<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 SEPTEMBER 27, 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 October 30, 1997 there were 7,699,581 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 NINE MONTHS ENDED
SEPT. 28, 1996 SEPT. 27, 1997 SEPT. 28, 1996 SEPT. 27, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Government contract revenues $ 2,159,000 $ 1,886,000 $ 5,053,000 $ 6,331,000
Commercial product revenues 40,000 85,000 128,000 112,000
Sublicense Royalties 0 38,000 0 38,000
------------- ------------- ------------- -------------
Total net revenues 2,199,000 2,009,000 5,181,000 6,481,000
------------- ------------- ------------- -------------
Costs and expenses:
Contract research and 1,553,000 1,479,000 4,170,000 4,453,000
development
Other research and development
and commercial 562,000 512,000 1,982,000 1,289,000
Selling, general and 841,000 1,093,000 2,217,000 2,900,000
administrative
------------- ------------- ------------- -------------
Total costs and 2,956,000 3,084,000 8,369,000 8,642,000
expenses
------------- ------------- ------------- -------------
Loss from operations (757,000) (1,075,000) (3,188,000) (2,161,000)
Interest income(expense), net 2,000 64,000 59,000 189,000
------------- ------------- ------------- -------------
Net loss ($755,000) ($ 1,011,000) ($3,129,000) ($1,972,000)
============= ============= ============= =============
Net loss per share ($0.12) ($0.13) ($0.51) ($0.26)
Weighted average number of
shares outstanding 6,092,226 7,717,356 6,076,770 7,696,955
============= ============= ============= =============
</TABLE>
(see accompanying notes)
2
<PAGE> 3
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
ASSETS DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,599,000 $ 2,784,000
Short-term investments 4,272,000 1,994,000
Accounts receivable 1,599,000 1,439,000
Inventory 502,000 630,000
Prepaid expenses and other current assets 183,000 187,000
------------ ------------
Total current assets 9,155,000 7,034,000
Note receivable from related party 150,000 0
Property and equipment, net of accumulated
depreciation
of $5,762,000 and $6,325,000 respectively 1,799,000 2,041,000
Patents and licenses, net of accumulated
amortization
of $835,000 and $1,002,000 respectively 2,204,000 2,175,000
Other assets, net of accumulated
amortization of $86,000 and $86,000 respectively 36,000 41,000
------------ ------------
Total assets $ 13,344,000 $ 11,291,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 935,000 $ 874,000
Accrued compensation 313,000 464,000
Long-term debt --current 423,000 149,000
Billings in excess of cost and earnings on 306,000 40,000
uncompleted contracts
------------ ------------
Total current liabilities 1,977,000 1,527,000
Long-term debt 77,000 29,000
------------ ------------
Total liabilities 2,054,000 1,556,000
------------ ------------
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 35,211,000
Deficit accumulated during development stage (23,512,000) (25,484,000)
------------ ------------
Total stockholders' equity 11,290,000 9,735,000
------------ ------------
Total liabilities and stockholders' equity $ 13,344,000 $ 11,291,000
============ ============
</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>
SEPT. 28, SEPT. 27,
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,129,000) ($1,972,000)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation, and patent/license amortization 850,000 730,000
Compensation expense associated with stock options granted 12,000 0
Changes in assets and liabilities:
Accounts receivable (801,000) 160,000
Inventory (169,000) (128,000)
Prepaid expenses and other current assets (350,000) (4,000)
Patents and licenses (116,000) (137,000)
Other assets 0 144,000
Accounts payable and accrued expenses 573,000 90,000
Billings in excess of cost and earnings on
uncompleted contracts 147,000 (266,000)
----------- -----------
Net cash used for operating activities (2,983,000) (1,383,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from short-term investments 2,161,000 2,278,000
Purchases of property and equipment (173,000) (806,000)
----------- -----------
Net cash provided by (used for) investing activities 1,988,000 1,472,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 39,000 0
Principal payments on long-term obligations (291,000) (321,000)
Proceeds from sale of common stock 46,000 417,000
----------- -----------
Net cash (used for) provided by financing activities (206,000) 96,000
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,201,000) 185,000
Cash and cash equivalents at beginning of period 2,430,000 2,599,000
----------- -----------
Cash and cash equivalents at end of period $ 1,229,000 $ 2,784,000
=========== ===========
</TABLE>
(see accompanying notes)
4
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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 nine
months ended September 27, 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:
December 31, 1996 September 27, 1997
Raw Materials $200,000 $276,000
Work-in-Progress 281,000 308,000
Finished Goods 21,000 46,000
-------- --------
Total Inventory $502,000 $630,000
======== ========
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 nine-month periods ended
September 27, 1997 and September 28, 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 NINE-MONTH PERIODS ENDED SEPTEMBER
27, 1997 AND SEPTEMBER 28, 1996
Total net revenues increased by $1,300,000, or 25%, from $5,181,000 in the first
nine months of 1996 to $6,481,000 in the first nine months of 1997 due primarily
to the increase in government contract revenues. Total net revenues decreased by
$190,000, or 9%, from $2,199,000 in the third quarter of 1996 to $2,009,000 in
the third quarter of 1997 due mainly to the decrease in government contract
revenues. Government contract revenues increased by $1,278,000, or 25%, from
$5,053,000 in the first nine months of 1996 to $6,331,000 in the first nine
5
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months of 1997. This increase is primarily attributable to revenues associated
with a government contract which the Company was awarded in the third quarter of
fiscal 1996. Government contract revenues decreased by $273,000, or 13%, from
$2,159,000 in the third quarter of 1996 to $1,886,000 in the third quarter of
1997. This anticipated decrease is due to the normal fluctuations in government
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. 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 was delivered
in late 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 increased by $45,000, or 113%, from $40,000 in the
third quarter of 1996 to $85,000 in the third quarter of 1997. This increase is
due to the Company's expanded efforts into commercialization which resulted in
commercial shipments of both SuperFilter(TM) products and cryogenic coolers in
the third quarter. Commercial product revenues decreased by $16,000, or 13%,
from $128,000 in the first nine months of 1996 to $112,000 in the first nine
months of 1997. This decrease in commercial revenues is the result of the
Company's continuing efforts to shift its emphasis towards SuperFilter(TM)
products and cryogenic cooler sales and away from sales of components such as
films and development hardware.
Sublicense royalties were $38,000 in the three-month and nine-month periods
ended September 27, 1997. There were no sublicense royalties in the three-month
and nine-month periods ended September 28, 1996 as the Company did not offer any
new sublicense agreements on its patents during this time period.
Contract research and development expenses increased by $283,000 or 7%, from
$4,170,000 in the first nine months of 1996 to $4,453,000 in the first nine
months of 1997. This increase is 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. Contract research and development expenses decreased by $74,000
or 5%, from $1,553,000 in the third quarter of 1996 to $1,479,000 in the third
quarter of 1997 due to the decrease in government contract revenues.
Other research and development expenses decreased by $50,000 or 9%, from
$562,000 in the third quarter of 1996 to $512,000 in the third quarter of 1997.
Other research and development expenses decreased by $693,000 or 35%, from
$1,982,000 in the first nine months of 1996 to $1,289,000 in the first nine
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 $252,000 or 30%, from
$841,000 in the third quarter of 1996 to $1,093,000 in the third quarter of
1997. Selling, general and administrative expenses increased by $683,000 or 31%,
from $2,217,000 in the first nine months of 1996 to $2,900,000 in the first nine
months of 1997. These increases are primarily due to an increase in
labor-related expenses, travel and general services as the Company continues its
sales and marketing efforts for its SuperFilter(TM) and cryogenic products.
Interest income increased by $51,000 or 268%, from $19,000 in the third quarter
of 1996 to $70,000 in the third quarter of 1997. Interest income increased by
$100,000 or 86%, from $116,000 in the first nine months of 1996 to $216,000 in
the first nine 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 $11,000 or 65%, from $17,000 in the third quarter
of 1996 to $6,000 in the third quarter of 1997. Interest expense decreased by
$30,000 or 53%, from $57,000 in the first nine months of 1996 to $27,000 in the
first nine months of 1997. These decreases are attributable to the reduction in
the Company's long-term portion of note payable and capitalized lease
obligations.
6
<PAGE> 7
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments declined by $2,093,000 or
30%, from $6,871,000 on December 31, 1996 to $4,778,000 on September 27, 1997.
The decrease is the result of funding operating losses and the related net
change in working capital items of $1,383,000, purchases of new equipment for
expansion of manufacturing operations of $806,000 and repayment of debt of
$321,000. 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.
The Company's principal resource commitments at September 27, 1997 consist of
accounts payable and accrued employee compensation of $874,000 and $464,000,
respectively, and approximately $178,000 of equipment financing commitments.
The Company believes that its existing cash, cash equivalents and short-term
investments, together with revenue from operations, should be adequate to fund
the Company's current level of operations and to meet its current anticipated
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.
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 and are for limited volume production. There can be no
assurance that the Company will
7
<PAGE> 8
be successful in overcoming the technological, engineering and management
challenges associated with the production of commercial quantities of HTS or
cryogenic 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 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
No reports on Form 8-K were filed during the quarter ended September 27, 1997.
8
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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: October 31, 1997 /s/ James G. Evans, Jr.
-------------------------
James G. Evans, Jr.
Vice President, Chief Financial Officer
9
<PAGE> 10
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUN-29-1997
<PERIOD-END> SEP-27-1997
<CASH> 178,000
<SECURITIES> 4,600,000
<RECEIVABLES> 1,439,000
<ALLOWANCES> 0
<INVENTORY> 630,000
<CURRENT-ASSETS> 7,034,000
<PP&E> 8,366,000
<DEPRECIATION> 6,325,000
<TOTAL-ASSETS> 11,291,000
<CURRENT-LIABILITIES> 1,527,000
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 35,211,000
<TOTAL-LIABILITY-AND-EQUITY> 11,291,000
<SALES> 0
<TOTAL-REVENUES> 6,481,000
<CGS> 0
<TOTAL-COSTS> 7,353,000
<OTHER-EXPENSES> 1,289,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,000
<INCOME-PRETAX> (1,972,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,484,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,972,000)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
