<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 MARCH 29, 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)
<TABLE>
<S> <C>
DELAWARE 77-0158076
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 April 30, 1997 there were 7,697,394 shares of the Registrant's Common
Stock outstanding.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 30, 1996 MARCH 29, 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Net revenues:
Government contract revenues.................................. $ 1,300,000 $ 2,105,000
Commercial product revenues................................... 58,000 13,000
----------- -----------
Total net revenues......................................... 1,358,000 2,118,000
Costs and expenses:
Contract research and development............................. 947,000 1,470,000
Other research and development................................ 1,023,000 352,000
Selling, general and administrative........................... 690,000 836,000
----------- -----------
Total costs and expenses................................... 2,660,000 2,658,000
----------- -----------
Loss from operations....................................... (1,302,000) (540,000)
Interest income (expense), net.................................. 31,000 74,000
----------- -----------
Net loss................................................... $ (1,271,000) $ (466,000)
=========== ===========
Net loss per share.............................................. $(0.21) $(0.06)
=========== ===========
Weighted average number of shares outstanding................... 6,036,162 7,676,058
=========== ===========
</TABLE>
(see accompanying notes)
2
<PAGE> 3
SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 29,
1996 1997
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 2,599,000 $ 2,272,000
Short-term investments...................................... 4,272,000 3,974,000
Accounts receivable......................................... 1,599,000 1,930,000
Inventory................................................... 502,000 507,000
Prepaid expenses and other current assets................... 183,000 156,000
----------- -----------
Total current assets................................ 9,155,000 8,839,000
Note receivable from related party............................ 150,000 150,000
Property and equipment, net................................... 1,799,000 1,932,000
Patents and licenses, net of accumulated amortization of
$835,000 and $891,000, respectively......................... 2,204,000 2,195,000
Other assets, net of accumulated amortization of $86,000 and
$86,000, respectively....................................... 36,000 36,000
----------- -----------
Total assets........................................ $ 13,344,000 $ 13,152,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 935,000 $ 993,000
Accrued compensation........................................ 313,000 408,000
Long-term debt -- current................................... 423,000 333,000
Billings in excess of costs and earnings on uncompleted
contracts................................................ 306,000 177,000
----------- -----------
Total current liabilities........................... 1,977,000 1,911,000
Long-term debt................................................ 77,000 61,000
----------- -----------
Total liabilities................................... 2,054,000 1,972,000
----------- -----------
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 7,697,394 shares issued and outstanding,
respectively............................................. 8,000 8,000
Capital in excess of par value.............................. 34,794,000 35,150,000
Deficit accumulated during development stage................ (23,512,000) (23,978,000)
----------- -----------
Total stockholders' equity.......................... 11,290,000 11,180,000
----------- -----------
Total liabilities and stockholders' equity.......... $ 13,344,000 $ 13,152,000
=========== ===========
</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
<TABLE>
<CAPTION>
MARCH 30, MARCH 29,
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $ (1,271,000) $ (466,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation, and patent/license amortization................. 296,000 235,000
Compensation expense associated with stock options granted.... 4,000 0
Changes in assets and liabilities:
Accounts receivable........................................ 553,000 (331,000)
Inventory.................................................. (124,000) (5,000)
Prepaid expenses and other current assets.................. 18,000 27,000
Patents and licenses....................................... (25,000) (47,000)
Accounts payable and accrued expenses...................... (181,000) 153,000
Billings in excess of costs and earnings on uncompleted
contracts................................................ 0 (129,000)
----------- -----------
Net cash used for operating activities................ (730,000) (563,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term investments.............................. 1,378,000 298,000
Purchases of property and equipment........................... (56,000) (313,000)
----------- -----------
Net cash provided by (used for) investing
activities.......................................... 1,322,000 (15,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings...................................... 39,000 0
Principal payments on long-term obligations................... (95,000) (105,000)
Proceeds from sale of common stock............................ 14,000 356,000
----------- -----------
Net cash (used for) provided by financing
activities.......................................... (42,000) 251,000
----------- -----------
Net increase (decrease) in cash and cash equivalents............ 550,000 (327,000)
Cash and cash equivalents at beginning of period................ 2,430,000 2,599,000
----------- -----------
Cash and cash equivalents at end of period...................... $ 2,980,000 $ 2,272,000
=========== ===========
</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
ended March 29, 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 MARCH 29, 1997
----------------- --------------
<S> <C> <C>
Raw Materials................................. $ 200,000 $154,000
Work-in-Progress.............................. 281,000 333,000
Finished Goods................................ 21,000 20,000
-------- --------
Total Inventory............................... $ 502,000 $507,000
======== ========
</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.
5
<PAGE> 6
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 periods ended March 29, 1997 and March 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 PERIODS ENDED MARCH 29, 1997 AND MARCH
30, 1996
Total net revenues increased by $760,000, or 56%, from $1,358,000 in the
first quarter of 1996 to $2,118,000 in the first quarter of 1997. This change is
due to an increase in government contract revenue. Government contract revenue
increased by $805,000, or 62%, from $1,300,000 in the first quarter of 1996 to
$2,105,000 in the first quarter of 1997. This increase is attributable to
revenue generated by the Military Communications Program contract which was
awarded in the fourth quarter of fiscal 1996 as well as lower revenues in the
first quarter of fiscal 1996 due to government shutdowns and budgetary impasses
which delayed contract funding.
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. Furthermore, 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 $45,000, or 78%, from $58,000 in
the first quarter of 1996 to $13,000 in the first quarter of 1997. This decrease
is due primarily to the Company's decision to use all film production for
expanding the Company's efforts to develop products for commercialization.
Contract research and development expenses increased by $523,000 or 55%,
from $947,000 in the first quarter of 1996 to $1,470,000 in the first quarter of
1997. This increase is attributable to the increase in contract revenue which is
directly related to contract expenses as well as increased research and
development efforts which are allowable expenses under contracts.
Other research and development expenses decreased by $671,000 or 66%, from
$1,023,000 in the first quarter of 1996 to $352,000 in the first quarter of
1997. This decrease is the result of the Company directing its research and
development efforts towards contract research and development projects.
Selling, general and administrative expenses increased by $146,000 or 21%,
from $690,000 in the first quarter of 1996 to $836,000 in the first quarter of
1997. This increase is primarily due to an increase in labor-related expenses as
the Company continues to expand its operations.
Interest income increased by $33,000 or 64%, from $52,000 in the first
quarter of 1996 to $85,000 in the first quarter 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 48%, from $21,000 in the first
quarter of 1996 to $11,000 in the first quarter of 1997. This decrease is
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 $625,000
or 10%, from $6,871,000 on December 31, 1996 to $6,246,000 on March 29, 1997.
The decrease is the result of funding operating losses of $446,000, purchases of
new equipment for expansion of manufacturing operations and an increase in
accounts receivable due to the increase in government contract revenue and was
partially offset by proceeds of $345,000 from the exercise of the over-allotment
option made by the Underwriter of the Company's secondary offering.
6
<PAGE> 7
The Company's principal resource commitments at March 29, 1997 consist of
accounts payable and accrued employee compensation of $993,000 and $408,000,
respectively, and approximately $394,000 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.
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
To gain market acceptance, the Company must demonstrate that its products
will provide advantages to such 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 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 preproduction 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 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
7
<PAGE> 8
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
------ ----------------------------------------------------------------------------
<C> <S>
10.1 Employment Offer Letter to M. Peter Thomas dated April 3, 1997
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 29,
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)
/s/ JAMES G. EVANS, JR.
--------------------------------------
James G. Evans, Jr.
Vice President, Chief Financial
Officer
Dated: May 1, 1997
9
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
------ ----------------------------------------------------------------------------
<C> <S>
10.1 Employment Offer Letter to M. Peter Thomas dated April 3, 1997
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.1
[Company Logo]
Date: April 3, 1997
Mr. M. Peter Thomas
Dear Peter,
It gives me great pleasure to make a formal offer to you for the position of
CEO and a director of the Board of Superconductor Technologies Inc. We would
like for this to become effective on Monday, 7 April, 1997. As you know from
our discussions, a tremendous amount of positioning has been accomplished at
STI over the last 10 years with over $60m dollars of expended effort. We
believe that STI is poised for "roll out" commercialization of its technology
with products serving the Wireless industry.
The attached Position description sets forth the duties, responsibilities and
authority for the STI position of CEO. Our offer is for an annual salary of
$200k. There are no executive bonus programs (other than option awards) in
place as STI has yet to reach a state of profitability for those to be
appropriate. The important equity consideration will be to grant you stock
options of 280,000 shares which represents roughly 3% fully diluted. These
options vest over four years with the following provisions. One eighth (35k
shares) vest immediately, with the remaining vesting monthly for the remainder
of the 4 years starting in six months except that one year of vesting (70k
shares) will accelerate in the event that control of STI changes and your
position changes. You will also be granted a salary continuation of six months
should there be a non cause change in your position.
This offer is made under the assumption that you will take up residence in
Santa Barbara. The normal STI company benefits program will be available to you
and details will be provided. You will be required to sign the normal trade
secret agreements and patent grants to the company etc.
This agreement will need to be ratified by the STI Board at our next meeting
and they are aware of this offer. I look forward to working with you Peter and
to see STI begin to reach a state of maturity as the commercialization phase
unfolds.
Please sign and return a copy indicating your acceptance.
Thank You,
/s/ Glenn Penisten
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-29-1997
<CASH> 1,263,000
<SECURITIES> 4,983,000
<RECEIVABLES> 1,930,000
<ALLOWANCES> 0
<INVENTORY> 507,000
<CURRENT-ASSETS> 8,839,000
<PP&E> 7,874,000
<DEPRECIATION> 5,942,000
<TOTAL-ASSETS> 13,152,000
<CURRENT-LIABILITIES> 1,911,000
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 35,150,000
<TOTAL-LIABILITY-AND-EQUITY> 13,152,000
<SALES> 0
<TOTAL-REVENUES> 2,118,000
<CGS> 0
<TOTAL-COSTS> 2,306,000
<OTHER-EXPENSES> 352,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,000
<INCOME-PRETAX> (466,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,978,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (466,000)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
