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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000
[ ] 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)
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<S> <C>
DELAWARE 77-0158076
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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 9, 2000 there were 17,614,640 shares of the Registrant's Common
Stock outstanding.
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SUPERCONDUCTOR TECHNOLOGIES INC.
INDEX TO FORM 10-Q
Three and Six Months Ended July 1, 2000
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<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Statement of Operations............................................3
Balance Sheet......................................................4
Statement of Cash Flows............................................5
Notes to Financial Statements......................................6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.............8
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk .............................................11
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings........................................11
ITEM 2 - Sales of Unregistered Securities.........................11
ITEM 4 - Submission of Matters to a Vote of Security Holders......11
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits...................................................12
(b) Reports on Form 8-K........................................13
SIGNATURE ...................................................................13
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERCONDUCTOR TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JULY 3, 1999 JULY 1, 2000 JULY 3, 1999 JULY 1, 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Commercial product revenues $ 239,000 $ 1,585,000 $ 666,000 $ 2,605,000
Government contract revenues 1,239,000 1,017,000 2,293,000 2,268,000
Less non-cash charge for warrants
vesting upon commercial
product sales and other discounts - (367,000) - (979,000)
Sub license royalties - - 10,000 10,000
------------ ------------ ------------ ------------
Total net revenues 1,478,000 2,235,000 2,969,000 3,904,000
------------ ------------ ------------ ------------
Costs and expenses:
Cost of commercial product revenues 1,196,000 2,353,000 2,702,000 4,145,000
Contract research and development 773,000 856,000 1,528,000 1,763,000
Other research and development 494,000 604,000 932,000 1,124,000
Selling, general and administrative 1,325,000 2,140,000 2,682,000 3,893,000
Other non-cash warrant charges and
other non-recurring charges - 296,000 - 609,000
------------ ------------ ------------ ------------
Total costs and expenses 3,788,000 6,249,000 7,844,000 11,534,000
------------ ------------ ------------ ------------
Loss from operations (2,310,000) (4,014,000) (4,875,000) (7,630,000)
Interest income - 102,000 1,000 174,000
Interest expense (102,000) (169,000) (154,000) (385,000)
------------ ------------ ------------ ------------
Net loss (2,412,000) (4,081,000) (5,028,000) (7,841,000)
Less:
Redeemable preferred stock dividends (201,000) - (370,000) -
Deemed distribution attributable to the
inducement to convert preferred stock
and beneficial conversion feature (125,000) - (125,000) (1,548,000)
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (2,738,000) $ (4,081,000) $ (5,523,000) $ (9,389,000)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.35) $ (0.23) $ (0.71) $ (0.65)
============ ============ ============ ============
Weighted average number of common
shares outstanding 7,744,053 17,536,406 7,740,267 14,442,524
============ ============ ============ ============
</TABLE>
See accompanying notes to the financial statements
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SUPERCONDUCTOR TECHNOLOGIES INC.
BALANCE SHEET
ASSETS
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<CAPTION>
DECEMBER 31, JULY 1,
1999 2000
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(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 66,000 $ 4,494,000
Accounts receivable 1,590,000 2,379,000
Inventory 2,745,000 3,780,000
Prepaid expenses and other current assets 452,000 548,000
------------ ------------
Total current assets 4,853,000 11,201,000
Property and equipment, net of accumulated depreciation
of $8,054,000 and $8,602,000, respectively 4,097,000 4,322,000
Patents and licenses, net of accumulated amortization
of $1,521,000 and $1,640,000, respectively 1,927,000 1,923,000
Other assets 208,000 140,000
------------ ------------
Total assets $ 11,085,000 $ 17,586,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,953,000 $ -
Accounts payable 1,796,000 1,434,000
Accrued expenses 906,000 1,463,000
Current portion of debt and capitalized lease obligations 211,000 209,000
------------ ------------
Total current liabilities 4,866,000 3,106,000
Long-term debt and capitalized lease obligations 750,000 650,000
------------ ------------
Total liabilities 5,616,000 3,756,000
------------ ------------
Redeemable convertible preferred stock, $.001 par value, 2,000,000
shares authorized:
Series A-2 shares, 64,584 and none, issued and outstanding
Series A-3 shares, 12,500 and none, issued and outstanding
Series B-1 shares, 50,000 and none, issued and outstanding
Series C shares, 41,667 and none, issued and outstanding
Series D shares, 106,000 and none, issued and outstanding 17,125,000 -
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 30,000,000 and 75,000,000 shares
authorized, 7,739,218 and 17,612,232 shares issued and outstanding 8,000 18,000
Capital in excess of par value 35,426,000 68,743,000
Accumulated deficit (47,090,000) (54,931,000)
------------ ------------
Total stockholders' equity (deficit) (11,656,000) 13,830,000
------------ ------------
Total liabilities and stockholders' equity $ 11,085,000 $ 17,586,000
============ ============
</TABLE>
See accompanying notes to the financial statements
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SUPERCONDUCTOR TECHNOLOGIES INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
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<CAPTION>
JULY 3, JULY 1,
1999 2000
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,028,000) $ (7,841,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 741,000 915,000
Warrant charges - 1,403,000
Changes in assets and liabilities:
Accounts receivable 155,000 (789,000)
Inventory (1,074,000) (1,035,000)
Prepaid expenses and other current assets (55,000) (207,000)
Patents and licenses (160,000) (115,000)
Other assets 9,000 61,000
Accounts payable and accrued expenses 405,000 268,000
------------ ------------
Net cash used in operating activities (5,007,000) (7,340,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (960,000) (773,000)
Proceeds from sale/leaseback of property and equipment 900,000 -
------------ ------------
Net cash used for investing activities (60,000) (773,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) borrowings 267,000 (1,454,000)
Payments on long-term obligations (97,000) (102,000)
Proceeds from sale of preferred and common stock 6,723,000 14,097,000
------------ ------------
Net cash provided by financing activities 6,893,000 12,541,000
------------ ------------
Net increase in cash and cash equivalents 1,826,000 4,428,000
Cash and cash equivalents at beginning of period 310,000 66,000
------------ ------------
Cash and cash equivalents at end of period $ 2,136,000 $ 4,494,000
============ ============
Supplemental schedule of non-cash financing activities:
Common stock options issued for services in lieu of accounts payable - $ 72,000
Issuance of warrants in connection with bank line of credit - 131,000
Conversion of note payable for common stock - 500,000
Redeemable preferred stock exchanged for common shares - 17,125,000
</TABLE>
See accompanying notes to the financial statements
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SUPERCONDUCTOR TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
1. 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, 1999, including but not limited to Exhibit 99 entitled
"Disclosure Regarding Forward-Looking Statements." The results of operations for
the quarter and six months ended July 1, 2000 are not necessarily indicative of
results for the entire fiscal year ending December 31, 2000.
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.
Certain reclassifications have been made to the 1999 financial statements to
conform to 2000 presentation.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first out) or market
and consist of the following:
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<CAPTION>
DECEMBER 31, 1999 JULY 1, 2000
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<S> <C> <C>
Raw Materials $ 428,000 $ 1,047,000
Work-in-Progress 1,688,000 2,072,000
Finished Goods 629,000 661,000
------------ ------------
Total Inventory $ 2,745,000 $ 3,780,000
============ ============
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3. SHORT TERM BORROWINGS AND NOTES PAYABLE
The Company has a revolving line of credit that matured on June 17, 2000. The
line of credit bears interest at the bank's prime rate (9.5% at July 1, 2000)
plus 1%. The credit line has a borrowing limit equal to the lesser of (i) $2.5
million or (ii) 80% of eligible accounts receivable. The credit facility is
collateralized by a lien on all the assets of the Company. It also contains
financial covenants and imposes restrictions on acquisitions, capital
expenditures and cash dividends. At July 1, 2000, the Company did not have any
amounts outstanding on the line. The Company has entered into negotiations with
the bank to renew the line of credit and change the financial covenants.
In March 2000, the Company secured a one-year loan commitment from a large
stockholder for an additional $5.0 million. At its option, the stockholder may
lend the funds directly to the Company or unconditionally guarantee a loan from
a commercial bank or institutional lender. The stockholder has elected to
guarantee a loan from the Company's bank, and the Company and the bank are
currently negotiating the terms of the loan. The stockholder's loan commitment
expires in March 2001 or earlier upon the Company's receipt of $10 million or
more of equity financing. If the Company is unable to reach agreement with its
bank on the terms of the loan and the stockholder makes the loan directly, the
loan would be unsecured and bear interest at four percent over the prime rate of
the Company's prime lender. The Company paid a $12,500 commitment fee to the
stockholder. The Company has not borrowed any funds under this loan commitment.
4. STOCKHOLDERS' EQUITY
On February 11, 2000, the Company completed the registration and sale of
2,473,701 shares of common stock, priced at $3.25 per share, of which 2,319,855
shares of common stock were sold for a cash payment totaling $7,540,000 and
153,846 shares of common
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stock were exchanged for short-term indebtedness of $500,000. Net proceeds to
the Company totaled $7.4 million. Concurrent with the offering, the holders of
the Series A-2, A-3 and C Redeemable Convertible Preferred Stock converted their
holdings into 2,458,491 shares of common stock. As inducement to convert the
preferred shares, the Company issued the preferred stockholders warrants to
purchase 250,000 shares of common stock at $3.58. The fair value of the warrant
was estimated using the Black-Scholes option-pricing model and was accounted for
as a deemed distribution of $1,548,000 to the preferred stockholders for
determining the loss per common share in the first quarter and full year of
2000. Also during the six months ended July 1, 2000, the holders of the
outstanding Series B-1 and D preferred shares elected to convert their holdings
into 3,175,410 shares of common stock.
During the six months ended July 1, 2000, the Company (i) issued options to
purchase 739,110 shares of common stock under the Company's stock option plans
and (ii) cancelled options to purchase 100,123 shares of common stock. Options
for 613,238 shares of common stock were exercised for $2,744,000 during the
period. At July 1, 2000, options to purchase 1,908,301 shares of common stock
were issued and outstanding under the Company's stock options plans. The
outstanding options expire by the end of June 2010. The exercise prices for
these options range from $2.313 to $49.375 per share, for an aggregate exercise
price of approximately $21.0 million. At July 1, 2000, there were 871,063 shares
of common stock available for the granting of future options.
Including the warrants issued in connection with the conversion of the
preferred stock described above, warrants to purchase 1,152,173 shares of common
stock were exercised resulting in net proceeds to the Company of $3,969,000.
At July 1, 2000, the following warrants to purchase shares of common stock
were outstanding:
<TABLE>
<CAPTION>
Number of Price Per Expiration
Common Shares Share Date
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<S> <C> <C>
85,800 $4.00 August 27, 2004
62,500 3.00 June 18, 2004
33,333 3.00 December 1, 2004
27,692 3.25 January 12, 2005
</TABLE>
5. LONG-TERM SALES AGREEMENT
In August 1999, the Company signed a five-year sales agreement with United
States Cellular Corporation ("U.S. Cellular"), one of the nation's ten largest
cellular service providers. As part of the agreement, the Company issued
warrants to U.S. Cellular to purchase of up to one million shares of common
stock at a price of $4.00 per share. These warrants expire August 27, 2004. The
warrants have a vesting schedule tied to product purchases and vest at the rate
of one share of common stock for every $25 of SuperFilter(R) system purchases
made by U.S. Cellular. As of July 1, 2000, U.S. Cellular had a total of 85,800
vested warrants and 914,200 unvested warrants.
The Company records a non-cash charge each quarter for the fair value of the
warrants vesting during that quarter. The charge is first allocated to
commercial sales discounts up to a maximum amount equal to the sales to U.S.
Cellular during that quarter, and any excess is then allocated to "Other
Non-Cash Warrant Charges." Fair value is determined using the Black-Scholes
option-pricing model. The value of the warrants, and the corresponding charge,
increases as the Company's stock price increases. Conversely, the value of the
warrants, and the corresponding charge, decreases as the Company's stock price
decreases. The Company recorded a non-cash charge of $536,000 and $1,403,000 for
warrants vesting in the quarter and six months ended July 1, 2000, respectively,
based on the Black-Scholes option-pricing model and the closing market prices of
$41.94 and $39.31 per common share on the last trading day ending the first
quarter of 2000 and the second quarter of 2000, respectively.
6. EARNINGS PER SHARE
The computation of per share amounts for the quarter and six months ended
July 1, 2000 and July 3, 1999 is based on the average number of common shares
outstanding for the period. Options and warrants to purchase 2,117,626 and
2,839,067 shares of common stock during the quarter and six months periods ended
July 1, 2000 and July 3, 1999, respectively, were not considered in the
computation of diluted earnings per share because their inclusion would be
antidilutive. Preferred stock convertible into 5,059,820
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common shares was also not considered in the computation of diluted earnings per
share for the quarter and six months ended July 3, 1999 because their inclusion
would also be antidilutive.
7. RECENT ACCOUNTING PRONOUNCEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In March 2000, FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB Opinion No.
25 (FIN 44). FIN 44 applies prospectively to new awards, exchanges of awards in
a business combination, modifications to outstanding awards, and changes to
grantee status that occur on or after July 1, 2000, except for the provisions
related to repricings and the definition of an employee, which apply to awards
issued after December 15, 1998. The provisions related to modifications to fixed
stock option awards to add a reload feature are effective for awards modified
after January 12, 2000. The adoption of FIN 44 is not expected to have a
material impact on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report contains various forward-looking statements made in
reliance on the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include, but are not limited to,
the Company's views with respect to future commercial revenues, capital
requirements, market growth, and new product introductions, and are generally
identified by phrases such as "anticipates," "believes," "estimates," "expects,"
"intends," "plans" and words of similar import. The Company reminds stockholders
that forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors which could cause the actual results
to differ materially from the forward-looking statement. The Company refers
interested persons to Exhibit 99 to its 1999 Annual Report on Form 10-K entitled
"Disclosure Regarding Forward-Looking Statements" and its other SEC filings for
a description of some of the uncertainties and factors that may affect
forward-looking statements. The Company assumes no obligation to update any
forward-looking statements.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JULY 3, 1999 AND
JULY 1, 2000
Total net revenues increased by $757,000 or 51%, from $1.5 million in the
second quarter of 1999 to $2.2 million in the second quarter of 2000. Net
revenues increased by $935,000 or 31% from $3.0 million in the first half of
1999 to $3.9 million in the same period this year. These increases are due to
higher commercial revenue, partially offset by lower government contract
revenue.
Commercial product revenue increased by $1.3 million or 563%, from $239,000
in the second quarter of 1999 to $1.6 million in the second quarter of 2000. For
the first half of 2000, commercial product revenue increased to $2.6 million
from $666,000 in the same period last year, an increase of $1.9 million or 291%.
These increases are the result of the Company's higher sales of the SuperFilter
product and a shift in mix to higher priced units. Commercial revenues are
expected to increase as a percentage of total revenues over the next several
quarters. Government contract revenues decreased by $222,000, or 18%, from
$1.2 million in the second quarter of 1999 to $1.0 million in the second quarter
of 2000 due to a decrease in the number of contracts in process. For the first
half of 2000, government contract revenues totaled $2.3 million and are
comparable to the same period last year.
The Company's commercial revenues are generated primarily from sales of its
SuperFilter product line which combines specialized superconducting filters with
a proprietary cryogenic cooler (and, in many cases, a low noise amplifier) in a
highly compact system. The Company began shipping its first TWO-Pak SuperFilter
in late 1997 and later introduced the SIX-Pak SuperFilter in early 1999.
SuperFilter product shipments increased to 79 units and 137 units in the second
quarter and first six months of 2000, respectively, as compared with 15 units
and 37 units in the corresponding periods last year. The Company's backlog for
SuperFilter products totaled 44 units at July 1, 2000; as compared with no
backlog at December 31, 1999 or July 3, 1999. Based on current prices, expected
product mix and costs, the Company estimates that it will achieve positive gross
margins (excluding the effect of the non-cash warrant charges) when product
sales reach approximately 200 units per quarter. The Company does not expect to
reach this level until 2001.
Net revenues were also affected by sales discounts on commercial product
sales totaling $367,000 for the quarter ended July 1, 2000 and $1.0 million for
the first six months of 2000. No similar amounts were incurred in the first half
of 1999. The majority of this discount represents the value of warrants vesting
in the current period previously granted to a customer with a long-term sales
contract. For further discussion of this contract please see the subsection
below entitled "Non-Cash Charges for Warrants Issued Under Long-Term Sales
Agreement".
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Cost of commercial product revenues includes all direct costs, manufacturing
overhead and related start up costs. The cost of commercial product revenues
increased by $1.2 million or 97%, from $1.2 million for the second quarter of
1999 to $2.4 million in the second quarter of 2000. The cost of commercial
product revenues increased by $1.4 million or 53%, from $2.7 million for the
first six months of 2000 to $4.1 million in the same period last year. These
increases primarily result from the larger number of unit shipments and
increased costs associated with ramping up the Company's manufacturing
abilities, partially offset by lower material costs and the effect of increased
manufacturing efficiencies.
Contract research and development expenses increased by $83,000 or 11%, from
$773,000 in the second quarter of 1999 to $856,000 in the second quarter of
2000. Contract research and development expenses increased by $235,000 or 15%,
from $1,528,000 in the first six months of 1999 to $1,763,000 in the first six
months of 2000. This increase is attributable to higher expenses associated with
the completion of a specific government contract.
Other research and development expenses increased by $110,000 or 22%, from
$494,000 in the second quarter of 1999 to $604,000 in the second quarter of
2000. Other research and development expenses increased by $192,000 or 21%, from
$932,000 in the first six months of 1999 to $1,124,000 in the first six months
of 2000. This increase is due to the Company's efforts in expanding market
opportunities through product line enhancement and development of the
SuperFilter product line.
Selling, general and administrative expenses increased by $815,000 or 62%,
from $1.3 million in the second quarter of 1999 to $2.1 million in the second
quarter of 2000. Selling, general and administrative expenses increased by $1.2
million or 45%, from $2.7 million in the first six months of 1999 to $3.9
million in the first six months of 2000. This increase results primarily from
increased corporate development, marketing and sales and management recruitment
activities, occupancy expenses, the implementation of a management incentive
program, liability insurance premiums and expenses associated with distributing
annual meeting information to a larger shareholder base.
Other non-cash warrant charges and other non-recurring charges totaled
$296,000 in the current quarter and $609,000 in the first six months of 2000.
This charge primarily relates to the vesting of warrants issued to a customer as
described above and represents the excess of the value of the vesting warrants
over the related sales. No similar agreements existed in the prior year periods.
The remainder of these charges consist of the write off of deferred offering
expenses.
Interest income totaled $102,000 and $174,000 in the quarter and six months
ended July 1, 2000, respectively, and increased as compared with the
corresponding periods in the prior year due to higher levels of cash available
for investment.
Interest expense increased by $67,000 or 66%, from $102,000 in the second
quarter of 1999 to $169,000 in the second quarter of 2000. Interest expense
increased by $231,000 or over 100%, from $154,000 in the first six months of
1999 to $385,000 in the first six months of 2000. These increases occurred as
the Company entered into new financing agreements in 1999 and 2000.
The Company had a net loss available to common shareholders of $4.1 million,
or $0.23 per common share, in the current quarter as compared with $2.7 million,
or $0.35 per common share, in the same period last year. Excluding the effect of
the non-cash warrant charges relating to the long-term sales contract,
cumulative dividends and deemed distributions to preferred stock shareholders
and other unusual items, the Company would have had a net loss available to
common stockholders of $3.4 million, or $0.19 per common share, in the current
period as compared with $2.4 million, or $0.31 per common share, in the same
quarter in 1999. For the first half of 2000, the Company had a net loss
available to common shareholders of $9.4 million, or $0.65 per common share as
compared with $5.5 million, or $0.71 per common share, for the first half of
1999. Excluding the effect of the non-cash warrant charges relating to the
long-term sales contract, cumulative dividends and deemed distributions to
preferred stock shareholders and other unusual items, the Company would have had
a net loss available to common stockholders of $6.3 million, or $0.44 per common
share, in the current period as compared with $5.0 million, or $0.65 per common
share, in the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by approximately $4.4 million from
$66,000 on December 31, 1999 to $4.5 million on July 1, 2000. The increase
results from the cash received from the sale of common stock and exercise of
warrants and stock options, partially offset by cash used in operations and
investing activities and the pay down of the line of credit.
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For the six months ended July 1, 2000, net cash used in operations totaled
$7.3 million. The significant portion of the operating use of cash related to
funding net losses of $7.8 million, or $5.6 million net of non-cash adjustments.
Other operating uses of cash primarily related to increases in accounts
receivables of $789,000 and inventories of $1.0 million. In the same period in
1999, cash used in operations totaled $5.0 million. This use of cash primarily
related to funding operating losses totaling $4.4 million net of non-cash
adjustments and inventory increases totaling $1.1 million, partially offset by
decreases in accounts receivables totaling $155,000 and increased liabilities of
$405,000.
Net cash used in investing activities totaled $773,000 in the six months
ended July 1, 2000 and primarily related to the purchase of manufacturing
equipment. In the same period in 1999, net cash used by investing activities
totaled $60,000. In the 1999 period, acquisitions of equipment totaling $960,000
were offset by the proceeds from the sale and leaseback of certain production
equipment with a net book value of $944,000 for cash proceeds of $900,000.
In the six months ended July 1, 2000, net cash provided by financing
activities totaled $12.5 million. Cash received from the sale of common stock
and upon the exercise of warrants and stock options totaled $14.1 million, and
was partially offset by the pay down of $1.5 million due on the line of credit
and principal payments totaling $102,000 on other debt obligations. In the same
period in 1999, cash provided by financing operations totaled $6.9 million and
primarily resulted from the issuance of preferred stock and short term
borrowings, partially offset by payments due on long-term obligations.
In the first half of 2000, the holders of the Series A-2, A-3, B-1, C and D
Redeemable Convertible Preferred Stock converted their holdings into 5,633,901
shares of common stock. As an inducement to convert their preferred shares into
common stock, the Company issued the Series A-2, A-3 and C preferred
stockholders warrants to purchase 250,000 shares of common stock. The issuance
of this warrant is considered a deemed distribution to the preferred
stockholders and, therefore, the fair market value of the warrant of $1.5
million is considered in the computation of the loss per share for the current
quarter.
The Company has a revolving line of credit that matured on June 17, 2000. The
line of credit bears interest at the bank's prime rate (9.5% at July 1, 2000)
plus 1%. The credit line has a borrowing limit equal to the lesser of (i) $2.5
million or (ii) 80% of eligible accounts receivable. The credit facility is
collateralized by a lien on all the assets of the Company. It also contains
financial covenants and imposes restrictions on acquisitions, capital
expenditures and cash dividends. At July 1, 2000, the Company did not have any
amounts outstanding on the line. The Company has entered into negotiations with
the bank to renew the line of credit and change the financial covenants.
In March 2000, the Company secured a one-year loan commitment from a large
stockholder for an additional $5.0 million. At its option, the stockholder may
lend the funds directly to the Company or unconditionally guarantee a loan from
a commercial bank or institutional lender. The stockholder has elected to
guarantee a loan from the Company's bank, and the Company and the bank are
currently negotiating the terms of the loan. The stockholder's loan commitment
expires in March 2001 or earlier upon the Company's receipt of $10 million or
more of equity financing. If the Company is unable to reach agreement with its
bank on the terms of the loan and the stockholder makes the loan directly, the
loan would be unsecured and bear interest at four percent over the prime rate of
the Company's prime lender. The Company paid a $12,500 commitment fee to the
stockholder. The Company has not borrowed any funds under this loan commitment.
At July 1, 2000 the Company had cash commitments for the purchase of fixed
assets totaling $745,000. To meet the anticipated continued increase in demand
for its products, the Company anticipates that it will spend an additional $2.5
million to $3.3 million for manufacturing equipment in 2000. In addition,
increased sales will require that higher inventory and accounts receivable
balances be maintained. Although revenues are expected to continue to increase
in the remainder of 2000, the Company expects to incur losses during that
period. The Company believes that its current cash resources and loan commitment
are adequate to fund its operations into early 2001. The Company is pursuing
additional debt or equity financing to fund its future operations.
NON-CASH CHARGES FOR WARRANTS ISSUED UNDER LONG-TERM SALES AGREEMENT
In August 1999, the Company signed a five-year sales agreement with United
States Cellular Corporation ("U.S. Cellular"), one of the nation's ten largest
cellular service providers. As part of the agreement, the Company issued
warrants to U.S. Cellular to purchase of up to one million shares of common
stock at a price of $4.00 per share. These warrants expire August 27, 2004. The
warrants have a vesting schedule tied to product purchases and vest at the rate
of one share of common stock for every $25 of SuperFilter(R) system purchases
made by U.S. Cellular. As of July 1, 2000, U.S. Cellular had a total of 85,800
vested warrants and 914,200 unvested
-10-
<PAGE> 11
warrants. The Company believes that all the systems ordered have been deployed
U.S. Cellular, and U.S. Cellular has not exercised any of the vested warrants.
The Company records a non-cash charge each quarter for the fair value of the
warrants vesting during that quarter. The charge is first allocated to
commercial sales discounts up to a maximum amount equal to the sales to U.S.
Cellular during that quarter, and any excess is then allocated to "Other
Non-Cash Warrant Charges." Fair value is determined using the Black-Scholes
option-pricing model. The value of the warrants, and the corresponding charge,
increases as the Company's stock price increases. Conversely, the value of the
warrants, and the corresponding charge, decreases as the Company's stock price
decreases. The Company cannot reasonably predict the amount or timing of future
charges relating to the warrant. The Company recorded a non-cash charge of
$867,000 for warrants vesting in the quarter ended April 1, 2000 and $536,000 in
the quarter ended July 1, 2000 based on the Black-Scholes option-pricing model
and the closing market prices of $41.94 and $39.31 per common share on the last
trading day ending the first quarter of 2000 and the second quarter of 2000,
respectively.
NET OPERATING LOSS CARRYFORWARD
At July 1, 2000, the Company had a federal net operating loss carryforward of
approximately $55 million. Section 382 of the Internal Revenue Code imposes an
annual limitation on the utilization of net operating loss carryforward
following a "change of ownership." The amount of the limitation is based on a
statutory rate of return (usually the applicable federal rate) and the value of
the corporation at the time of the change of ownership. Private placements and
other sales of equity securities by the Company can cause a change of ownership
either individually or in the aggregate. If a change of ownership occurs and an
annual limitation is imposed, a portion of these carryforwards may expire before
we are able to utilize them.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There was no material change in the Company's exposure to market risk at July
1, 2000 as compared with it's market risk exposure on December 31, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk" in the Company's 1999 Annual Report on Form 10-K.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation.
ITEM 2. SALE OF UNREGISTERED SECURITIES
The Company did not sell any unregistered securities in the quarter ended
July 1, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to the shareholders at the Company's
Annual Meeting of Shareholders held May 17, 2000:
(1) All of the following nominated directors were elected to serve for
the ensuing year and until their successors are duly elected and qualified.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF % OF SHARES SHARES % OF SHARES
SHARES FOR VOTING WITHHELD VOTING
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Glenn E. Penisten 15,755,420 91.80% 229,324 1.34%
M. Peter Thomas 15,754,931 91.80% 229,813 1.34%
E. Ray Cotten 15,754,840 91.80% 229,904 1.34%
</TABLE>
-11-
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C>
Robert P. Caren, Ph.D 15,710,981 91.54% 273,763 1.60%
Dennis J. Horowitz 15,710,831 91.54% 273,913 1.60%
John D. Lockton 15,710,531 91.54% 274,213 1.60%
J. Robert Schrieffer, Ph.D 15,711,131 91.54% 273,613 1.59%
Joseph C. Manzinger 15,710,881 91.54% 273,863 1.60%
H. Vaughan Blaxter, III 15,755,131 91.80% 229,613 1.34%
</TABLE>
(2) The proposal to increase the authorized common stock from 30,000,000
shares to 75,000,000 shares was approved.
<TABLE>
<S> <C>
Votes For: 15,599,454 (includes 3,055,410 shares of Preferred)
Votes Against: 373,686
Votes Abstaining: 11,604
Broker Non-Votes: 0
</TABLE>
(3) The appointment of PricewaterhouseCoopers as independent auditors of
the Company was ratified for the year ending December 31, 2000.
<TABLE>
<S> <C>
Votes For: 15,962,706 (includes 3,055,410 shares of Preferred)
Votes Against: 13,575
Votes Abstaining: 8,463
Broker Non-Votes: 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Reference
Number Description Document
------ ----------- ---------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws (2)
4.1 Form of Common Stock Certificate (3)
4.2 Form of Warrant Issued to United States Cellular Corporation (4)
4.3 Registration Rights Agreement with United States Cellular (4)
Corporation
4.4 Warrant Issued to PNC Bank, National Association in connection with
Credit Agreement (2)
4.5 Warrant Purchase Agreement dated December 1, 1999 with PNC Bank (6)
4.6 Warrant Purchase Agreement dated January 12, 2000 with PNC Bank (6)
27 Financial Data Schedule --
</TABLE>
Exhibits followed by a number in parenthesis are incorporated by reference
to the similarly numbered Company document cited below:
(1) Quarterly Report on Form 10-Q for the quarter ended April 3,
1999.
(2) Quarterly Report on Form 10-Q for the quarter ended July 3,
1999.
(3) Registration Statement on Form S-1 (Reg. No. 33-56714).
(4) Quarterly Report on Form 10-Q for the quarter ended October 2,
1999.
(5) Quarterly Report on Form 10-Q filed for the quarter ended July
3, 1999.
(6) Annual Report on Form 10-K filed for the year ended December 31,
1999.
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<PAGE> 13
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
quarter ended July 1, 2000.
SIGNATURE
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.
Dated: August 14, 2000 /s/ Martin S. McDermut
------------------------------------------
Martin S. McDermut
Vice President, Finance and Administration
and Chief Financial Officer
[Authorized Signatory and
Principal Financial Officer]
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<PAGE> 14
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 1, 2000
COMMISSION FILE NO. 0-21074
SUPERCONDUCTOR TECHNOLOGIES INC.
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Reference
Number Description Document
------ ----------- ---------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws (2)
4.1 Form of Common Stock Certificate (3)
4.2 Form of Warrant Issued to United States Cellular Corporation (4)
4.3 Registration Rights Agreement with United States Cellular (4)
Corporation
4.4 Warrant Issued to PNC Bank, National Association in connection with
Credit Agreement (2)
4.5 Warrant Purchase Agreement dated December 1, 1999 with PNC Bank (6)
4.6 Warrant Purchase Agreement dated January 12, 2000 with PNC Bank (6)
27 Financial Data Schedule --
</TABLE>
Exhibits followed by a number in parenthesis are incorporated by reference to
the similarly numbered Company document cited below:
(1) Quarterly Report on Form 10-Q for the quarter ended April 3,
1999.
(2) Quarterly Report on Form 10-Q for the quarter ended July 3,
1999.
(3) Registration Statement on Form S-1 (Reg. No. 33-56714).
(7) Quarterly Report on Form 10-Q for the quarter ended October 2,
1999.
(8) Quarterly Report on Form 10-Q filed for the quarter ended July
3, 1999.
(9) Annual Report on Form 10-K filed for the year ended December 31,
1999.
