14,000 in the second quarter of 1997. Commercial
product revenues decreased by $60,000, or 69%, from $87,000 in the first six
months of 1996 to $27,000 in the first six months of 1997. These decreases are
due primarily to the Company's decision to use its superconducting film output
for expanding the Company's efforts to develop products for commercialization.
Contract research and development expenses increased by $412,000 or 38%, from
$1,092,000 in the second quarter of 1996 to $1,504,000 in the second quarter of
1997. Contract research and development expenses increased by $685,000 or 30%,
from $2,289,000 in the first six months of 1996 to $2,974,000 in the first six
months of 1997. These increases are attributable to the increase in government
contract revenue which is directly related to contract expenses as well as
increased research and development efforts which are allowable expenses under
these contracts.
Other research and development expenses decreased by $550,000 or 56%, from
$975,000 in the second quarter of 1996 to $425,000 in the second quarter of
1997. Other research and development expenses decreased by $971,000 or 56%, from
$1,748,000 in the first six months of 1996 to $777,000 in the first six months
of 1997. These decreases are the result of the Company directing its research
and development efforts towards contract research and development projects.
Selling, general and administrative expenses increased by $285,000 or 42%, from
$686,000 in the second quarter of 1996 to $971,000 in the second quarter of
1997. Selling, general and administrative expenses increased by $431,000 or 31%,
from $1,376,000 in the first six months of 1996 to $1,807,000 in the first six
months of 1997. These increases are primarily due to an increase in
labor-related expenses, travel and general services as the Company continues to
expand its operations.
Interest income increased by $15,000 or 33%, from $45,000 in the second quarter
of 1996 to $60,000 in the second quarter of 1997. Interest income increased by
$48,000 or 50%, from $97,000 in the first six months of 1996 to $145,000 in the
first six months of 1997. The increase in interest income is the result of an
increase in the interest-earning investment balances during this period due to
the successful completion of the Company's secondary offering in the fourth
quarter of fiscal 1996.
Interest expense decreased by $10,000 or 53%, from $19,000 in the second quarter
of 1996 to $9,000 in the second quarter of 1997. Interest expense decreased by
$20,000 or 50%, from $40,000 in the first six months of 1996 to $20,000 in the
first six months of 1997. These decreases are attributable to the reduction in
the Company's long-term portion of note payable and capitalized lease
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments declined by $1,712,000 or
25%, from $6,871,000 on December 31, 1996 to $5,159,000 on June 28, 1997. The
decrease is the result of funding operating losses and the related net change in
working capital items of $1,381,000 as well as purchases of new equipment for
expansion of manufacturing operations of $537,000. These cash outflows were
partially offset by proceeds of $416,000 from the sale of common stock primarily
from the exercise of the over-allotment option made by the Underwriter of the
Company's secondary offering in the first quarter of fiscal 1997.
6
<PAGE> 7
The Company's principal resource commitments at June 28, 1997 consist of
accounts payable and accrued employee compensation of $474,000 and $485,000,
respectively, and approximately $290,000 of equipment financing commitments.
The Company believes that its existing cash, cash equivalents and short-term
investments, together with revenue from operations, should provide sufficient
resources to meet its current anticipated liquidity and capital expenditure
requirements for at least the next 12 months.
NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
revises the computation and disclosure requirements of earnings per share. SFAS
No. 128 becomes effective for the Company for its year ending December 31, 1997.
The Company has determined that adopting SFAS No. 128 will not have a material
impact on its earnings per share computation or disclosure.
FACTORS AFFECTING FUTURE BUSINESS OPERATIONS
EARLY STAGE OF THE COMMERCIAL SUPERCONDUCTOR PRODUCTS MARKET: MARKET ACCEPTANCE
AND RELIABILITY
The commercial superconductor products market has experienced limited product
commercialization to date. Moreover, since inception, the Company has been
principally engaged in research and development activities and has only limited
experience in the commercialization of its products. The Company's ability to
grow will depend on its ability to successfully transition its expertise in HTS
filter and cryogenics technologies and applications to commercial markets,
including the wireless communications and high-speed computing markets. There
can be no assurance that the Company will be able to produce its products in
volume or that any of the Company's products will achieve market acceptance.
DEPENDENCE ON SALES TO OEMS AND SERVICE PROVIDERS
In order to gain market acceptance, the Company must demonstrate that its
products will provide advantages to OEMs and service providers, including a
decrease in system size, an increase in range extension and a reduction in
interference. There can be no assurance that upon market acceptance, the
Company's products will be able to achieve any of these advantages. Moreover,
even if the Company is able to demonstrate such advantages, there can be no
assurance that OEMs and service providers will elect to incorporate the
Company's products into their systems or, if they do, that related system and
manufacturing requirements can or will be met. Furthermore, there can be no
assurance that an OEM's systems will be commercially accepted.
LIMITED MANUFACTURING EXPERIENCE
To date, the Company has sold products only in limited quantities, primarily for
use in the development and demonstration of prototypes and for laboratory and
field testing. The Company's current manufacturing facilities are pilot and
pre-production scale only and are not sufficient for volume production. There
can be no assurance that the Company will be successful in overcoming the
technological, engineering and management challenges associated with the
production of commercial quantities of HTS or cold computing products at
acceptable costs and on a timely basis.
HIGH DEGREE OF DEPENDENCE ON GOVERNMENT CONTRACTS
A significant portion of the Company's revenues have historically consisted of
government research and development contract revenues. The Company expects that
government contract revenues will continue to account for a substantial portion
of total net revenues over the next several quarters. Government contract
revenues have historically fluctuated from period to period. This variability is
attributable to government contract budgeting and
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<PAGE> 8
funding patterns, as the government procurement process is lengthy and may
involve competing budget considerations, making the timing of the Company's
revenues difficult to predict. Funds authorized by the government under any
development contract may be reduced or eliminated at any time, and there can be
no assurance that the Company will receive all or any part of the funds under
any of the Company's existing government contracts not yet performed.
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, trademark, trade secret and
copyright law and internal procedures and nondisclosure agreements to protect
its intellectual property. There can be no assurance that the Company's
intellectual property rights can be successfully asserted in the future or will
not be invalidated, circumvented or challenged. In addition, the laws of certain
foreign countries in which the Company's products may be produced or sold do not
protect the Company's intellectual property rights to the same extent as the
laws of the United States. The failure of the Company to protect its proprietary
information could have a material adverse effect on the Company's business,
results of operations and financial condition.
RAPID TECHNOLOGICAL CHANGE
The field of superconductivity is characterized by rapidly advancing
technology. The future success of the Company will depend in large part upon its
ability to keep pace with advancing superconductor technology, including
superconducting materials and processes and industry standards. There can be no
assurance that the Company's 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 the Company will not prove more advantageous
for the commercialization of HTS products.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In addition to the election of the directors, the following matters were
submitted to the shareholders at the Company's Annual Meeting of Shareholders
held May 20, 1997:
1) The Company's 1988 Amended and Restated Stock Option Plan was amended to
increase the number of shares reserved for issuance by 500,000 shares.
<TABLE>
<S> <C>
Votes For: 3,245,220
Votes Against: 682,020
Votes Abstaining: 103,055
NonVotes: 2,590,352
</TABLE>
2) The appointment of Price Waterhouse LLP as independent auditors of the
Company was ratified for the year ending December 31, 1997.
<TABLE>
<S> <C>
Votes For: 6,581,247
Votes Against: 29,825
Votes Abstaining: 9,575
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 28, 1997.
8
<PAGE> 9
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUPERCONDUCTOR TECHNOLOGIES INC.
--------------------------------
(Registrant)
Dated: August 6, 1997 /s/ James G. Evans, Jr.
-------------------------
James G. Evans, Jr.
Vice President, Chief Financial Officer
9
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-30-1997
<PERIOD-END> JUN-28-1997
<CASH> 109,000
<SECURITIES> 5,050,000
<RECEIVABLES> 1,943,000
<ALLOWANCES> 0
<INVENTORY> 544,000
<CURRENT-ASSETS> 7,837,000
<PP&E> 8,098,000
<DEPRECIATION> 6,130,000
<TOTAL-ASSETS> 12,035,000
<CURRENT-LIABILITIES> 1,246,000
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 35,210,000
<TOTAL-LIABILITY-AND-EQUITY> 12,035,000
<SALES> 0
<TOTAL-REVENUES> 4,472,000
<CGS> 0
<TOTAL-COSTS> 4,781,000
<OTHER-EXPENSES> 777,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,000
<INCOME-PRETAX> (961,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,474,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (961,000)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
