<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 MARCH 28, 1998
[ ] 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 May 7, 1998 there were 7,707,081 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
MARCH 28, 1998 MARCH 29, 1997
-------------- --------------
<S> <C> <C>
Net revenues:
Government contract revenues $ 1,691,000 $ 2,105,000
Commercial product revenues 213,000 13,000
----------- -----------
Total net revenues 1,904,000 2,118,000
----------- -----------
Costs and expenses:
Cost of commercial revenues 1,033,000 0
Contract research and development 1,323,000 1,484,000
Other research and development 153,000 352,000
Selling, general and administrative 1,247,000 822,000
----------- -----------
Total costs and expenses 3,756,000 2,658,000
----------- -----------
Loss from operations (1,852,000) (540,000)
Interest income(expense), net 16,000 74,000
----------- -----------
Net loss ($1,836,000) ($466,000)
=========== ===========
Basic and diluted loss per share ($0.24) ($0.06)
Weighted average number of
shares outstanding 7,720,793 7,676,058
=========== ===========
</TABLE>
(See accompanying notes)
2
<PAGE> 3
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS MARCH 28, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,729,000 $ 1,438,000
Short-term investments 197,000 2,099,000
Accounts receivable 1,650,000 1,048,000
Inventory 993,000 677,000
Prepaid expenses and other current assets 70,000 146,000
------------ ------------
Total current assets 6,639,000 5,408,000
Property and equipment, net of accumulated depreciation
of $6,451,000 and $6,534,000, respectively 2,656,000 2,456,000
Patents and licenses, net of accumulated amortization
of $1,114,000 and $1,057,000, respectively 2,111,000 2,152,000
Other assets, net of accumulated
amortization of $86,000 and $86,000, respectively 145,000 71,000
------------ ------------
Total assets $ 11,551,000 $ 10,087,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,630,000 $ 1,407,000
Accrued compensation 364,000 437,000
Current portion of long-term debt 64,000 64,000
------------ ------------
Total current liabilities 2,058,000 1,908,000
Long-term debt 156,000 13,000
------------ ------------
Total liabilities 2,214,000 1,921,000
------------ ------------
Redeemable Preferred Series A, 2,000,000 shares
authorized, 500,000 shares issued and outstanding 3,000,000 0
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common Stock, $.001 par value, 15,000,000 shares
authorized, 7,707,081 and 7,699,581 shares issued
and outstanding 8,000 8,000
Capital in excess of par value 35,218,000 35,211,000
Deficit accumulated during development stage (28,889,000) (27,053,000)
------------ ------------
Total stockholders' equity 6,337,000 8,166,000
------------ ------------
Total liabilities and stockholders' equity $ 11,551,000 $ 10,087,000
============ ============
</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>
MARCH 28, MARCH 29,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,836,000) ($ 466,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 290,000 235,000
Changes in assets and liabilities:
Accounts receivable (601,000) (331,000)
Inventory (316,000) (5,000)
Prepaid expenses and other current assets 76,000 27,000
Patents and licenses (17,000) (47,000)
Other assets (74,000) 0
Accounts payable and accrued expenses 150,000 153,000
Billings in excess of cost and earnings on
uncompleted contracts 0 (129,000)
----------- -----------
Net cash used for operating activities (2,328,000) (563,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term investments 1,902,000 298,000
Purchases of property and equipment (434,000) (313,000)
----------- -----------
Net cash provided by (used for) investing activitieS 1,468,000 (15,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 159,000 0
Principal payments on long-term obligations (16,000) (105,000)
Proceeds from sale of preferred and common stock 3,007,000 356,000
----------- -----------
Net cash provided by financing activities 3,150,000 251,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,290,000 (327,000)
Cash and cash equivalents at beginning of period 1,438,000 2,599,000
----------- -----------
Cash and cash equivalents at end of period $ 3,728,000 $ 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 has been prepared in
accordance with generally accepted accounting principles and 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, 1997. The results of operations for the three months
ended March 28, 1998 are not necessarily indicative of results for the entire
fiscal year ending December 31, 1998.
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>
MARCH 28, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Raw Materials $564,000 $336,000
Work-in-Progress 393,000 302,000
Finished Goods 36,000 39,000
-------- --------
Total Inventory $993,000 $677,000
======== ========
</TABLE>
C. PER SHARE INFORMATION
Basic net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding in each
year. Diluted net loss per share is computed by dividing income available to
common stockholders plus income associated with dilutive securities by the
weighted average number of common shares outstanding plus any potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock in each year. Potential Common Stock
issuable upon exercise of options and warrants to purchase shares of the
Company's Common Stock (and conversion of the outstanding Preferred Stock to
Common Stock) is not included as the result would have been antidilutive
considering the Company's reported net loss from operations for all periods
presented.
D. PRIVATE PLACEMENT
On March 26, 1998, the Company completed a private placement of 500,000 shares
of Series A 6% Cumulative Convertible Preferred Stock ("Preferred Shares") to
certain investors at $6.00 per share. The proceeds of the offering, net of
offering expenses, totaled $3 million. Each Preferred Share is convertible into
two shares of Common Stock at $3 per share and carries a cumulative dividend of
6% per annum. The Preferred Shares also have voting rights and liquidation
preferences. The Preferred Shares are not redeemable prior to March 26, 2001.
Thereafter, the Company may redeem the Preferred Shares at 110% of the carrying
amount plus accrued dividends. Subsequent to March 26, 2005, the holders of the
Preferred Shares have the option to redeem the Preferred Shares at their
carrying amount plus accrued dividends. The Company has an option, exercisable
through March 26, 1999, to sell up to an additional $2 million of Preferred
Shares under the same terms provided the Company meets a certain milestone.
5
<PAGE> 6
E. LEASE AGREEMENT
The Company is in continuing negotiations to establish a master lease agreement
as well as continuing to explore alternative financing arrangements to provide
approximately $3 million of capital asset financing. Upon execution of a master
lease or other financing agreement, the Company believes that the financing will
be adequate to meet its operational needs over the next 12 months. However, in
the event that a master lease or other financing agreement is not successfully
executed, the Company will be required to seek alternative financing. Depending
upon the timing of market acceptance of the Company's products and the
manufacturing ramp-up necessary to support the market acceptance, additional
working capital financing may be required to fully implement the Company's
business plan.
F. NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("SFAS 130"), and
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 130 and 131 became effective for the Company in 1998. The
adoption of SFAS 130 and 131 is not expected to have a material effect on the
Company's financial statements disclosures.
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, as amended. These statements are in "Results of
Operations for the three-month periods ended March 28, 1998 and March 29, 1997"
and "Liquidity and Capital Resources". These statements represent the Company's
expectations or beliefs concerning future events and includes statements, among
others, regarding commercial revenues and the Company's financial resources.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth herein.
Investors are strongly encouraged to review the section entitled "Factors
Affecting Future Business Operations" for a discussion of factors that could
affect future performance.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 28, 1998
AND MARCH 29, 1997
Total net revenues decreased by $214,000, or 10%, to $1,904,000 in the first
quarter of 1998 from $2,118,000 in the first quarter of 1997. This change is due
to a decrease in government contract revenue offset in part by an increase in
commercial revenue. Government contract revenue decreased by $414,000, or 20%,
from $2,105,000 in the first quarter of 1997 to $1,691,000 in the first quarter
of 1998. This decrease is attributable to the completion of certain government
programs and the transition period associated with entering into new government
contracts.
Commercial revenue increased $200,000 from $13,000 in the first quarter of 1997
to $213,000 in the first quarter of 1998. This increase is due to the increased
shipments of the Company's commercial products.
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
revenues 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.
The cost of commercial revenues was $1,033,000 for the first quarter of 1998.
This represents an increase over 1997 in cost of commercial revenues and related
start-up costs to support the increase in commercial sales and manufacturing
capacity.
Contract research and development expenses decreased by $161,000 or 11%, from
$1,484,000 in the first quarter of 1997 to $1,323,000 in the first quarter of
1998. This decrease is attributable to the decrease in contract revenue which is
directly related to contract expenses.
Other research and development expenses decreased by $199,000 or 57%, from
$352,000 in the first quarter of 1997 to $153,000 in the first quarter of 1998.
The Company's continued focus on commercial production and ramp-up of
manufacturing capacity has directly contributed to the decline in other research
and development expenses.
6
<PAGE> 7
Selling, general and administrative expenses increased by $425,000 or 52%, from
$822,000 in the first quarter of 1997 to $1,247,000 in the first quarter of
1998. This increase is due to increased labor-related expenses, attributable to
the expansion of the Company's sales force, as well as increased efforts in the
Company's marketing program, both of which were projected by the Company as part
of its business plan to expand sales and marketing activities.
Interest income decreased by $67,000 or 79%, from $85,000 in the first quarter
of 1997 to $18,000 in the first quarter of 1998. The decrease in interest income
is primarily due to withdrawal of interest-earning investment balances utilized
by the Company to fund and expand operations.
Interest expense decreased by $9,000 or 82%, from $11,000 in the first quarter
of 1997 to $2,000 in the first quarter of 1998. 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 increased by $389,000 or
10%, from $3,537,000 on December 31, 1997 to $3,926,000 on March 28, 1998. The
increase is the result of a private placement of $3 million offset by operating
losses of $1.8 million and purchases of new equipment in the amount of $434,000
for expansion of manufacturing operations.
The Company's principal resource commitments at March 28, 1998 consist of
accounts payable and accrued employee compensation of $1,630,000 and $364,000,
respectively, and approximately $220,000 of equipment financing commitments.
The Company is in continuing negotiations to establish a master lease agreement
as well as continuing to explore alternative financing arrangements to provide
approximately $3 million of capital asset financing. Upon execution of a master
lease or other financing agreement, the Company believes that the financing will
be adequate to meet its operational needs over the next 12 months. However, in
the event that a master lease or other financing agreement is not successfully
executed, the Company will be required to seek alternative financing. There can
be no assurance that such alternative financing would be available on terms
acceptable to the Company, if at all. Depending upon the timing of market
acceptance of the Company's products and the manufacturing ramp-up necessary to
support the market acceptance, additional working capital financing may be
required to fully implement the Company's business plan. Under such
circumstances, the Company's inability to fully implement its business plan,
including the procurement of additional financing, would have a material adverse
effect on the Company's business, operating results and financial condition.
IMPACT OF YEAR 2000
The Company currently uses a limited number of software products that are not
Year 2000 compliant. However, the Company currently plans to acquire
manufacturing software in order to support its expansion efforts. The new
software will be Year 2000 compliant and is expected to replace substantially
all non-Year 2000 compliant software. Accordingly, the Company does not expect
the amounts required to be expensed to become Year 2000 compliant to have a
material effect on its financial position or results of operations.
7
<PAGE> 8
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 market. 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. The failure to produce
products in volume or achieve market acceptance would have a material adverse
effect on the Company's business, results of operations and cash flows.
DEPENDENCE ON SALES TO SERVICE PROVIDERS AND OEMS
To gain market acceptance, the Company must demonstrate that its products will
provide advantages to service providers who utilize base station systems and
OEMs that manufacture base station systems. These advantages include 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 service providers
and OEMs 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 sufficient for
limited 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
superconducting 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.
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 March 28, 1998.
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: May 7, 1998 /s/ James G. Evans, Jr.
-------------------------
James G. Evans, Jr.
Vice President, Chief Financial Officer
9
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-28-1998
<CASH> 696,000
<SECURITIES> 3,230,000
<RECEIVABLES> 1,650,000
<ALLOWANCES> 0
<INVENTORY> 993,000
<CURRENT-ASSETS> 6,639,000
<PP&E> 9,107,000
<DEPRECIATION> 6,451,000
<TOTAL-ASSETS> 11,551,000
<CURRENT-LIABILITIES> 2,058,000
<BONDS> 0
0
3,000,000
<COMMON> 8,000
<OTHER-SE> 35,218,000
<TOTAL-LIABILITY-AND-EQUITY> 11,551,000
<SALES> 213,000
<TOTAL-REVENUES> 1,904,000
<CGS> 1,033,000
<TOTAL-COSTS> 3,603,000
<OTHER-EXPENSES> 153,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000
<INCOME-PRETAX> (1,836,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,889,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,836,000)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
