<PAGE> 1
FORM 10-Q/A
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 JULY 3, 1999
[ ] 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,
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 August 13, 1999 there were 7,738,216 shares of the Registrant's Common
Stock outstanding.
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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
------------------------------- -------------------------------
JULY 3, 1999 JUNE 27, 1998 JULY 3, 1999 JUNE 27, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net revenues:
Government contract revenues $ 1,239,000 $ 1,985,000 $ 2,293,000 $ 3,676,000
Commercial product revenues 239,000 255,000 676,000 468,000
----------- ----------- ----------- -----------
Total net revenues 1,478,000 2,240,000 2,969,000 4,144,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of commercial product revenues 1,124,000 1,486,000 2,630,000 2,519,000
Contract research and development 773,000 1,077,000 1,528,000 2,400,000
Other research and development 494,000 495,000 932,000 648,000
Selling, general and administrative 1,397,000 1,393,000 2,790,000 2,640,000
----------- ----------- ----------- -----------
Total costs and expenses 3,788,000 4,451,000 7,880,000 8,207,000
----------- ----------- ----------- -----------
Loss from operations (2,310,000) (2,211,000) (4,911,000) (4,063,000)
Interest (expense) income, net (102,000) 28,000 (117,000) 44,000
----------- ----------- ----------- -----------
Net loss $(2,412,000) $(2,183,000) $(5,028,000) $(4,019,000)
=========== =========== =========== ===========
Deemed distribution for accounting purposes (366,000) 0 (366,000) 0
----------- ----------- ----------- -----------
Net loss available for common stockholders $(2,778,000) $(2,183,000) $(5,394,000) $(4,019,000)
=========== =========== =========== ===========
Basic and diluted loss per share:
Net loss $ (0.31) $ (0.28) $ (0.65) $ (0.52)
Deemed distribution (0.05) (0.00) (0.05) (0.00)
----------- ----------- ----------- -----------
Net loss available to common stockholders $ (0.36) $ (0.28) $ (0.70) $ (0.52)
=========== =========== =========== ===========
Weighted average number of shares outstanding 7,744,053 7,723,335 7,740,267 7,721,787
=========== =========== =========== ===========
</TABLE>
(See accompanying notes)
2
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SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
ASSETS JULY 3, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,136,000 $ 310,000
Short-term investments 0 0
Accounts receivable 1,784,000 1,939,000
Inventory 3,793,000 2,719,000
Prepaid expenses and other current assets 228,000 173,000
------------ ------------
Total current assets 7,941,000 5,141,000
Property and equipment, net of accumulated depreciation
of $7,559,000 and $6,985,000, respectively 4,666,000 5,114,000
Patents and licenses, net of accumulated amortization
of $1,401,000 and $1,285,000, respectively 1,997,000 2,070,000
Other assets 175,000 184,000
------------ ------------
Total assets $ 14,779,000 $ 12,509,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,689,000 $ 2,396,000
Accrued compensation 695,000 583,000
Current portion of debt and capitalized lease obligations 999,000 813,000
------------ ------------
Total current liabilities 4,383,000 3,792,000
Long-term debt 915,000 932,000
------------ ------------
Total liabilities 5,298,000 4,724,000
------------ ------------
Redeemable Preferred, $.001 par value,
2,000,000 shares authorized, Series A
645,833 shares issued and outstanding,
Series A-1 125,000 shares issued and outstanding,
Series B 500,000 shares issued and outstanding 0 8,982,000
Commitments and contingencies
Stockholders' equity:
Convertible Preferred Shares, $.001 par value, 2,000,000
shares authorized, Series A-2 64,584 shares issued and
outstanding, Series A-3 12,500 shares issued and
outstanding, Series B-1 50,000 shares issued and
outstanding, Series C 41,667 shares issued and
outstanding, Series D 77,296 shares issued
and outstanding 14,561,000 0
Common Stock, $.001 par value, 30,000,000 shares
authorized, 7,737,216 and 7,722,591 shares
issued and outstanding 8,000 8,000
Capital in excess of par value 36,521,000 35,010,000
Deficit accumulated during development stage (41,609,000) (36,215,000)
------------ ------------
Total stockholders' equity (deficit) 9,481,000 (1,197,000)
------------ ------------
Total liabilities and stockholders' equity $ 14,779,000 $ 12,509,000
============ ============
</TABLE>
(See accompanying notes)
3
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SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before deemed distribution for accounting purposes $(5,028,000) $(4,019,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 625,000 614,000
Changes in assets and liabilities:
Accounts receivable 155,000 (546,000)
Inventory (1,074,000) (568,000)
Prepaid expenses and other current assets (55,000) 34,000
Patents and licenses (44,000) (58,000)
Other assets 9,000 (89,000)
Accounts payable and accrued expenses 405,000 1,123,000
----------- -----------
Net cash used in operating activities (5,007,000) (3,509,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 0 2,099,000
Purchases of property and equipment (960,000) (1,593,000)
Proceeds from sale/leaseback of property and equipment 900,000 0
----------- -----------
Net cash (used for) provided by investing activities (60,000) 506,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings, net 267,000 159,000
Principal payments on long-term obligations (97,000) (39,000)
Proceeds from sale of preferred and common stock 6,723,000 2,983,000
----------- -----------
Net cash provided by financing activities 6,893,000 3,103,000
----------- -----------
Net increase in cash and cash equivalents 1,826,000 100,000
Cash and cash equivalents at beginning of period 310,000 1,438,000
----------- -----------
Cash and cash equivalents at end of period $ 2,136,000 $ 1,538,000
=========== ===========
</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 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, 1998, including but not limited to the caption entitled
"Factors Affecting Future Business Operations." The results of operations for
the three months and six months ended July 3, 1999 are not necessarily
indicative of results for the entire fiscal year ending December 31, 1999.
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>
JULY 3, 1999 DECEMBER 31, 1998
------------ -----------------
<S> <C> <C>
Raw Materials $ 541,000 $ 817,000
Work-in-Progress 2,232,000 1,666,000
Finished Goods 1,020,000 236,000
---------- ----------
Total Inventory $3,793,000 $2,719,000
========== ==========
</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. Net loss available to common stockholders is computed by deducting
dividends accumulated on cumulative preferred stock and accretion of redemption
value on redeemable preferred shares while outstanding. Diluted net loss per
share is computed by dividing loss 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.
The Company has reflected an accounting deemed distribution in the
second quarter of 1999 relating to the issuance of the Series D Preferred Stock
which, at issuance, is convertible at a discount from the market price for the
Company's common stock. This accounting deemed dividend is a non-cash,
non-recurring accounting entry for determining net loss available to common
stockholders and the related net loss per share.
During the third quarter of 1999, it was determined an error was made in
calculating the effect of the deemed distribution that was reported in the
second quarter of 1999. The deemed distribution reported of $1,195,000 was
overstated by $829,000. This correction has no effect on previously reported net
loss or total stockholder's equity. The effect on the relevant financial
statement elements is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended July 3, 1999 Six months ended July 3, 1999
As As As As
reported Adjustment adjusted reported Adjustment adjusted
<S> <C> <C> <C> <C> <C> <C>
Net Loss $2,412 $0 $2,412 $5,028 $0 $5,028
Deemed distribution for accounting
purposes 1,195 (829) 366 1,195 (829) 366
Net loss available to common
stockholders 3,607 (829) 2,778 6,223 (829) 5,394
Basic and diluted loss per share:
Net loss per share ($0.31) $0 ($0.31) ($0.65) $0 ($0.65)
Deemed distribution ( 0.15) 0.10 ( 0.05) ( 0.15) 0.10 ( 0.05)
Net loss per share available to
common stockholders ( 0.46) 0.10 ( 0.36) ( 0.80) 0.10 ( 0.70)
July 3, 1999
As As
reported Adjustment adjusted
Capital in excess of par value $37,350 ($829) $36,521
Deficit accumulated during
development stage (42,438) 829 (41,609)
Total stockholder's equity 9,481 0 9,481
</TABLE>
D. PRIVATE PLACEMENT
On June 23, 1999, the Company entered into a private equity financing
agreement providing for the sale of securities in two tranches with gross
proceeds of up to $6.5 million. Under the first transaction, which took place
June 23, 1999, the Company sold 77,296 shares of Series D 6% Cumulative
Convertible Preferred Stock to certain investors at $50.00 per share which
resulted in gross proceeds of approximately $3.8 million. Under the second
transaction, which took place on August 17, 1999, the Company sold 28,704 shares
of Series D 6% Cumulative Convertible Preferred Stock to certain investors at
$50.00 per share which resulted in gross proceeds of approximately $1.4 million.
Each share of Preferred Stock is convertible into twenty shares of Common Stock
at $2.50 per share and carries a cumulative dividend of 6% per annum. The
Preferred Stock also has voting rights and liquidation preferences. In
connection with the Series D financing the Company also issued warrants for the
purchase of up to 212,000 shares of Common Stock at a price of $3.00 per share.
The Company granted the Series D investors registration rights with respect to
the Common Stock underlying the Series D Preferred Stock and related warrants.
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F. WORKING CAPITAL CREDIT AGREEMENT
On June 18, 1999, the Company entered into a new credit agreement, which
includes a revolving line of credit maturing on July 1, 2000. The revolving line
of credit is not to exceed the lesser of (i) $2.5 million or (ii) 80% of
eligible accounts receivable. The revolving line of credit bears interest at the
prime rate plus 1% (9.00% at July 3, 1999). The Company is required to maintain
certain minimum tangible net worth, debt and other financial and business
covenants. Borrowings under the revolving line of credit are secured by
substantially all of the Company's assets. The agreement is renewable annually.
All outstanding borrowings under all previous agreements were fully paid at July
3, 1999. At July 3, 1999, the Company had $858,000 outstanding under this
agreement. In connection with the new credit agreement, the Company issued
warrants for the purchase of 62,500 shares of Common Stock at a price of $3.00
per share.
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 and six-month periods ended June 27,
1998 and July 3, 1999" and "Liquidity and Capital Resources." These statements
represent the Company's expectations or beliefs concerning future events and
include 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, a
portion of which is set forth herein under the caption "Factors Affecting Future
Business Operations." Investors are strongly encouraged to review the section
entitled "Factors Affecting Future Business Operations" in the Company's Form
10-K for a full discussion of the risk factors that could affect future
performance.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED JUNE 27, 1998 AND JULY
3, 1999
Total net revenues decreased by $762,000, or 34%, from $2,240,000 in the
second quarter of 1998 to $1,478,000 in the second quarter of 1999. Net revenues
decreased by $1,175,000 or 28%, from $4,144,000 in the first six months of 1998
to $2,969,000 in the first six months of 1999. These changes are due to a
decrease in government contract revenue offset in part by increases in
commercial revenue and sublicense royalties.
Government contract revenue decreased by $746,000, or 38%, from
$1,985,000 in the second quarter of 1998 to $1,239,000 in the second quarter of
1999. Government contract revenue decreased by $1,383,000 or 38%, from
$3,676,000 in the first six months of 1998 to $2,293,000 in the first six months
of 1999. These decreases are attributable to the completion of certain
government programs and the transition period associated with entering into new
government contracts.
Commercial product revenue decreased by $16,000 or 6%, from $255,000 in
the second quarter of 1998 to $239,000 in the second quarter of 1999. Commercial
product revenue increased by $208,000 or 44%, from $468,000 in the first six
months of 1998 to $676,000 in the first six months of 1999. These increases are
the result of the Company's increased sales of the SuperFilter(R) product.
Additionally, sublicense royalties were $10,000 in the first half of 1999. There
were no sublicense royalties in the first half of 1998.
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 product revenues decreased by $362,000 or 24%,
from $1,486,000 for the second quarter of 1998 to $1,124,000 in the second
quarter of 1999 due to the Company's cost reduction efforts. The cost of
commercial product revenues increased by $111,000 or 4%, from $2,519,000 for the
first six months of 1998 to $2,630,000 in the first six months of 1999 due to
the substantial increase in sales of commercial products offset by product cost
reductions.
Contract research and development expenses decreased by $304,000 or 28%,
from $1,077,000 in the second quarter of 1998 to $773,000 in the second quarter
of 1999. Contract research and development expenses decreased by $872,000 or
36%, from $2,400,000 in the first six months of 1998 to $1,528,000 in the first
six months of 1999. These decreases are attributable to the decrease in contract
activity.
Other research and development expenses were essentially unchanged from
$495,000 in the second quarter of 1998 to $494,000 in the second quarter of
1999. Other research and development expenses increased by $284,000 or 44%, from
$648,000 in the first six months of 1998 to $932,000 in the first six months of
1999. This increase is due to the Company's efforts in expanding market
opportunities through product line enhancement and development.
Selling, general and administrative expenses remained effectively the
same at $1,393,000 in the second quarter of 1998 as compared to $1,397,000 in
the second quarter of 1999. Selling, general and administrative expenses
increased by $150,000 or 6%, from $2,640,000 in the first six months of 1998 to
$2,790,000 in the first six months of 1999.
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These increases reflect increased labor-related expenses, attributable to the
Company's sales force and marketing program expansions.
Interest income decreased by approximately $34,000 or 99%, from $34,000
in the second quarter of 1998 to $0 in the second quarter of 1999. Interest
income decreased by $51,000 or 98%, from $52,000 in the first six months of 1998
to $1,000 in the first six months of 1999. The decreases in interest income are
primarily due to withdrawal of interest-earning investment balances by the
Company to fund and expand operations.
Interest expense increased by $96,000 or over 100%, from $6,000 in the
second quarter of 1998 to $102,000 in the second quarter of 1999. Interest
expense increased by $110,000 or over 100%, from $8,000 in the first six months
of 1998 to $118,000 in the first six months of 1999. These increases occurred as
the Company entered into new working capital financing agreements and borrowed
for working capital needs in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1,826,000 or over 100%, from
$310,000 on December 31, 1998 to $2,136,000 on July 3, 1999. The increase is the
result of two private placements of $3 million and $3.8 million, respectively, a
sale/leaseback of equipment of $900,000, and net borrowings from bank lines of
$267,000 offset by operating losses of $5.0 million, working capital increases
of $1,212,000 (accounts receivable decrease of $155,000 offset by accounts
payable increase of $293,000 and inventory increase of $1,074,000) and purchases
of new equipment in the amount of $960,000 for expansion of manufacturing
operations. The net increase in inventory is due to the Company's strategy of
creating capacity and products to quickly respond to anticipated demand.
The Company's principal resource commitments at July 3, 1999 consist of
accounts payable and accrued employee compensation of $2,689,000 and $695,000,
respectively, and approximately $1.9 million of obligations under financing
commitments.
On February 26, 1999, the Company entered into an Exchange Agreement
with the holders of all of the Company's then outstanding redeemable Preferred
Stock to remove redemption provisions and to place limits on Preferred Stock
conversions and warrant exercises by the holders of the Preferred Stock pending
approval by the Company's stockholders of the removal of such limitations. The
Company's stockholders approved the elimination of conversion and exercise
limitations at the Company's 1999 Annual Meeting of Stockholders. In partial
exchange for the elimination of the redemption feature the Company issued the
holders exchanging Preferred Stock warrants to purchase up to 75,000 shares of
common stock at $7.00.
On March 5, 1999, the Company completed a private placement of 41,667
shares of Series C 7% Cumulative Convertible Preferred Stock to a certain
investor at $72.00 per share. The gross proceeds of the offering totaled $3
million. Each share of Preferred Stock is convertible into twenty shares of
Common Stock at $3.60 per share and carries a cumulative dividend of 7% per
annum. The Preferred Stock also has voting rights and liquidation preferences.
In March 1999, the Company entered into a master lease agreement for
$1.5 million in lease financing. The Company has drawn upon $900,000 as of July
3, 1999 in an equipment sale/leaseback transaction under the agreement to
provide working capital. The implicit interest rate of the lease agreement is
14.4% for a term of 48 months. In connection with the new lease, the Company
issued warrants for the purchase of 25,180 shares of Common Stock at a price of
$4.17 per share.
On June 23, 1999, the Company entered into a private equity financing
agreement providing for the sale of securities in two tranches with gross
proceeds of up to $6.5 million. Under the first transaction, which took place
June 23, 1999, the Company sold 77,296 shares of Series D 6% Cumulative
Convertible Preferred Stock to certain investors at $50.00 per share which
resulted in gross proceeds of approximately $3.8 million. Under the second
transaction, which took place on August 17, 1999, the Company sold 28,704 shares
of Series D 6% Cumulative Convertible Preferred Stock to certain investors at
$50.00 per share which resulted in gross proceeds of approximately $1.4 million.
Each share of Preferred Stock is convertible into twenty shares of Common Stock
at $2.50 per share and carries a cumulative dividend of 6% per annum. The
Preferred Stock also has voting rights and liquidation preferences. In
connection with the Series D financing the Company also issued warrants for the
purchase of up to 212,000 shares of Common Stock at a price of $3.00 per share.
The Company granted the Series D investors registration rights with respect to
the Common Stock underlying the Series D Preferred Stock and related warrants.
On June 18, 1999, the Company entered into a new credit agreement, which
includes a revolving line of credit maturing on July 1, 2000. The revolving line
of credit is not to exceed the lesser of (i) $2.5 million or (ii) 80% of
eligible accounts receivable. The revolving line of credit bears interest at the
prime rate plus 1% (9.00% at July 3, 1999). The Company is required to maintain
certain minimum tangible net worth, debt and other financial and business
covenants. Borrowings under the revolving line of credit are secured by
substantially all of the Company's assets. The agreement is renewable annually.
All outstanding borrowings under all previous agreements were fully paid at July
3, 1999. At July 3, 1999, the Company had $858,000 outstanding under this
agreement. In connection with the new credit agreement, the Company issued
warrants for the purchase of 62,500 shares of Common Stock at a price of $3.00
per share.
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<PAGE> 8
The Company anticipates relying on external sources of financing to meet
its cash needs over the next 12 months. In an effort to support its capital
requirements, the Company continues to explore several financing alternatives.
The Company is exploring the expansion of its working capital lines of credit in
order to provide the additional flexibility to fund its working capital needs.
The Company is also reviewing other means of equity infusion in order to support
the Company's growth potential and operations. There can be no assurance that
additional financing will be available to the Company, on terms acceptable to
the Company, if at all. In addition, if the Company does not meet its operating
objectives for market penetration and manufacturing production, the need for
capital will increase substantially.
IMPACT OF YEAR 2000
The Company currently uses a limited number of software products that
are not Year 2000 compliant. However, the Company has acquired manufacturing
software, which replaces substantially all non-Year 2000 compliant software, in
order to support its expansion efforts. The software developer has represented
that the new software is Year 2000 compliant. The Company has reviewed the
remaining software programs that are not Year 2000 compliant and believes that
with modification to existing software or cessation of utilization of
non-compliant software, the Year 2000 problem will not pose significant
operational problems. The Company currently does not expect the amounts required
to be incurred to become Year 2000 compliant to have a material effect on its
business, operating results or financial condition.
FACTORS AFFECTING FUTURE BUSINESS OPERATIONS
FUTURE CAPITAL NEEDS
To foster growth of its commercial product sales, the Company has built
a sales and marketing infrastructure and is currently ramping up its
manufacturing operations to support anticipated increased sales of its
SuperFilter(R) product. In order to fully implement its business plan, the
Company is in the process of seeking additional debt and equity financing. There
can be no assurance that the Company will be successful in obtaining such
additional debt or equity financing on acceptable terms or at all. In the event
that the Company is unable to obtain additional financing throughout the course
of 1999, the Company will have insufficient cash to fund operations. The
Company's independent accountants have indicated in their report accompanying
the Company's 1998 year-end financial statements that, based on generally
accepted auditing standards, there is substantial doubt about the Company's
ability to continue as a going concern. If the Company is successful in
obtaining additional equity financing, future dilution to existing or future
stockholders is likely to result.
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 superconducting 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
sufficient volume to meet market demand or that any of the Company's products
will achieve market acceptance. If the Company is unable to manufacture and
market its products for its target markets successfully, its business, results
of operations and financial condition will be materially affected.
DEPENDENCE ON SALES TO SERVICE PROVIDERS AND OEMS
Most of the Company's products, including those developed for wireless
communications base stations and government applications, are intended for use
as components or subsystems in base station systems or other complex systems.
Therefore, to gain market acceptance, particularly in the wireless market, the
Company must demonstrate that its products will provide advantages to the
service providers who utilize base station systems and the OEMs that manufacture
base station systems. These benefits include a decrease in system size, an
increase in base station range 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 limited deployment, use in field-testing as well as development
and prototypes. During 1998, the Company significantly increased its
manufacturing capacity in order to meet the increased demand for its products as
well as expected future requirements. While the Company has increased its
manufacturing capacity, there can be no assurance that the Company will be
successful in overcoming the technological, engineering and management
challenges associated with the production of
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commercial quantities of superconducting or cryogenic products for large scale
deployment at acceptable costs and on a timely basis.
HIGH DEGREE OF DEPENDENCE ON GOVERNMENT CONTRACTS
Since inception, 91% of the Company's net revenues have been from
research and development contract sales directly to the government or to
resellers to the government. Although the Company recently has been devoting
substantial resources to the development of commercial markets for its products,
the Company is, and expects to continue to be in the near term, dependent on
government funding for its research and development projects. 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. Absent significant future revenues from commercial sales, a
significant loss of government funding would have a material adverse effect on
the Company's business, results of operations and financial condition.
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 Company has an exclusive, worldwide license, in all fields of use,
to formulations covered by patents held by the University of Arkansas covering
TBCCO, the material upon which the Company primarily relies for its HTS products
and product development. There can be no assurance that the validity of these
patents will not be subject to challenge. In addition, other parties may have
developed similar materials utilizing TBCCO formulations and may design around
the patented aspects of this material. In addition, the Company has granted
DuPont and its affiliates a non-exclusive worldwide sublicense under its license
with the University of Arkansas to develop and market TBCCO materials and
superconducting technologies. There can be no assurance that this sublicense
will not adversely affect the Company's business, results of operations and
financial condition.
PREFERRED STOCK FINANCINGS
The market value of the Company's Common Stock will likely be diluted by
the issuance of Common Stock upon the conversion of the Company's Series A-2,
Series A-3, Series B-1, Series C and Series D Preferred Stock and the exercise
of options and warrants for the purchase of Company Common Stock, including the
warrants issued in connection with the Company's Preferred Stock financings and
the Exchange Agreement. At its annual meeting of stockholders that was held on
June 2, 1999 the Company received stockholder approval of the elimination of
limitations on conversions of the Company's Preferred Stock and exercises of
warrants issued in connection with the Series C Preferred Stock financing and
the Exchange Agreement. Similarly, and at the special meeting of stockholders
held on August 6, 1999, the Company's stockholders approved the issuance of
Series D Preferred Stock and related warrants. As a result, the Series A-2,
Series A-3, Series B-1, Series C and Series D Preferred Stock may be fully
converted into shares of Common Stock, potentially at a discount to the market
price of the Common Stock on the date of conversion. Also, the holders of
warrants issued in connection with the Preferred Stock financings and the
Exchange Agreement may fully exercise warrants for the purchase of Company
Common Stock at prices that may be below the market value of the Company's
Common Stock on the date of such exercise. The total number of shares that may
be issued upon such Preferred Stock conversions and warrant exercises shall be
6,353,841 shares, plus approximately 6,700 shares pursuant to an antidilution
adjustment on the Series B-1 Warrants. This number of shares is subject to
adjustment for certain future dilutive stock issuances by the Company and for
recapitalizations, stock combinations, stock dividends, stock splits and the
like.
The Company anticipates issuing additional securities in the foreseeable
future to satisfy its capital requirements. In addition, as a means of obtaining
benefits for the Company without the expenditure of cash, the Company has in the
past and may in the future offer equity participation to parties in connection
with debt, leasing, supply agreements or similar arrangements. In such cases,
the Company may issue warrants or other securities providing for the purchase of
Common Stock. These future financing and operating arrangements will likely
result in the eventual issuance of Company Common Stock that may be dilutive to
the Company's current holders of Common Stock.
The Company has never paid a cash dividend on its Common Stock and does
not expect to do so in the foreseeable future. Cumulative dividends on the
Series A-2, Series A-3, Series B-1, Series C and Series D Preferred Stock are
payable at the rates of 6%, 6%, 7%, 7% and 6% per annum, respectively. While the
Series A-2, Series A-3, Series B-1, Series C and Series D Preferred Stock are
outstanding, the Company is limited in its ability to pay dividends on the
Common Stock.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Between June 23, 1999 and the date of this Form 10-Q the Company raised
a total of $5.3 million through the sale of securities to institutional
investors, in private offerings (the "Financings") of preferred stock and
warrants for the purchase of Common Stock. On June 23, 1999 and August 17, 1999,
the Company issued Series D Preferred Stock and related warrants.
The chart below reflects the private securities outstanding following completion
of the Financings:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Common Stock
Issuable
upon Warrants for
Conversion Purchase of Total
Series of Number of of Preferred Common Consideration Date of
Preferred Stock Shares Issued Shares Stock(1) Received Issuance
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series D 77,296 1,545,920 154,592 $3,864,800 June 23, 1999
- ----------------------------------------------------------------------------------------------
Series D 28,704 574,080 57,408 $1,435,200 August 17, 1999
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) The exercise prices and expiration dates of the warrants are as follows:
Series D first closing, $3.00 per share, expiring June 23, 2004; Series
D second closing, $3.00 per share, expiring August 17, 2004.
All of the Company's private placements were effected pursuant to an
exemption from federal registration requirements provided under Rule 506 of
federal Regulation D. The purchasers in each case were accredited investors.
security holders provided under Section 3(a)(9) of the Securities Act of 1933,
as amended (the "Securities Act").
During the last quarter, the Company also issued warrants in connection
with the Company's leasing activities. On June 18, 1999 the Company issued
warrants to PNC Bank, National Association for the purchase of 62,500 shares of
Common Stock at a price of $3.00 per share. The securities were issued pursuant
to an exemption from registration provided under Section 4(2) of the Securities
Act. The warrant holder is a sophisticated institutional investor that obtained
the warrants for investment purposes.
The Company also issued warrants under an obligation in connection with
the Company's Series B and Series C financing to Tanner Unman Securities Inc.
for the purchase of 3,750 shares of Common Stock at a price of $4.50 per share.
The securities were issued pursuant to an exemption from registration provided
under Section 4(2) of the Securities Act. The warrant holder is a sophisticated
institutional investor that obtained the warrants for investment purposes.
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 June 2, 1999:
1) The removal of limitations on conversion of preferred stock into common
stock and exercises of warrants to purchase common stock issued by the Company
in private offerings in 1998 and 1999 were approved.
<TABLE>
<S> <C>
Votes For: 3,621,607
Votes Against: 135,782
Votes Abstaining: 83,750
Broker Non-Votes: 3,135,331
</TABLE>
2) The provision on the Company's Series C Preferred Stock financing
providing Wilmington Securities, Inc. (an indirect, wholly owned subsidiary of
The Hillman Company) representation on the Board of Directors was approved.
<TABLE>
<S> <C>
Votes For: 3,702,434
Votes Against: 82,155
Votes Abstaining: 56,550
Broker Non-Votes: 3,135,331
</TABLE>
3) The proposal to adopt the Company's 1999 Stock Plan was approved.
<TABLE>
<S> <C>
Votes For: 5,037,120 (including 1,533,709 Preferred)
Votes Against: 225,279
Votes Abstaining: 112,449
Broker Non-Votes: 3,135,331
</TABLE>
10
<PAGE> 11
4) The appointment of PricewaterhouseCoopers as independent auditors of the
Company was ratified for the year ending December 31, 1999.
<TABLE>
<S> <C>
Votes For: 8,466,277 (including 1,533,709 Preferred)
Votes Against: 20,200
Votes Abstaining: 23,702
Broker Non-Votes: 0
</TABLE>
In addition to the election of the directors, the following matters were
submitted to the shareholders at the Company's Special Meeting of Shareholders
held August 6, 1999:
1) The issuance of Series D Preferred Stock and related warrants and the
issuance of Common Stock upon the conversion and exercise of such securities
were approved.
<TABLE>
<S> <C>
Votes For: 7,042,201(including 3,375,020 Preferred)
Votes Against: 158,900
Votes Abstaining: 38,357
Broker Non-Votes: 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
* Exhibit 3.1 Certificate of Designation for Series D Preferred Stock
* Exhibit 3.2 Corporate Bylaws
* Exhibit 4.1 Third Amended and Restated Stockholder Rights Agreement
* Exhibit 4.2 Form of Series D Warrant
* Exhibit 4.3 Form of Series D Stock Certificate
* Exhibit 4.4 Warrant issued to PNC Bank, National Association in
connection with Credit Agreement
* Exhibit 10.2 PNC Bank, National Association Credit Agreement
* Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended July 3, 1999.
* Incorporated by reference from the Registrant's Report on Form 10-Q
filed on August 17, 1999 for the quarter ended July 3, 1999.
11
<PAGE> 12
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: November 2, 1999 /s/ M. Peter Thomas
----------------------------------------
M. Peter Thomas
President, Chief Executive Officer
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
* Exhibit 3.1 Certificate of Designation for Series D Preferred Stock
* Exhibit 3.2 Corporate Bylaws
* Exhibit 4.1 Third Amended and Restated Stockholder Rights Agreement
* Exhibit 4.2 Form of Series D Warrant
* Exhibit 4.3 Form of Series D Stock Certificate
* Exhibit 4.4 Warrant issued to PNC Bank, National Association in
connection with Credit Agreement
* Exhibit 10.2 PNC Bank, National Association Credit Agreement
* Exhibit 27 Financial Data Schedule
* Incorporated by reference from the Registrant's Report on Form 10-Q
filed on August 17, 1999 for the quarter ended July 3, 1999.
</TABLE>
