<PAGE> 1
FORM 10-Q
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 APRIL 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)
<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 May 13, 1999 there were 7,729,716 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
APRIL 3, MARCH 28,
1999 1998
----------- -----------
<S> <C> <C>
Net revenues:
Government contract revenues $ 1,054,000 $ 1,691,000
Commercial product revenues 437,000 213,000
----------- -----------
Total net revenues 1,491,000 1,904,000
----------- -----------
Costs and expenses:
Cost of commercial product revenues 1,506,000 1,033,000
Contract research and development 755,000 1,323,000
Other research and development 438,000 153,000
Selling, general and administrative 1,393,000 1,247,000
----------- -----------
Total costs and expenses 4,092,000 3,756,000
----------- -----------
Loss from operations (2,601,000) (1,852,000)
Interest (expense) income, net (15,000) 16,000
----------- -----------
Net loss ($2,616,000) ($1,836,000)
=========== ===========
Basic and diluted loss per share ($0.34) ($0.24)
Weighted average number of
shares outstanding 7,738,397 7,720,793
=========== ===========
</TABLE>
(See accompanying notes)
2
<PAGE> 3
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
ASSETS APRIL 3, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,276,000 $ 310,000
Short-term investments 0 0
Accounts receivable 1,374,000 1,939,000
Inventory 3,583,000 2,719,000
Prepaid expenses and other current assets 192,000 173,000
----------- -----------
Total current assets 6,425,000 5,141,000
Property and equipment, net of accumulated depreciation
of $7,304,000 and $6,985,000, respectively 4,421,000 5,114,000
Patents and licenses, net of accumulated amortization
of $1,343,000 and $1,285,000, respectively 2,023,000 2,070,000
Other assets 198,000 184,000
----------- -----------
Total assets $13,067,000 $12,509,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,621,000 $ 2,396,000
Accrued compensation 847,000 583,000
Current portion of debt and capitalized lease obligations 608,000 813,000
----------- -----------
Total current liabilities 4,076,000 3,792,000
Long-term debt 915,000 932,000
----------- -----------
Total liabilities 4,991,000 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 11,970,000 0
Common Stock, $.001 par value, 30,000,000 shares authorized,
7,729,716 and 7,722,591 shares issued and outstanding 8,000 8,000
Capital in excess of par value 34,928,000 35,010,000
Deficit accumulated during development stage (38,830,000) (36,215,000)
----------- -----------
Total stockholders' equity (deficit) 8,076,000 (1,197,000)
----------- -----------
Total liabilities and stockholders' equity $13,067,000 $12,509,000
=========== ===========
</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>
ASSETS APRIL 3, MARCH 28,
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,616,000) ($1,836,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 315,000 290,000
Changes in assets and liabilities:
Accounts receivable 565,000 (601,000)
Inventory (864,000) (316,000)
Prepaid expenses and other current assets (19,000) 76,000
Patents and licenses (12,000) (17,000)
Other assets (14,000) (74,000)
Accounts payable and accrued expenses 489,000 150,000
----------- -----------
Net cash used in operating activities (2,156,000) (2,328,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale (purchases of) short-term investments 0 1,902,000
Purchases of property and equipment (464,000) (434,000)
Proceeds from sale/leaseback of property and equipment 900,000 0
----------- -----------
Net cash provided by (used for) investing activities 436,000 1,468,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 36,000 159,000
Principal payments on long-term obligations (256,000) (16,000)
Proceeds from sale of preferred and common stock 2,906,000 3,007,000
----------- -----------
Net cash provided by financing activities 2,686,000 3,150,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 966,000 2,290,000
Cash and cash equivalents at beginning of period 310,000 1,438,000
----------- -----------
Cash and cash equivalents at end of period $ 1,276,000 $ 3,728,000
=========== ===========
</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, 1998, including but not limited to the caption entitled
"Factors Affecting Future Business Operations." The results of operations for
the three months ended April 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>
APRIL 3, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Raw Materials $ 716,000 $ 817,000
Work-in-Progress 2,023,000 1,666,000
Finished Goods 844,000 236,000
----------- ----------
Total Inventory $ 3,583,000 $ 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.
D. EXCHANGE AGREEMENT
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.
The impact of the Exchange Agreement is 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. Pending such approval, total Preferred Stock
conversions, together with exercises of certain warrants, may not result in the
issuance of more than 1,533,709 shares of Common Stock, a number of shares equal
to 19.9% of the shares of Common Stock outstanding at the time of the Company's
Series A Preferred Stock financing. The Exchange Agreement requires the Company
to seek stockholders' approval for removing the limitations on convertibility.
In partial exchange for the elimination of the redemption feature the Company
issued warrants to purchase up to 75,000 shares of common stock at $7.00.
5
<PAGE> 6
E. PRIVATE PLACEMENT
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 connection with the Series C financing the Company also issued warrants for
the purchase of up to 120,000 shares of Common Stock at a price of $4.50 per
share.
F. LEASE FINANCING
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 April 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.
As of April 3, 1999 the Company was not in compliance with all of the
covenants related to its revolving line of credit facility. The Company
continues to borrow under the existing facility and is working with the bank to
revise the provisions of the Agreement which are out of compliance.
G. NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." In February 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections." SFAS 134 and SFAS 135 will not have a material effect on the
Company's financial statement 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 April 3, 1999 and March
28, 1998" 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 APRIL 3, 1999 AND
MARCH 28, 1998
Total net revenues decreased by $413,000, or 22%, from $1,904,000 in the
first quarter of 1998 to $1,491,000 in the first quarter of 1999. This change is
due to a decrease in government contract revenue offset in part by increases in
commercial revenue and sublicense royalties. Government contract revenue
decreased by $637,000, or 38%, from $1,691,000 in the first quarter of 1998 to
$1,054,000 in the first quarter of 1999. This decrease is attributable to the
completion of certain government programs and the transition period associated
with entering into new government contracts.
Commercial product revenue increased by $214,000 or 100%, from $213,000 in
the first quarter of 1998 to $427,000 in the first quarter of 1998. This
increase is the result of the Company's increased sales of the SuperFilter(R)
product. Additionally, sublicense royalties were $10,000 in the first quarter of
1999. There were no sublicense royalties in the first quarter 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 increased by $473,000 or 46%, from
$1,033,000 for the first quarter of 1998 to $1,506,000 in the first quarter of
1999 due to the substantial increase in commercial product revenues offset by
product cost reductions.
6
<PAGE> 7
Contract research and development expenses decreased by $568,000 or 43%,
from $1,323,000 in the first quarter of 1998 to $755,000 in the first quarter of
1999. This decrease is attributable to the decrease in contract activity.
Other research and development expenses increased by $285,000 or 186%, from
$153,000 in the first quarter of 1998 to $438,000 in the first quarter 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 increased by $146,000 or 12%,
from $1,247,000 in the first quarter of 1998 to $1,393,000 in the first quarter
of 1999. This increase reflects increased labor-related expenses, attributable
to the Company's sales force and marketing program expansions.
Interest income decreased by $17,000 or 94%, from $18,000 in the first
quarter of 1998 to $1,000 in the first quarter of 1999. The decrease in interest
income is primarily due to withdrawal of interest-earning investment balances by
the Company to fund and expand operations.
Interest expense increased by $14,000 or over 100%, from $2,000 in the
first quarter of 1998 to $16,000 in the first quarter of 1999 as the Company
entered into new financing agreements in 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $966,000 or over 100%, from $310,000
on December 31, 1998 to $1,276,000 on April 3, 1999. The increase is the result
of a private placement of $3 million, a sale/leaseback of equipment of $900,000,
and working capital increases of $190,000 (accounts receivable decrease of
$565,000 accounts payable decrease of $489,000 offset by inventory increase of
$864,000) offset by operating losses of $2.6 million and purchases of new
equipment in the amount of $464,000 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 April 3, 1999 consist of
accounts payable and accrued employee compensation of $2,621,000 and $847,000,
respectively, and approximately $1.5 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.
The impact of the Exchange Agreement is 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. Pending such approval, total Preferred Stock
conversions, together with exercises of certain warrants, may not result in the
issuance of more than 1,533,709 shares of Common Stock, a number of shares equal
to 19.9% of the shares of Common Stock outstanding at the time of the Company's
Series A Preferred Stock financing. The Exchange Agreement requires the Company
to seek stockholders' approval for removing the limitations on convertibility.
In partial exchange for the elimination of the redemption feature the Company
issued 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 April 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.
As of April 3, 1999 the Company was not in compliance with all of the
covenants related to its revolving line of credit facility. The Company
continues to borrow under the existing facility and is working with the bank to
revise the provisions of the Agreement which are out of compliance.
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. The Company anticipates relying on external sources of
financing to meet its cash needs over the next 12 months. 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.
7
<PAGE> 8
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 auditors,
PricewaterhouseCoopers LLP, 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 it s 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 commercial quantities of
superconducting or cryogenic products for large scale deployment at acceptable
costs and on a timely basis.
8
<PAGE> 9
HIGH DEGREE OF DEPENDENCE ON GOVERNMENT CONTRACTS
Since inception, 92% 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 each
of DuPont and Superconducting Core Technologies, Inc. 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 these sublicenses 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 and Series C 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 to be held on June 2,
1999 the Company will seek stockholder approval of the elimination of current
limitations on conversions of the Company's Preferred Stock and exercises of
warrants issued in connection with the Preferred Stock financings and the
Exchange Agreement. Upon receipt of such approval the Series A-2, Series A-3,
Series B-1 and Series C 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. Similarly, after stockholder approval is obtained,
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
is 3,856,687 shares. This number of shares is subject to adjustment certain for
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 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, and Series C Preferred Stock are payable at the
rates of 6%, 6% and 7%, and 7% per annum, respectively. In the event that the
Company's stockholders do not approve the elimination of limitations placed on
Preferred Stock conversions and certain warrant exercises at the 1999 annual
stockholders meeting, the dividend rate on the Series A-2, Series A-3, Series
B-1 and Series C Preferred Stock shall increase to 20% per annum. The 20%
dividend shall apply retroactively and be deemed to have begun on March 26,
1998, August 11, 1998, September 2, 1998 and March 5, 1999 in the case of the
Series A-2, Series A-3, Series B-1 and Series C Preferred Stock, respectively.
While the Series A-2, Series A-3,
9
<PAGE> 10
Series B-1 and Series C Preferred Stock are outstanding, the Company is limited
in its ability to pay dividends on the Common Stock.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Between March 26, 1998 and the date of this Form 10-Q the Company raised a
total of $11,875,000 through the sale of securities to an institutional
investor, in private offerings (the "Financings") of preferred stock and
warrants for the purchase of Common Stock. The Company issued Series A, Series
A-1 and Series B Preferred Stock and related warrants that were exchanged for
Series A-2, Series A-3, Series B-1 and modified warrants, respectively, on
February 26, 1999 (the "Exchange"). Following the Exchange the Company by action
of its Board of Directors eliminated the Series A, Series A-1 and Series B
Preferred Stock. On March 5, 1999 the Company issued Series C Preferred Stock
and related warrants. The chart below reflects the private securities
outstanding following completion of the Financings and Exchange:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Common Stock
Issuable upon Warrants for Total
Series of Number of Conversion of Purchase of Consideration Date of
Preferred Stock(1) Shares Issued Preferred Shares Common Stock(2) Received Issuance(3)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A-2 64,584 1,291,680 100,000 $3,875,000 February 26, 1999
Series A-3 12,500 250,000 66,667 $1,000,000 February 26, 1999
Series B-1 50,000 1,000,000 120,000 $4,000,000 February 26, 1999
Series C 41,667 833,340 120,000 $3,000,000 March 5, 1999
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In the event that the Company's stockholders do not approve the elimination
of the Preferred Stock conversion limitation, as described below, each
share of Preferred Stock shall be entitled to a cumulative dividend equal
to 20% per annum of the purchase price of the Preferred Stock. Such
dividends shall be deemed to have accrued daily from the date of the
issuance of the Preferred Stock as described in footnote 3 to this table.
(2) The exercise prices and expiration dates of the warrants are as follows:
Series A-2, $4.00 per share, expiring March 26, 2003; Series A-3, $4.00 per
share, expiring August 11, 2003; Series B-1, $5.70 per share, expiring
September 2, 2003; and Series C, $4.50 per share, expiring March 5, 2004.
In connection with the Exchange the Company issued warrants for the
purchase of up to 75,000 shares of Common Stock at a purchase price of
$7.00 per share, expiring February 26, 2004.
(3) The Exchange occurred on February 26, 1999. The Series A-2 Preferred Stock
was exchanged for 500,000 shares of Series A Preferred Stock issued on
March 26, 1998 and 145,833 shares of Series A Preferred Stock issued on
September 3, 1998. The Series A-3 Preferred Stock was exchanged for Series
A-1 Preferred Stock issued on August 11, 1998 and the Series B-1 Preferred
Stock was exchanged for Series B Preferred Stock issued on September 2,
1998.
A maximum of 1,533,709 shares of Common Stock may be issued upon
conversions and exercises of the preferred stock and warrants described above
until the Company's stockholders approve the elimination of such limitations.
The Company is seeking such stockholder approval at its June 2, 1999 annual
meeting. 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 purchaser in each case was an accredited investor. The
Exchange was effected through an exemption from registration for exchanges with
existing 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 March 19, 1999 the Company issued
warrants to Leasing Technologies Inc. for the purchase of 25,180 shares of
Common Stock at a price of $4.17 per share. The securities were issued pursuant
to a private placement registration exemption under Section 4(2) of the
Securities Act. The warrant holder is a sophisticated institutional investor
that obtained the warrants for investment purposes.
10
<PAGE> 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 3.1 Restated Certificate of Incorporation of the Company
(b) Reports on Form 8-K.
On February 26, 1999 the Company filed a Current Report on Form 8-K
reporting under Item 5. Other Events an Exchange Agreement with the
holders of all of the Company's outstanding preferred stock.
- --------------------------------------------------------------------------------
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 13, 1999 /s/ James G. Evans, Jr.
---------------------------------------
James G. Evans, Jr.
Vice President, Chief Financial Officer
11
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation
of Superconductor Technologies Inc.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
SUPERCONDUCTOR TECHNOLOGIES INC.
Superconductor Technologies Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), does hereby certify
that:
1. The name of the Corporation is Superconductor Technologies Inc. The
Corporation was originally incorporated under that name, and the original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on May 11, 1987.
2. Pursuant to Section 245 of the Code, this Restated Certificate of
Incorporation restates and integrates the provisions of the Certificate of
Incorporation of the Corporation as approved by the Company's Board of Directors
and does not further amend the provisions of such Certificate of Incorporation.
3. The text of the Restated Certificate of Incorporation as previously
amended or supplemented is hereby restated to read in its entirety as follows:
"ARTICLE I
The name of this corporation is "SUPERCONDUCTOR TECHNOLOGIES INC."
<PAGE> 2
ARTICLE II
The address of its registered office in the State of Delaware is 1209
Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State
Delaware.
ARTICLE IV
Section 1. Designation and Amount. The Corporation is authorized to
issue two classes of stock to be designated, respectively, Common Stock and
Preferred Stock. The total number of shares of Common Stock which the
Corporation shall have authority to issue is 30,000,000, par value $0.001 per
share, and the total number of shares of Preferred Stock this Corporation shall
have authority to issue is 2,000,000, par value $0.001 per share. Of the
Preferred Stock, 64,584 shares shall be designated Series A-2 Preferred Stock
(the "Series A-2 Preferred"), 12,500 shares shall be designated Series A-3
Preferred Stock (the "Series A-3 Preferred"), 50,000 shares shall be designated
Series B-1 Preferred Stock (the "Series B-1 Preferred") and 41,667 shares shall
be designated Series C Preferred Stock (the "Series C Preferred").
The undesignated 1,831,249 shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors of the Corporation is
authorized to determine or alter the powers, designations, preferences and
rights and the qualifications, limitations or restrictions granted to or imposed
upon any wholly unissued series of Preferred Stock, and within the limitations
or restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares of any such series then
outstanding) the number of shares of any such series subsequent to the issuance
of shares of that series, to determine the designation of any series, and to fix
the number of shares of any series. In case the number of shares of any series
shall be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
The Corporation shall from time to time in accordance with the laws of
the State of Delaware increase the authorized amount of its Common Stock if at
any time the number of shares of Common Stock remaining unissued and available
for issuance shall not be sufficient to permit conversion of the Preferred
Stock.
2
<PAGE> 3
The rights, preferences, privileges and restrictions granted to or
imposed on the Common Stock and Preferred Stock are as follows:
Section 2. Rank. Except as provided in Article IV, Section 8, the Series
A-2, Series A-3, Series B-1 and Series C Preferred shall rank (i) prior to the
Common Stock; (ii) pari passu with each other, and pari passu with any class or
series of capital stock of the Corporation hereafter created specifically
ranking, by its terms, on parity with the Series A-2, Series A-3, Series B-1 and
Series C Preferred; and (iii) junior to any class or series of capital stock of
the Corporation hereafter created specifically ranking, by its terms, senior to
the Series A-2, Series A-3, Series B-1 and Series C Preferred, in each case as
to distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
Section 3. Dividends. The holders of shares of Series A-2, Series A-3,
Series B-1 and Series C Preferred shall be entitled to receive dividends, out of
funds legally available therefor, payable in preference and priority to any
payment of any dividend on Common Stock of the Corpora tion, at the rates of
$3.60, $4.80, $5.60 and $5.04 per share (adjusted for any recapitalization,
stock combinations, stock dividends, stock splits and the like (a
"Recapitalization")) per annum, respectively, provided, however, that in the
event Stockholder Approval (as defined in Article IV, Section 6(h)) is not
obtained, then effective as of March 26, 1998, August 11, 1998, September 2,
1998 and March 5, 1999, for the Series A-2, Series A-3, Series B-1 and Series C
Preferred, respectively, the $3.60, $4.80, $5.60 and $5.04 dividends shall be
increased to $12.00, $16.00, $16.00 and $14.40 per share, respectively (as
adjusted for Recapitalizations). Such dividends shall be cumulative, accrue
daily (beginning March 26, 1998, August 11, 1998, September 2, 1998 and March 5,
1999, for the Series A-2, Series A-3, Series B-1 and Series C Preferred,
respectively) and be paid quarterly in cash or as an addition to the Liquidation
Preferences of the Series A-2, Series A- 3, Series B-1 and Series C,
respectively (as defined below). No dividend shall be paid on the Common Stock
in any year, other than dividends payable solely in Common Stock, until all
dividends due and payable on the Preferred Stock have been declared and paid,
and then such dividends on the Common Stock shall not be in excess of the
dividends paid on the Preferred Stock unless the amount of such excess is also
paid on the Preferred Stock on an as-converted per share basis.
Section 4. Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary (a
"Liquidation Event"), distributions to the stockholders of the Corporation shall
be made in the following manner:
(a) The holders of Series A-2, Series A-3, Series B-1 and Series
C Preferred shall be entitled to receive, on a pari passu basis with each other
holder of Series A-2, Series A-3, Series B-1 and Series C Preferred and any
series of Preferred Stock ranked pari passu with the Series A-2, Series A-3,
Series B-1 and Series C Preferred, but prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of any series of Preferred Stock ranked junior to the Series A-2, Series
A-3, Series B-1 or Series C Preferred or holders of Common Stock by reason of
their ownership of such stock, an amount per share equal to the sum (the
3
<PAGE> 4
"Liquidation Preference") of (1) $60.00, $80.00, $80.00 and $72.00 for each
share of Series A-2, Series A-3, Series B-1 and Series C Preferred,
respectively, then held by them, adjusted for any Recapitalization with respect
to such shares, and, (2) an amount equal to all unpaid dividends on the Series
A-2, Series A-3, Series B-1 and Series C Preferred held by them; provided,
however, in the event of a Liquidation Event pursuant to Article IV, Section
4(b) below that is consummated on or before March 26, 2001 in the case of the
Series A-2 or Series A-3 Preferred, or on or before March 5, 2002 in the case of
the Series C Preferred, the Liquidation Preference shall be (i) for the Series
A-2 Preferred, the greater of (1) $72.00 or (2) $60.00 plus all accrued
dividends for each share of Series A-2 Preferred, (ii) for the Series A-3
Preferred, the greater or (1) $96.00 or (2) $80.00 plus all accrued dividends
for each share of Series A-3 Preferred, and (iii) for the Series C Preferred,
the greater of (1) $86.40 or (2) $72.00 plus all accrued dividends for each
share of Series C Preferred, adjusted for any Recapitalizations with respect to
such shares. If the assets and funds thus distrib uted among the holders of the
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Preferred Stock on a pari passu basis in proportion to
the aggregate preferential amount of shares of Preferred Stock outstanding as of
the date of the distribution upon the occurrence of such event. After payment
has been made to the holders of the Preferred Stock of the full amounts to which
they shall be entitled, the holders of the Common Stock shall be entitled to
share ratably in the remaining assets, based on the number of shares of Common
Stock held.
(b) For purposes of this Article IV, Section 4, a merger or
consolidation of the Corporation (as contemplated under Section 251 of the
Delaware General Corporation Law, or similar state statute) with or into any
other corporation or corporations, or the merger of any other corporation or
corporations into the Corporation, or the sale of all or substantially all of
the assets of the Corporation, or any other corporate reorganization, in which
consolidation, merger, sale of assets or reorganization the stockholders of the
Corporation receive distributions in cash or securities of another corporation
or corporations (the "Consideration") as a result of such consolidation, merger,
sale of assets or reorganization, shall be treated as a Liquidation Event (such
that the Preferred holders shall be entitled to receive Consideration equal to
the value of the Liquidation Preference for the respective series of Preferred
Stock held) unless the stockholders of this Corporation immediately prior to
such consolidation, merger, sale of assets or reorganization hold or control
more than fifty percent (50%) of the voting equity securities of the successor
or surviving corporation immediately following such consolidation, merger, sale
of assets or reorganization, in which case such consolidation, merger, sale of
assets or reorganization shall not be treated as a Liquidation Event.
Section 5. Voting Rights. Except as otherwise required by law, the
Restated Certificate of Incorporation or Bylaws of the Corporation, the holder
of each share of Common Stock issued and outstanding shall have one vote and the
holder of each share of Preferred Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share of Preferred
Stock could be converted, subject to the limits set forth in Article IV, Section
6(h) below, at the record date for determination of the stockholders entitled to
vote on such
4
<PAGE> 5
matters, or, if no such record date is established, at the date such vote is
taken or any written consent of stockholders is solicited, such votes to be
counted together with all other shares of stock of the Corporation having
general voting power and not separately as a class. Holders of Common Stock and
Preferred Stock shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of the Corporation. Fractional votes by the holders
of Preferred Stock shall not, however, be permitted and any fractional voting
rights shall (after aggregating all shares into which shares of Preferred Stock
held by each holder could be converted) be rounded to the nearest whole number.
Section 6. Conversion. The holders of Series A-2, Series A-3, Series
B-1 and Series C Preferred have conversion rights as follows (the "Conversion
Rights"):
(a) Right to Convert. Subject to the limits set forth in Article
IV, Section 6(h) below, each share of Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of such
share at the office of the Corporation or any transfer agent for the Preferred
Stock, into such number of fully paid and nonassessable shares of Common Stock
as is determined:
(1) in the case of the Series A-2 Preferred, by dividing
$60.00 by the Series A-2 Conversion Price, determined as hereinafter provided,
(2) in the case of the Series A-3 Preferred, by dividing
$80.00 by the Series A-3 Conversion Price, determined as hereinafter provided,
(3) in the case of the Series B-1 Preferred, by dividing
$80.00 by the Series B-1 Conversion Price, determined as hereinafter provided,
and
(4) in the case of the Series C Preferred, by dividing
$72.00 by the Series C Conversion Price, determined as hereinafter provided, in
effect at the time of their respective conversions.
The price at which shares of Common Stock shall be deliverable upon
conversion of shares of Series A-2, Series A-3, Series B-1 and Series C
Preferred shall initially be $3.00, $4.00, $4.00 and $3.60 with respect to each
share of Series A-2, Series A-3, Series B-1 and Series C Preferred, respectively
(the "Series A-2 Conversion Price", "Series A-3 Conversion Price", "Series B-1
Conversion Price", and "Series C Conversion Price", respectively). The term
"Conversion Price," as used herein shall refer to the respective Conversion
Price of each series of Preferred Stock. The initial Conversion Price shall be
subject to adjustment as hereinafter provided.
(b) Automatic Conversion. Subject to the limits set forth in
Article IV, Section 6(h) below, each share of Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Conversion Price for such series upon the election of holders of at least a
majority of the then outstanding shares of Preferred Stock.
5
<PAGE> 6
(c) Mechanics of Conversion. The mechanics of conversion set
forth in this Article IV, Section 6(c) are subject to the limits set forth in
Article IV, Section 6(h) below. No fractional shares of Common Stock shall be
issued upon conversion of Preferred Stock. In lieu of any fractional shares to
which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Conversion Price. Before
any holder of Preferred Stock shall be entitled to convert the same into full
shares of Common Stock and to receive certificates therefor, the holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the Preferred Stock, and shall
give written notice to the Corporation at such office that the holder elects to
convert the same; provided, however, that in the event of an automatic
conversion pursuant to Article IV, Section 6(b), the outstanding shares of
Preferred Stock shall be converted automatically without any further action by
the holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent and provided,
further, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such automatic conversion
unless the certificates evidencing such shares of Preferred Stock are either
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connec tion with such certificates. The Corporation shall, as soon as
practicable after such delivery, or such agreement and indemnification in the
case of a lost certificate, issue and deliver at such office to such holder of
Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred Stock to be converted, or in the
case of automatic conversion, then on the date of election by a majority of the
then outstanding shares of Preferred Stock, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
(d) (1) Adjustment of Conversion Price of Preferred Stock. The
Conversion Price shall be subject to adjustment from time to time as follows:
(i) Adjustments for Subdivisions, Combinations or
Consolidation of Common Stock. In the event the outstanding shares of Common
Stock shall be subdivided by stock split, stock dividends or otherwise into a
greater number of shares of Common Stock, the Conversion Price then in effect
shall, concurrently with the effectiveness of such subdivision, be
proportionately decreased. In the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise into a
lesser number of shares of Common Stock, the Conversion Price then in effect
shall, concurrently with the effectiveness of such combination or consolidation,
be proportionately increased.
6
<PAGE> 7
(ii) Adjustments for Stock Dividends and Other
Distributions. In the event the Corporation at any time or from time to time
makes or fixes a record date for the deter mination of holders of Common Stock
entitled to receive any distribution (excluding any repurchases of securities by
the Corporation not made on a pro rata basis from all holders of any class of
the Corporation's securities) payable in property or in securities of the
Corporation other than shares of Common Stock, and other than as otherwise
adjusted in this Article IV, Section 6 or as provided in Article IV, Section 3,
then and in each such event, the holders of Preferred Stock shall receive at the
time of such distribution the amount of property or the number of securities of
the Corporation that they would have received had their Preferred Stock been
converted into Common Stock on the date of such event.
(iii) Adjustments for Reclassification, Exchange
and Substitution. Except as provided in Article IV, Section 4, upon any
liquidation, dissolution or winding up of the Corporation, if the Common Stock
issuable upon conversion of the Preferred Stock shall be changed into the same
or a different number of shares of any other class or classes of stock, whether
by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares provided for above), each share of
Preferred Stock shall thereafter be convertible into the number of shares of
stock or other securities or property to which a holder of the number of shares
of Common Stock of the Corporation deliverable upon conversion of such share of
Preferred Stock shall have been entitled upon such reorganization or
reclassification.
(2) Adjustments of Conversion Price for Diluting Issues.
In addition to the adjustment of the Conversion Price provided in Article IV,
Section 6(d)(1) above, the Conversion Price shall be subject to further
adjustment from time to time as follows:
(i) Special Definitions. For purposes of this
Article IV, Section 6(d)(2), the following definitions shall apply:
(1) "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Original Issue Date" shall mean March
26, 1998, August 11, 1998, September 2, 1998 and March 5, 1999, for the Series
A-2, Series A-3, Series B-1 and Series C Preferred, respectively.
(3) "Convertible Securities" shall mean
securities convertible into or exchangeable for Common Stock.
(4) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Article IV,
Section 6(d)(2)(iii), deemed to be issued) by the Corporation after the Original
Issue Date other than shares of Common Stock issued or issuable:
7
<PAGE> 8
(A) upon conversion of shares of the
Preferred Stock;
(B) to officers, directors and
employees of, and consultants to, the Corporation pursuant to plans and
arrangements approved by the Board of Directors;
(C) as a dividend or other
distribution on the Preferred Stock or pursuant to clause (i), (ii) or (iii) of
Article IV, Section 6(d)(1);
(D) upon the exercise of options
issued prior to the Original Issue Date;
(E) to research or development
collaborators or to banks or other institutional lendors or lessors in
connection with capital asset leases or borrowings for the acquisition of
capital assets, pursuant to any arrangement approved by the Board of Directors;
(F) upon exercise of warrants
outstanding on the Original Issue Date or warrants to be issued pursuant to
agreements outstanding on the Original Issue Date, including, without
limitation, the following warrants: the warrant, dated as of November 22, 1997,
the warrant dated as of December 21, 1998, the warrants issued or issuable
pursuant to the Letter Agreement between the Company and Tanner Unman
Securities, Inc., dated as August 10, 1998, the warrants issued or issuable
pursuant to the Exchange Agreement, any additional warrants to be issued
pursuant to the Securities Purchase Agreement dated as of September 2, 1998, and
any Preferred Stock purchase agreement entered into before Stockholder Approval
(as defined below);
(G) with the written approval of the
holders of a majority of the outstanding Series A-2, Series A-3, Series B-1 or
Series C Preferred, respectively, in the event that an issuance would otherwise
trigger an anti-dilution adjustment for such Series A-2, Series A-3, Series B-1
or Series C Preferred under Article IV, Section 6(d)(2), or
(H) by way of dividend or other
distributions on securities referred to in clauses (A), (B), (C), (D), (E), (F)
and (G) above.
(ii) No Adjustment of Conversion Price. No
adjustment in the Conversion Price of a particular share of Preferred Stock
shall be made in respect of the issuance of Additional Shares of Common Stock
unless the consideration per share for an Additional Share of Common Stock
issued or deemed to be issued by the Corporation is less than the Conversion
Price in effect on the date of, and immediately prior to such issue, for such
share of Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common
Stock.
8
<PAGE> 9
(1) Options and Convertible Securities.
Except as otherwise provided in Article IV, Section 6(d)(2)(i) above, in the
event the Corporation at any time or from time to time after the Original Issue
Date shall issue any Options or Convertible Securities or shall fix a record
date for the determination of any holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that
Additional Shares of Common Stock shall not be deemed to have been issued unless
the consideration per share (determined pursuant to Article IV, Section
6(d)(2)(v) below) of such Additional Shares of Common Stock would be less than
the Conversion Price in effect on the date of and immediately prior to such
issue, or such record date, as the case may be, and provided further that in any
such case in which additional shares of Common Stock are deemed to be issued:
(A) no further adjustment in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consid eration payable to the Corporation, or
increase or decrease in the number of shares of Common Stock issuable, upon the
exercise, conversion or exchange thereof, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
(C) upon the expiration of any such
Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Conversion Price computed
upon the original issue thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(I) in the case of
Convertible Securities or Options for Common Stock, the only additional shares
of Common Stock issued were shares of Common Stock, if any, actually issued upon
the exercise of such Options or the conversion or exchange of such Convertible
Securities, and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus the addi tional consideration, if
any, actually received by the Corporation upon such conversion or exchange, and
9
<PAGE> 10
(II) in the case of Options
for Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options and the consideration received by the Corporation for the Additional
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation upon the issue of the Convertible Securities with respect to which
such Options were actually exercised;
(D) no readjustment pursuant to
clause (B) or (C) above shall have the effect of increasing the Conversion Price
to an amount which exceeds the lower of (i) the Conversion Price on the original
adjustment date, or (ii) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date; and
(E) in the case of any Options which
expire by their terms not more than thirty (30) days after the date of issue
thereof, no adjustment of the Conversion Price shall be made until the
expiration or exercise of all such Options.
(iv) Adjustment of Conversion Price Upon Issuance
of Additional Shares of Common Stock. In the event the Corporation shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Article IV, Section 6(d)(2)(iii), but excluding
stock dividends, subdivisions or split-ups that are the subject of adjustment
pursuant to Article IV, Section 6(d)(i)) without consideration or for a
consideration per share less than the Conversion Price, in effect on the date
of, and immediately prior to such issue, then and in such event, such Conversion
Price shall be reduced, concurrently with such issue, to a price (calculated to
the nearest cent) determined by multiplying such Conversion Price by a fraction,
the numerator of which shall be the sum of (i) the number of shares of Common
Stock outstanding immediately prior to such issue, (ii) the number of shares of
Common Stock issuable upon conversion of the Preferred Stock outstanding
immediately prior to such issue and (iii) the number of shares of Common Stock
which the aggregate consideration received by the Corporation for the total
number of Additional Shares of Common Stock so issued would purchase at such
Conversion Price; and the denominator of which shall be the sum of (i) the
number of shares of Common Stock outstanding immediately prior to such issue,
(ii) the number of shares of Common Stock issuable upon conversion of the
Preferred Stock outstanding immediately prior to such issue and (iii) the number
of such Additional Shares of Common Stock so issued; and provided further that,
for the purposes of this Article IV, Section 6(d)(2)(iv), all shares of Common
Stock issuable upon exercise of outstanding Options or conversion of outstanding
Convertible Securities shall be deemed to be outstanding, and immediately after
any Additional Shares of Common Stock are deemed issued pursuant to Article IV,
Section 6(d)(2)(iii), such Additional Shares of Common Stock shall be deemed to
be outstanding.
10
<PAGE> 11
(v) Determination of Consideration. For purposes of
this Article IV, Section 6(d)(2), the consideration received by the Corporation
for the issue of any Additional Shares of Common Stock shall be computed as
follows:
(1) Cash and Property: Such consideration
shall:
(A) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation
(excluding amounts paid or payable for accrued interest or accrued dividends);
(B) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board of Directors; and
(C) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses (A) and (B)
above, as determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Article IV, Section
6(d)(2)(iii)(1), relating to Options and Convertible Securities, shall be
determined by dividing
(x) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Option
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(e) No Impairment. Except as provided in Article IV, Section 8,
the Corporation will not, by amendment of its Restated Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation but will at all times in good
faith assist in
11
<PAGE> 12
the carrying out of all the provisions of this Article IV, Section 6 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the holders of the Preferred Stock against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article IV,
Section 6, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Price at the time in effect, and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of Preferred Stock.
(g) Notices of Record Date. In the event that the Corporation
shall propose at any time:
(1) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(2) to effect any reclassification or capitalization of
its Common Stock outstanding involving a change in the Common Stock; or
(3) to merge or consolidate with or into any other person
or entity, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the
holders of Preferred Stock:
(i) at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in (2) and (3) above; and
(ii) in the case of the matters referred to in (2)
and (3) above, at least 20 days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Preferred Stock at
the address for each such holder as shown
12
<PAGE> 13
on the books of the Corporation. The above written notice requirement may be
waived for any series of Preferred Stock by the holders of a majority of the
then outstanding shares of that respective series of Preferred Stock.
(h) Limits on Conversion. Notwithstanding anything herein to the
contrary, the Series A-2, Series A-3, Series B-1 and Series C Preferred of the
Corporation and any additional shares of Preferred Stock issued by the
Corporation prior to Stockholder Approval (as defined below), and the
outstanding warrants to purchase Common Stock of the Corporation (issued or
issuable to holders of such shares of Preferred Stock pursuant to agreements
outstanding as of February 26, 1999 or entered into prior to Stockholder
Approval) (collectively, the "Securities") shall not be convertible into or
exercisable for (as the case may be) shares of Common Stock in excess of
1,533,709 shares (as adjusted for Recapitalizations and the like) (the "19.9%
Cap" or the "Allowed Conversion Shares"), unless the Corporation has received
stockholder approval to eliminate such 19.9% Cap at a duly held meeting of the
stockholders in calendar 1999 (the "Stockholder Approval"). Until Stockholder
Approval has been obtained (or, if Stockholder Approval is not obtained, then
continuing thereafter) the 19.9% Cap shall apply and each holder of Securities
(each a "Holder") shall have the right to convert its Preferred Stock or
exercise its warrants only up to its pro rata portion of the Allowed Conversion
Shares. A Holder may waive in writing its right to convert or exercise (or
transfer to another Holder) its pro rata portion of the Allowed Conversion
Shares. In the event that a Holder converts or exercises its Securities, then
the number of Allowed Conversion Shares will be reduced by such amount.
Section 7. Status of Converted Stock. In case any shares of Preferred
Stock shall be repurchased or converted pursuant to Article IV, Section 6, the
shares so repurchased or converted shall be cancelled and shall not be issued by
the Corporation and this Restated Certificate of Incorporation shall be
appropriately amended to effect the corresponding reduction in the Corporation's
authorized Preferred Stock.
Section 8. Covenants. In addition to any other rights provided by law,
so long as at least twenty-five percent (25%) of the shares of any authorized
series of Preferred Stock shall be outstanding, the Corporation shall not,
without first obtaining the affirmative vote or written consent of the holders
of not less than a majority of the outstanding shares of that respective series
of Preferred Stock:
(a) amend or repeal any provision of the Corporation's Restated
Certificate of Incorporation, certificates of designation or Bylaws if such
action would materially and adversely alter or change the preferences, rights,
privileges or powers of, or the restrictions provided for the benefit of, the
affected series of Preferred Stock; or
(b) authorize or issue shares of any class or series of stock
having any preference or priority as to dividends or assets superior to or on
parity with any such preference or priority of the affected series of Preferred
Stock.
13
<PAGE> 14
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
Except as otherwise provided in this Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend or rescind any or all of the Bylaws of the Corporation.
ARTICLE VII
Section 1. The number of directors of the Corporation shall be fixed
from time to time by a Bylaw or amendment thereof duly adopted by the Board of
Directors or by the stockholders.
Section 2. Vacancies occurring on the Board of Directors for any reason
may be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum, at a meeting of the Board of Directors.
A person so elected by the Board of Directors to fill a vacancy shall hold
office until the next succeeding annual meeting of stockholders of the
Corporation and until his or her successor shall have been duly elected and
qualified.
ARTICLE VIII
Elections of directors at an annual or special meeting need not be by
written ballot unless the Bylaws of the Corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
14
<PAGE> 15
ARTICLE X
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation.
ARTICLE XI
To the fullest extent permitted by the General Corporation Law of the
State of Delaware, a director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. Neither any amendment nor repeal of this Article,
nor the adoption of any provision of this Restated Certificate of Incorporation
inconsistent with this Article shall eliminate or reduce the effect of this
Article in respect of any matter occurring, or any cause of action, suit or
claim that, but for this Article would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
THE UNDERSIGNED, being the President and Chief Executive Officer of the
Corporation, does make this certificate, hereby declaring and certifying that
this is his act and deed and the facts herein stated are true, and accordingly,
has hereunto set his hand this 30th day of March, 1999.
SUPERCONDUCTOR TECHNOLOGIES INC.
/s/ M. Peter Thomas
----------------------------------------
M. Peter Thomas, President and Chief
Executive Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 1,276,000
<SECURITIES> 0
<RECEIVABLES> 1,404,000
<ALLOWANCES> (30,000)
<INVENTORY> 3,583,000
<CURRENT-ASSETS> 6,425,000
<PP&E> 11,725,000
<DEPRECIATION> 7,304,000
<TOTAL-ASSETS> 13,067,000
<CURRENT-LIABILITIES> 4,076,000
<BONDS> 0
0
11,970,000
<COMMON> 8,000
<OTHER-SE> 34,928,000
<TOTAL-LIABILITY-AND-EQUITY> 13,067,000
<SALES> 437,000
<TOTAL-REVENUES> 1,491,000
<CGS> 1,506,000
<TOTAL-COSTS> 3,654,000
<OTHER-EXPENSES> 438,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,000
<INCOME-PRETAX> (2,616,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (38,830,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,616,000)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
