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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRAANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21074
SUPERCONDUCTOR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0158076
State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
460 WARD DRIVE, SANTA BARBARA, CALIFORNIA 93111-2310
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 683-7646
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on the closing sale price the common stock as reported on
The NASDAQ Stock Market on March 17, 2000) was approximately $521,789,000.
For purposes of this determination, shares of common stock held by each officer
and director and by each person who owns 5% or more of the outstanding common
stock have been excluded in that such persons may be deemed to be affiliates of
the Registrant. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares of
the Registrant's common stock as of the close of business on March 17, 2000 was
13,986,138.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III incorporate information by reference
from the definitive proxy statement for the Registrant's Annual Meeting of
Stockholders to be held on May 17, 2000.
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SUPERCONDUCTOR TECHNOLOGIES INC.
FORM 10-K ANNUAL REPORT
Fiscal Year Ended December 31, 1999
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<S> <C> <C>
PART I
Item 1. Business............................................................................................. 3
Item 2. Properties........................................................................................... 11
Item 3. Legal Proceedings.................................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................ 11
Item 6. Selected Financial Data.............................................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................... 16
Item 8. Financial Statements and Supplementary Data.......................................................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 16
PART III
Item 10. Directors and Executive Officers of the Registrant................................................... 16
Item 11. Executive Compensation............................................................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 16
Item 13. Certain Relationships and Related Transactions....................................................... 16
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.................................... 17
</TABLE>
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PART I
ITEM 1. BUSINESS.
The following discussion contains forward-looking statements that
involve risks and uncertainties. Actual results may differ significantly from
the results discussed in the forward-looking statements. For a discussion of
factors that might affect forward looking statements, see the discussion under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Forward Looking Statements."
INTRODUCTION AND OVERVIEW
The Company manufactures and markets high-performance filters to
service providers and original equipment manufacturers in the mobile wireless
telecommunications industry. The Company's product, the SuperFilter, combines
high-temperature superconductors with cryogenic cooling technology to produce a
filter with significant advantages over conventional filters. From 1987 to
1997, the Company was engaged primarily in research and development and
generated revenues primarily from government research contracts. The Company
began full-scale commercial production of the SuperFilter in 1997 and shipped
more than 120 units in 1999. The Company has incurred cumulative losses of
$47.1 million from inception to December 31, 1999.
The Company markets its products to the mobile wireless
telecommunications industry. The Company does not market products for fixed
wireless telecommunications which has significantly different technological and
economic challenges. Accordingly, the discussion of wireless telecommunications
in this Annual Report refers only to mobile wireless telecommunications.
High-temperature superconductors ("HTS") are materials that have the
ability to conduct electrical energy with little or no resistance when cooled
below "critical" temperatures. STI believes that the growing worldwide wireless
communications market offers the most viable commercial opportunities for its
superconducting products. To capitalize on these opportunities the Company
developed its SuperFilter products, which combine specialized superconducting
filters with a proprietary cryogenic cooler and, in many cases, a low noise
amplifier ("LNA") in a highly compact system. The SuperFilter products, when
incorporated into wireless base stations, offer significant advantages over
conventional filter products for wireless applications, including reduced size,
increased range, reduced interference, increased capacity, extended handset
battery life, and reduced handset transmit power.
In 1998, the Company completed the transition from its focus on research
and development by successfully manufacturing and delivering its SuperFilter
TWO-Pak products. STI introduced the TWO-Pak SuperFilter for application in the
AMPS/B segment of the cellular market in 1997 and introduced the AMPS/A product
in 1998. Recently, STI also introduced the SIX-Pak SuperFilter for both A Band
and B Band in order to enhance network performance in urban areas. As a result
of these product introductions, the Company significantly expanded its sales and
marketing efforts. STI employs four Regional Sales Managers and a Vice President
of Sales to cover the United States and Latin America. Additionally, the Company
has recently added a Senior Vice President of Sales and Marketing to bring
focused senior-level management experience to its sales and marketing efforts.
The Company's initial sales and marketing efforts were directed primarily at
rural and suburban cellular providers because the Company believed they were
likely to be early users of the product. The Company's products address the
critical needs of these service providers: range coverage and call quality. In
addition, STI now actively markets its new SIX-Pak SuperFilter as a practical
urban application and expects that sales will increase significantly in this
area.
The augmented SuperFilter product line and increased sales activities
resulted in multiple product orders in 1998 and 1999. The Company conducted
field trials of its products with more than thirty cellular service providers,
including all of the top ten carriers in the country, resulting in orders for
over 200 systems. The Company shipped eighty-three SuperFilter systems in 1998
and 123 SuperFilter systems in 1999 as a result of these orders. In order to
prove the economic benefits of the product, the Company continues to actively
conduct numerous demonstrations and field trials in the United States and in
Latin America.
In order to support the SuperFilter product line, the Company built a
new 18,000 square foot state of the art manufacturing facility in Santa Barbara,
which opened in 1998. Currently, this facility, along with the manufacturing
equipment and tooling procured, has the capacity to produce up to three
SuperFilter products a day. Operating units within this facility are capable of
producing all the critical components of STI's products including
superconducting filters, cryogenic coolers, cryogenic packaging and final
enclosures, as well as system assembly and test, quality and material control
functions.
In addition to strengthening its manufacturing capability, STI also
strengthened its management capability in 1998 and 1999 by adding a Vice
President of Wireless Manufacturing, a Director of Marketing, by promoting a
Regional Sales Manager to Vice President of Sales and making the previous Vice
President of Operations the Vice President of Material Operations. The Company
believes it has the management structure to allow for its projected growth.
A critical component of all superconducting applications is the
cryogenic cooling system. STI developed a proprietary cryogenic cooler, which,
in addition to being integrated into its SuperFilter systems, has the potential
to be used in other applications. These other applications include medical
products, cold computing to increase the processing speed of computers and
components of various kinds of instrumentation. Since its formation in 1987, the
Company has received over $56.0 million in revenue from government research and
development contracts, through which it developed much of the technology used in
its commercial products. STI continues to secure government contracts, primarily
to fund its research and development efforts, and to address potential wireless
product opportunities in the government sector.
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STI'S STRATEGY
STI's objective is to establish commercial leadership by marketing its
SuperFilter products to wireless service providers and original equipment
manufacturers. Utilizing HTS thin-film technology, the Company's products offer
superior filter selectivity and sensitivity, which produce enhanced range and
minimize interference. Wireless service providers are able to increase their
revenue through the use of STI products.
Several years ago, the Company identified the wireless market for mobile
telecommunications as the most viable path to commercialization of HTS because
of the current and expected rapid growth of the market and STI's ability to
address critical needs of the market with HTS. The worldwide mobile wireless
market is expected to grow at an annual compounded growth rate of over 26%
during the next five years. The United States market for tower mount amplifiers
and repeaters, products that also extend coverage, is projected by World
Information Technologies to grow at the rate of 30% through 2001. The Company
believes that market acceptance for its products will increase, providing an
opportunity to displace some of the other coverage enhancement products in this
segment. STI's approach to product development is to harness the power of
superconductivity with a high degree of technology excellence, resulting in a
product that meets the requirements of the Company's customers effectively and
efficiently. The Company provides the mobile wireless communications industry
with a proprietary and integrated solution incorporating superconducting
materials, RF circuitry, and cryogenic cooling and packaging - the key
components of which are designed, developed and manufactured in-house - which
the Company believes provides strategic and cost advantages. Through the use of
proprietary computer simulation software developed internally, STI designs
advanced RF circuitry and prototypes using HTS materials. The result is
extremely small, high performance RF circuits that are then integrated into
STI's standard platform. The Company believes that this approach will allow it
to respond quickly to specific customer requirements. STI believes that its
standard platform is the smallest and most energy-efficient superconducting
filter system in the industry.
The Company believes the early market acceptance for its product will be
from mobile wireless service providers because they are faced with resolving
critical performance issues within the wireless networks. In particular,
cellular service providers, who are encountering increasing competition from new
Personal Communication Services (PCS) providers, are most likely to test and use
this advanced technology to solve their performance problems. Service
enhancements such as coverage in "dead zones," increased range of the base
station, reduction in dropped calls and decreased interference respond to some
of the most common user complaints, which give rise to customer churn among
service providers. The Company believes its SuperFilter products provide
effective and economical solutions to these critical problems. In order to
penetrate the wireless service provider market, STI must appeal directly to the
service providers and effectively demonstrate the superior return on investment
provided by its products.
Due to the proprietary and technological nature of the Company's product
and in order to produce a high quality product, the Company decided to
manufacture the key components of its product internally. These key components
include superconducting filters, cryogenic coolers, cryogenic packaging and
final enclosures, as well as system assembly and test, quality and material
control functions. The Company believes that this will enable it to control its
manufacturing processes properly, achieve required cost reductions and to
produce a highly reliable and quality product.
In 1998, the Company began volume production of SuperFilter systems
within its newly expanded manufacturing facility. Additional capital equipment
was acquired and the manufacturing employee base doubled to increase product
output.
WIRELESS FILTER PRODUCTS
The Company principally targets the worldwide mobile wireless
telecommunications market for its commercial superconducting products. STI is
initially marketing its SuperFilter systems primarily to wireless service
providers and OEMs for inclusion in base stations, which are the basic building
blocks of wireless networks. Base stations house the complex electronic
equipment required to receive and transmit radio waves for multiple real-time
voice and data communications. Base station systems generally include an antenna
and a series of transmitters, receivers, receiver filters and network interface
electronics. Base stations are manufactured by OEMs and are sold to service
providers that deliver wireless services to the public. The Company's products
provide the primary receiver filter after the antenna has captured the
transmission from the wireless handset. The product is designed to improve the
uplink transmission path, which is a critical part of today's wireless
technology.
THE WIRELESS MARKET
Mobile wireless industry analysts estimate the worldwide number of
wireless subscribers will double in less than 5 years from 308 million in 1998
to 975 million in 2003. To provide services to these customers it is estimated
that the number of
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installed base stations worldwide will increase from 233,000 in 1998 to 1.1
million in 2003. The Company believes that this rapid growth represents a
significant market opportunity for the Company, as each newly deployed base
station must incorporate a wireless filter system. This rapid growth is also
expected to produce increasing levels of interference which in turn may create
further demand for higher performance filters.
The reasons for the anticipated rapid expansion of the base station
market are two-fold. First, the overall demand for wireless products is
increasing both in the United States and worldwide. As the cost of providing
mobile wireless communications decreases and the number of service providers
increases, consumer access to mobile wireless service will become more
affordable and utilization will increase. This is evidenced by the many
different rate plans offered to users of mobile wireless telephones by the
wireless service providers. In addition, in areas without fully implemented
communications systems, the cost of installing a wireless communications system
is significantly lower than the cost of installing a traditional landline
communications system. Accordingly, many developing regions, including Latin
America, are seeking to establish a wireless infrastructure.
Second, a broader range of wireless services, such as e-mail, faxing and
Internet access, is now being offered, further burdening the already crowded
wireless frequencies. To accommodate the expanding need for wireless
communications, the FCC has auctioned PCS frequencies (around the 2 gigahertz
frequency) domestically to wireless service providers. Auction winners are under
financial, regulatory and competitive pressures to deploy and operate wireless
services quickly in these new frequencies. As a result of the PCS frequency
auctions, the number of licensed wireless service providers in any given service
area has increased from two to as many as five, thereby increasing competition
and creating pressure for cellular and PCS service providers to provide the
highest quality services possible.
THE WIRELESS NETWORK AND RELATED CONSTRAINTS
The ability of wireless service providers to increase system utilization
is enhanced by their ability to increase base station coverage, decrease
existing interference and minimize the physical size of base station components.
A wireless network consists of a number of adjoining cells that form a service
provider's geographic coverage area. Each cell has a base station, and the user
communicates through the closest base station on one of a limited number of RF
bands. The call is switched from base station to base station as the user moves
within the geographic area. Transmissions that pass through a base station are
filtered for unwanted signals to improve call clarity. The filtering process
improves the quality of the signals received and the range that the base station
can cover. Range is the distance at which a base station can continue to pick up
a wireless phone signal as the user travels away from the physical base station
site. Most base stations within the present cellular network were deployed at a
time when the typical cellular telephone unit was designed to transmit up to
three watts of RF power. Today, smaller portable telephones that transmit only
0.6 watts of power are increasingly replacing higher-power mobile units, thereby
decreasing the effective range of existing cellular base stations.
This is particularly a problem in rural and suburban networks. In the
PCS arena, wireless systems operate at a higher frequency than traditional
cellular systems, which reduces the range of signal transmission due to the
larger path losses. In urban settings, site location, site acquisition and
special environmental requirements can drive total base station implementation
costs up to $1 million per site. Each site may also be subject to additional or
unique regional and local regulatory processes and citizen demands that can
burden the deployment process. As a result, decreasing the number of base
stations that must be deployed can significantly reduce the service provider's
infrastructure costs.
Another issue is interference due to the imperfect RF channel
selectivity of filtering components. Interference, which occurs when two radio
waves of the same or similar frequency interact with one another to produce
"in-band" distortion, can cause dropped calls and cross talk, causing poor
service to wireless customers. This problem can also prevent a service provider
from fully utilizing the available RF spectrum, as some spectrum must be
reserved to protect against interference from another service provider's RF
spectrum, which in turn decreases the number of users a base station can
process. Problems caused by interference can be especially acute in urban areas,
where caller density is high. Because these symptoms of interference can
dramatically degrade service quality, a wireless filter system that reduces
interference can provide a meaningful advantage in this increasingly competitive
market.
The physical size of the base station can also be a significant issue
for service providers. Because a conventional filter system can account for
approximately 30% of the total base station size (excluding the antenna) and a
smaller base station requires less real estate per site, reducing the size of
the filter system can provide significant cost savings to service providers. In
addition, when new sites are not available, base station utilization must be
increased by retrofitting electronics for additional channels in the same
physical space. In such cases, reducing component size is a viable alternative.
See "Competition."
STI'S WIRELESS PRODUCT PERFORMANCE
The Company believes that its SuperFilter systems offer solutions to
some of the most pressing constraints facing the wireless industry: range, size,
interference, increased capacity, extended handset battery life and reduced
handset transmit power. Each SuperFilter system is a self-contained unit that
can be retrofitted into existing base stations or incorporated into new base
stations regardless of the protocol used (including Advanced Mobile Phone
Service ("AMPS"), Code Division
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Multiple Access ("CDMA"), Time Division Multiple Access ("TDMA") and Global
Systems for Mobile Communications ("GSM"), among others) with little or no
modification to conventional design. Through extended use or field trials, STI's
customers observed the following results through the use of the SuperFilter
product:
- Call traffic increased up to 101%
- Dropped call percentage decreased by up to 50%
- Calls achievable from previous "dead" spots
- Increase in average call duration up to 33%
- Increased base station range up to 40%
The Company's SuperFilter products also have the following beneficial
characteristics:
- - Range Extension. The Company's SuperFilter systems incorporate a low
noise amplifier, or LNA, with a superconducting filter, both of which
are then cryogenically cooled. The filters and LNAs expand the receiving
range of the base station by reducing the electrical noise of the
system, enabling each base station site to cover a larger area. The
Company believes that extending base station range can result in more
calls completed per base station and higher revenue per base station.
- - Reduction in Interference. STI has demonstrated that superconducting
thin-film materials are attractive for wireless communications base
station applications because the near-perfect conductivity of the
superconductor filters allows for greater control of RF signals. The
Company believes that its superconducting filter systems can insulate a
desired frequency against interference from unwanted frequency
transmissions more selectively than conventional filters, thereby
reducing the number of dropped calls and the amount of cross talk. While
the exact number of dropped calls will vary among base stations due to
differences in call volume and geographic location, a reduction in the
number of dropped calls may increase revenues to the service provider.
STI believes that a decrease in interference also can result in an
increase in utilization of the service provider's allocated frequency
spectrum, which in turn can result in an increase in the volume of calls
processed.
- - Proprietary Cooler. Superconducting materials require cooling to
temperatures as low as 77 Kelvin (-196- C) to operate. In order to
incorporate a compact, efficient and reliable cooling system into its
superconducting products, STI developed a proprietary Stirling
closed-cycle cryogenic cooler. About the size of a wine bottle, the
cooler utilizes helium gas as both the lubricant and coolant. This
eliminates the use of oils and grease, often used in other cryogenic
cooling systems, which require scheduled maintenance. STI's cryogenic
technology requires approximately 100 watts of power, much less than
other commonly used cryogenic systems. The resulting product is
energy-efficient and extremely compact with the ability to generate very
cold temperatures reliably.
- - Low Power Consumption. The Company believes that an additional benefit
to its superconducting filter systems is that these systems consume less
energy than competing superconducting systems, because the power budget
for some base stations can be as low as 1500 watts. A higher power
budget requires high capacity back-up units, resulting in undesirable
increases in base station size. Currently, the most energy-efficient
competing superconducting system consumes more than 500 watts or more of
power while the Company's SuperFilter system consumes only approximately
100 watts of power, comparable to that of a household light bulb.
- - Reduced Size. Advanced thin-film superconductor materials and designs
allow STI to provide superconducting filters that are one one-thousandth
the size of the conventional filters most commonly used in base
stations. A complete SuperFilter system is approximately 70% to 90%
smaller than a high-performance cellular conventional filter and can be
incorporated easily into a standard 19-inch component rack mount. This
significant reduction in physical size makes valuable space available
for other required electronic components, enabling service providers to
enhance the utilization of existing base stations instead of deploying
additional base stations. In addition, reduced size can decrease
deployment costs for new base stations, as less real estate is required
to support a base station. STI believes its SuperFilter systems are the
smallest systems currently available in the industry.
ACCESSING THE WIRELESS MARKET
The Company markets its products to wireless service providers and OEMs
worldwide with a particular focus on domestic wireless service providers. In the
Company's experience, wireless service providers with rural base stations had
the most immediate need for the SuperFilter system, particularly for range
extension. By targeting this segment of the market STI expects to create
significant interest from these service providers for solving their wireless
infrastructure problems,
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which will allow the Company to demonstrate its product capabilities in the
suburban and urban markets as well. In addition, the Company expects the
interest in its products to create a "pull through" interest from industry OEMs
by creating additional market demand for the Company's products. The Company has
been successful at receiving orders for its products from wireless service
providers in small quantities for field trials and deployment. In the case of
smaller wireless service providers, orders have been received for deployment of
50% to 100% of the base stations within their region. The Company has also
established relationships with major wireless service providers and OEMs from
which STI expects to seek volume orders.
In August 1999, the Company signed a five-year agreement with United
States Cellular Corporation ("U.S. Cellular"). Under the terms of the purchase
agreement, U.S. Cellular will purchase a minimum of 100 SuperFilter(R) systems
prior to December 31, 2000 and may purchase an additional 400 SuperFilter(R)
systems during the remaining term of the agreement. As part of the agreement,
the Company issued U.S. Cellular a warrant, subject to vesting provisions,
providing for the purchase of up to one million shares of common stock at a
price of $4.00 per share. Under the terms of the warrant, U.S. Cellular may
purchase one share of common stock for every $25 worth of SuperFilter(R)
systems purchased by U.S. Cellular.
In March 2000, the Company signed a supply agreement with ALLTEL
Communications Products. Under the terms of the supply agreement, ALLTEL has
designated the Company as their supplier of high temperature superconductor
base station receiver solutions for their analog and CDMA cellular and PCS
networks.
At a major industry trade show in February 1998, the Company introduced
the SuperFilter system for use in AMPS/A cellular networks. The AMPS/A product
offers range extension, with a diplexed filter for reduced interference. The
AMPS/A product offers the same advantages as the AMPS/B product, with filters
designed for the AMPS/A frequency. With the introduction of both systems, STI
has positioned itself to provide products to both major segments of the cellular
industry. In addition, the Company continues to develop product enhancements
that allow the customer more flexibility when installing and utilizing the
SuperFilter product. In some cases, the Company's product can replace the entire
receiver filter system within a base station. STI has chosen to offer these two
core cellular products initially as the Company believes cellular service
providers utilizing AMPS networks are the most immediately receptive customer
base for its products. The Company believes that cellular service providers will
be receptive to its products due to the increasing competition from PCS
providers, which will cause cellular providers to enhance service in order to
retain customers. The Company has also demonstrated in prototypes the ability to
design products for use in PCS networks, as well as a variety of digital
protocols. STI expects to offer additional product offerings in these areas as
the Company's position in the wireless market increases.
GOVERNMENT CONTRACTS
The Company's strategy is to pursue government research and development
contract awards to supplement it's funding of superconducting wireless and
cryogenic product development. Since inception, the majority of the Company's
net revenues have been from research and development contracts, sales directly
with the U.S. government or resellers to the U.S. government. Nearly all of such
revenues were paid under contracts between the Company and the Department of
Defense ("DoD"). Since 1988, the Company has successfully obtained a number of
non-classified government contracts for superconductor research, including one
of the largest non-classified HTS awards from the DoD Advanced Research Projects
Agency ("DARPA") through the Office of Naval Research, under DARPA's original
superconductivity program. In addition to actively soliciting government
contracts, the Company participates in the Small Business Innovative Research
("SBIR") program. Since its inception, the Company has been awarded 32 Phase I
SBIR contracts, each of which typically generates from $70,000 to $100,000 of
revenues for the Company. The Company has been successful in converting eight of
these Phase I contracts into Phase II programs, each of which typically
generates $500,000 to $750,000 in revenues for the Company and one into a Phase
III program valued at $2.2 million dollars.
Since the Company's inception, government contracts have provided over $56.0
million of revenue to the Company.
PRODUCTS DEVELOPED UNDER GOVERNMENT CONTRACTS
STI pursues U.S. government research contracts that augment the
Company's internal development programs, particularly in the areas of HTS
materials production, RF filter design, and cryogenics. STI believes it has
successfully leveraged its government research in the development of commercial
products for the wireless industry.
The U.S. government is working with military communications equipment
contractors on government wireless programs. The focus is generally to improve
the integrity of digital communications links through the use of superconducting
filters and cryogenic low noise amplifiers. The Company also developed a
proprietary switched filter bank ("SFB") system in conjunction with Wright
Laboratory at Wright-Patterson Air Force Base ("WP-SFB") with funding from
DARPA. The SFB demonstrated an ability to mitigate the problem of signal
interference, which DARPA believes can increase aircraft and pilot survival
rates. The Company is currently working on a DARPA funded effort to develop
rapid tuning of superconducting filters. This capability will greatly increase
the effectiveness in blocking interference in both government and commercial
applications.
CURRENT GOVERNMENT R&D CONTRACTS
At December 31, 1999, the Company was working with the U.S. government
under four separate research and development contracts with a total award value
of $11 million dollars, all of which are fully funded. Because all of the
Company's government contracts are terminable by the contracting agency at its
option, award amounts should not be used as a measure of future revenues.
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STI'S TECHNOLOGY
SUPERCONDUCTING TECHNOLOGY
Superconductors are materials that have the ability to conduct
electrical energy with little or no resistance when cooled below "critical"
temperatures. In contrast, electric currents that flow through normal conductor
materials encounter resistance that consumes energy when electrical energy is
converted into heat. Substantial improvements in the performance characteristics
of electrical systems can be made with superconductors, including reduced power
loss, lower heat generation and decreased electrical noise. As these properties
have been applied to radio and microwave frequency applications, new products,
such as wireless filters, have been developed that can be extremely small,
highly sensitive and highly frequency selective.
The discovery of superconductors was made in 1911. However, a
fundamental understanding of the phenomenon of superconductivity eluded
physicists until J. Robert Schrieffer (a director of the Company and Chairman of
its Technical Advisory Board), John Bardeen (co-inventor of the transistor) and
Leon Cooper proposed a theory explaining superconductivity, for which they were
awarded the Nobel Prize in Physics in 1972. Until 1986, all superconductor
utilization was done at extremely low temperatures below 23K (-250-C).
Superconductors were not widely used in commercial applications because of the
high cost and complexities associated with reaching and maintaining such low
temperatures. In 1986, high temperature superconductors with critical
temperatures greater than 30K (-243-C) were discovered. In early 1987 yttrium
barium copper oxide ("YBCO") was discovered, which has a critical temperature of
93K (-180-C). Shortly thereafter, thallium barium calcium copper oxide ("TBCCO")
was discovered, which has a critical temperature of 125K (-148-C). These
discoveries were important because these high temperature superconductors
allowed for operating temperatures higher than 77K (-196-C), or the point at
which nitrogen liquefies. These high critical temperatures allow superconductors
to be cooled using less expensive and more conventional refrigeration processes.
STI was formed following this discovery to develop and commercialize high
temperature superconductors.
STI'S TECHNOLOGY APPROACH
The Company has internally developed its key technologies from a
standard set of technology platforms. The Company utilizes a proprietary
manufacturing process for HTS thin-film production, the base material for the
Company's filtering products. An in-house design team develops the filters,
which are packaged into a vacuum-sealed container for thermal insulation. The
filter package is incorporated with the Company's cryogenic cooler, and then
integrated with the necessary control electronics into a complete system for
simple adaptation into new or existing wireless communications base stations.
The Company believes that its filter systems provide its targeted markets with
the smallest and most cost-effective products and that it is the only
superconducting company that develops and manufactures all of these key
components.
HTS Materials. A number of HTS materials have been discovered with
superconducting properties, but only a few have characteristics capable of
commercialization. The Company primarily utilizes TBCCO, which has one of the
highest known critical temperatures, allowing for reduced cooling needs in order
to achieve superconducting properties. The Company holds a worldwide exclusive
license, in all fields of use, to TBCCO formulations covered by patents held by
the University of Arkansas through a license agreement. The TBCCO superconductor
is the base material used by STI to produce RF components, such as wireless
communications filters. The Company has obtained eleven patents for technologies
related to thin-film production. The Company believes that the process
technology it has developed produces state of the art HTS thin- films of the
highest quality.
RF Circuitry. The Company has devoted a significant portion of its
engineering resources to design and model the complex RF circuitry that is basic
to the Company's products. The Company's RF engineering team is led by Vice
President of Engineering Neal O. Fenzi, and includes Drs. Gregory Hey-Shipton
and George Matthaei, recognized leaders in RF filter design. In addition, Dr. J.
Robert Schrieffer, a Nobel laureate, is head of the Company's Technical Advisory
Board. The expertise of this highly qualified team has allowed the Company to
design and fabricate very precise individual components, such as RF signal
filters. STI has developed and implemented computer simulation systems to design
its products and this RF circuitry design has allowed the Company to produce
extremely small, high-performance circuits. Some of the Company's design and
engineering innovations have been patented; others are the subjects of pending
patent applications. The Company believes that its RF engineering expertise
provides the Company with a competitive advantage.
Cryogenic Cooling Technology. The availability of a low-cost, highly
reliable, compact cooling technology is critical to the successful
commercialization of the Company's superconducting products. When STI was
founded no such cryogenic cooler was commercially available. As a result, the
Company developed a low-cost, low-power cooler designed to cool to 77K (-196-C)
with sufficient heat dissipation for its superconducting applications, and has a
target life of over 40,000 hours.
Its development was based in part on patents licensed by the Company from
Sunpower, Inc. under a cross-licensing arrangement. STI believes that its
internally-developed cryogenics allow it to offer a cooler that is both compact
and reliable enough to meet wireless industry standards and provides the Company
with a significant competitive advantage. In high
8
<PAGE> 9
volume production, the Company believes that unit costs for this cooler will be
significantly less than currently available cryogenic coolers.
Cryogenic Packaging. Cooling to cryogenic temperatures requires proper
insulation and packaging. Any superconducting or other cryogenically cooled
device must be maintained at its optimal operating temperature, and its
interaction with higher temperature components must be controlled. The Company
has developed and patented several thermal insulation technologies to satisfy
this requirement.
MANUFACTURING
In 1998, the Company opened its new 18,000 square foot state of the art
manufacturing facility in Santa Barbara. The facility contains HTS thin film
circuit production "clean rooms", microelectronics assembly, cryocooler
production and final system assembly and test. Due to the proprietary and
technical nature of the Company's products and the need to produce high quality
products, the Company has decided to produce substantially the entire product
in-house. The Company believes this will enable it to control its manufacturing
process and achieve required cost reductions. An Enterprise Resource Planning
system manages all parts of the business. We monitor quality at each stage of
the production process, including the selection of component suppliers. Many of
the production processes are proprietary and are protected by patents.
The Company relies on detailed sales forecasts to determine production
requirements and manage inventory. The production process and inventory points
have been designed to facilitate responsiveness to the customer while minimizing
inventory. We have programs focusing on cost reduction and supply chain
management designed to reduce costs and reduce inventory exposures.
Certain parts and components used in the HTS receiver system are
currently obtained from a single source. These suppliers have historically met
the Company's quality and delivery requirements.
MARKETING AND SALES
The Company pursues a marketing strategy aimed at service providers and
OEMs with the goal of building long-term business relationships that will lead
to future volume orders for STI's products. STI utilizes a direct sales force of
four Regional Sales Managers, a VP of Sales and a Senior Vice President of Sales
and Marketing. Additionally, the Company has agreements with one international
independent organization that perform as Sales Representative for STI's products
[in South America]. The Company demonstrates STI products at trade shows,
participates in industry conferences, utilizes advertising and direct mailings,
and provides technical and application reports to recognized trade journals.
Product information in the form of brochures, data sheets, application notes,
trade journal reports, product photos and press releases are updated as
necessary. The Company has an internal sales and marketing support staff with
extensive experience in wireless marketing and sales, contracts and sales
administration and marketing communications.
INTELLECTUAL PROPERTY
The Company regards elements of its manufacturing processes, product
design and fabrication equipment as proprietary and seeks to protect its rights
in them through a combination of patent, trademark, trade secret and copyright
law and internal procedures and non-disclosure agreements. The Company also
seeks licenses from third parties for HTS materials and processes used by the
Company, which have been patented by other parties. The Company believes that
its success will depend, in part, on the protection of its proprietary
information, patents and the licensing of key technologies from third parties.
The Company has focused its development efforts on TBCCO. The Company
has an exclusive worldwide license (including the right to sublicense) under
several U.S. patents that have been issued to the University of Arkansas
covering TBCCO, subject to the University of Arkansas' right to conduct research
related to the patents. The consideration for the license included $250,000 in
cash, prepaid royalties of $750,000 through April 1995 and an aggregate of
200,000 shares of common stock. Since April 1995, the Company has been obligated
to pay royalties of 4% on sales of TBCCO-based products, subject to a $100,000
annual minimum from and after April 1997, and royalties of 35% of sublicense
revenues received by the Company. In the event that the Company fails to pay
minimum annual royalties, the license automatically becomes non-exclusive. The
license terminates upon expiration of the right to claim damages for
infringement of all the patents covered. Under the terms of its exclusive
license, the Company has agreed to assume litigation expenses for infringement
actions, subject to a right of setoff against future royalty obligations.
In January 1993, as part of its strategy to stimulate the development
and use of TBCCO, the Company granted DuPont a non-exclusive worldwide
sublicense to develop processes and market TBCCO thin-films. DuPont paid the
Company $388,000 as partial consideration for the sublicense, a portion of which
represents prepaid royalties. DuPont must pay royalties on sales of TBCCO
thin-films or devices containing TBCCO thin-films, subject to annual minimums.
Dupont paid the minimum royalties of $10.000 in 1999 and again in 2000. In the
event that the Company grants another sublicense to a third party on more
favorable terms, it will be obligated to extend those terms to DuPont. The term
of the sub-license is the same as the Company's license from the University of
Arkansas, but the sublicense is terminable by DuPont upon 30 days' notice to the
Company. In 1996, the Company granted a nonexclusive license for TBCCO to
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<PAGE> 10
Midwest Superconductivity, Inc. on terms substantially similar to those of the
1993 DuPont agreement. DuPont and Midwest Superconductivity, Inc., and their
customers are current or potential competitors of the Company, and there can be
no assurance that these sublicenses will not adversely affect the Company's
business, results of operations and financial condition.
As of December 31, 1999, the Company held 21 U.S. patents. Nine of the
Company's patents are for technologies directed toward producing thin-film
materials, including its proprietary thin-film process for TBCCO production. In
addition, the Company currently holds eight patents for circuit designs and four
patents covering cryogenics and packaging. As of December 31, 1999, the Company
had eleven patents pending. The Company has also begun to apply for design
patents in an effort to protect all phases of product development.
SuperFilter(R) is a registered trademark of Superconductor Technologies Inc. All
other marks herein are properties of their respective owners.
RESEARCH AND DEVELOPMENT
As part of STI's strategy to maintain its technological leadership, the
Company has focused its research and development activities on materials, RF
circuitry, and cryogenics design and product application. At December 31, 1999,
the Company's research and development department consisted of 45 individuals.
The Company's research and development expenses consist primarily of labor,
engineering, material and overhead costs incurred in connection with research
and development activities. The Company spent $8.0 million, $5.9 million and
$5.2 million on all research and development in 1997, 1998 and 1999,
respectively. Of those expenses, contract research and development expenses
accounted for $6.2 million, $4.7 million and $3.4 million, respectively. The
Company's revenues from government-related contracts were approximately $8.1
million, $6.0 million, and $5.0 million, respectively. Research and development
contracts accounted for 97%, 76% and 71% of the Company's total revenues in the
fiscal years ended 1997, 1998 and 1999, respectively.
COMPETITION
The markets for the Company's products are intensely competitive. The
Company faces competition in various aspects of its technology and product
development and in each of the markets targeted by the Company. The Company's
current and potential competitors include conventional RF filter manufacturers
and both established and newly emerging companies developing similar or
competing superconducting technologies. The Company competes primarily with
Conductus, Inc. and Illinois Superconductor Corporation with respect to its
superconducting filter systems. The Company also competes with alternative means
of enhancing base stations' range and selectivity other than by superconducting
filter. The primary competition comes from tower mount and ground mount
amplifiers and "smart" antennas. Tower mount and ground mount amplifiers pass
the signal received by the antenna through a broad low-level filter, which then
amplifies the signal. These units are produced by a number of companies, which
include most of the OEMs of base stations such as Motorola, Lucent, Nortel and
Nokia. Filter manufacturers including Allen Telecom and Celwave also produce
these units. The "smart" antennas allow the antennas to focus on the signal they
are trying to receive to enhance the ability to receive the signal. Among the
companies that produce these systems are Metawave and Arraycom.
ENVIRONMENTAL ISSUES
The Company uses certain hazardous materials in its research,
development and manufacturing operations. As a result, the Company is subject to
stringent federal, state and local regulations governing the storage, use and
disposal of such materials. Current or future laws and regulations could require
substantial expenditures for preventative or remedial action, reduction of
chemical exposure or waste treatment or disposal. Although the Company believes
that its safety procedures for the handling and disposing of hazardous materials
comply with the standards prescribed by state and federal regulations, there is
always the risk of accidental contamination or injury from these materials. To
date, the Company has not incurred substantial expenditures for preventive
action with respect to hazardous materials or for remedial action with respect
to any hazardous materials accident, but the use and disposal of hazardous
materials involves the risk that the Company could incur substantial
expenditures for such preventive or remedial actions. If such an accident
occurred, the Company could be held liable for resulting damages. The liability
in the event of an accident or the costs of such remedial actions could exceed
the Company's resources or otherwise have a material adverse effect on the
Company's financial condition and results of operations.
EMPLOYEES
As of December 31, 1999, the Company employed a total of 118 persons.
Nine of the Company's employees have Ph.D.s and 18 others hold advanced degrees
in physics, materials science, electrical engineering and related fields. The
Company's employees are not represented by a labor union and the Company
believes that its employee relations are good.
The Company is highly dependent upon the efforts of its senior
management. Due to the specialized technical nature of the Company's business,
the Company is also highly dependent upon its ability to attract and retain
qualified technical personnel, primarily in the areas of wireless
communications. The loss of the services of one or more members of the senior
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<PAGE> 11
management or technical teams could have a material adverse affect on the
Company. There is intense competition for qualified personnel in the areas of
the Company's activities and there can be no assurance that the Company will be
able to continue to attract and retain qualified personnel necessary for the
development of its business.
ITEM 2. PROPERTIES.
The Company's primary operations, including its manufacturing line, are
located in approximately 36,000 square feet of space in Santa Barbara,
California. The Company occupies approximately 33,000 square feet of this space
under a lease that expires on December 31, 2009. The remaining 3,000 square feet
is occupied under a lease that expires in January 2001. The Company also leases
regional sales offices in Illinois, Texas, Massachusetts and Washington on
monthly and annual terms. The Company believes its facilities will be adequate
to meet its current and reasonably anticipated needs for approximately the next
year. During the current year, the Company plans to pursue significant
additional space to supplement its main facility for planned growth in 2001. The
Company believes that suitable space will be available at a reasonable cost in
Santa Barbara or other nearby areas.
ITEM 3. LEGAL PROCEEDINGS
There are currently no pending or threatened material legal actions
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during
the quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
The Company's common stock is listed on The NASDAQ Stock Market under
the symbol "SCON". The following table sets forth for the periods indicated the
high and low intraday sales prices for our common stock as reported on The
NASDAQ Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
Quarter ended March 28, 1998 ............. $ 3.75 $ 2.50
Quarter ended June 27, 1998 .............. $ 6.63 $ 3.41
Quarter ended September 26, 1998 ......... $ 6.56 $ 4.00
Quarter ended December 31, 1998 .......... $ 5.75 $ 3.25
1999
Quarter ended April 3, 1999 .............. $ 4.63 $ 3.25
Quarter ended July 3, 1999 ............... $ 3.88 $ 2.19
Quarter ended October 2, 1999 ............ $ 5.50 $ 2.63
Quarter ended December 31, 1999 .......... $ 5.22 $ 2.69
2000
Quarter ended April 1, 2000 .............. $ 115.00 $ 4.38
(Through March 17, 2000)
</TABLE>
HOLDERS OF RECORD
As of March 29, 2000, there were approximately 171 holders of record of
the common stock. The Company estimates that there are approximately 16,500
round lot common stockholdeers of beneficial interest.
DIVIDENDS
The Company intends to employ all available funds in the development of
its business and does not expect to pay any cash dividends for the foreseeable
future. Furthermore, the Company may not pay any cash dividends on its common
stock, until all dividends due and payable on its preferred stock have been
declared and paid and without the written consent of its equipment leasing line
provider and its lender.
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<PAGE> 12
SALES OF UNREGISTERED SECURITIES
During the fourth quarter of 1999, the Company issued equity securities
in two transactions that were not registered under the Securities Act of 1933.
During the past quarter, the Company issued warrants in connection with the
Company's financing activities. The Company issued warrants to PNC Bank for the
purchase of 33,333 shares of common stock at a price of $3.00 per share and
warrants to Wilmington Securities, Inc., an affiliate of the Hillman Company, to
purchase 20,000 shares of common stock at $3.00 per share. These securities were
issued pursuant in private placements exemption from registration under Section
4(2) of the Securities Act. The warrant holders are sophisticated institutional
investors and obtained the warrants for investment purposes.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth below is not necessarily indicative of results
of future operations and should be read in conjunction with the Company's
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing in Item 14 of Part
IV of this Report.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues:
Government contract revenues ................ $ 7,310 $ 7,104 $ 8,104 $ 6,029 $ 5,059
Commercial product revenues, net of non- cash
sales discount of $124 in 1999 ............ 300 250 175 1,954 2,053
Sub license royalties ....................... -- 38 38 -- 10
-------- -------- -------- -------- --------
Total net revenues ..................... 7,610 7,392 8,317 7,983 7,122
Costs and expenses:
Cost of commercial product revenues ........ -- -- -- 5,873 6,848
Contract research and development ......... 5,414 5,721 6,218 4,693 3,427
Other research and development ............. 2,397 2,260 1,809 1,161 1,747
Selling, general and administrative ........ 2,871 2,967 4,076 5,435 5,701
-------- -------- -------- -------- --------
Total costs and expenses ................ 10,682 10,948 12,103 17,162 17,723
-------- -------- -------- -------- --------
Loss from operations ........................... (3,072) (3,556) (3,786) (9,179) (10,601)
Other income (expense), net .................... 253 85 245 17 (274)
-------- -------- -------- -------- --------
Net loss ....................................... (2,819) (3,471) (3,541) (9,162) (10,875)
Less:
Redeemable preferred stock dividends........ -- -- -- (271) (908)
Deemed distribution attributable to
beneficial conversion feature............. -- -- -- -- (456)
-------- --------- -------- --------- --------
Net loss available to common stockholders ...... $ (2,819) $ (3,471) $ (3,541) $ (9,433) $(12,239)
======== ======== ======== ======== ========
Basic and diluted net loss per share ........... $ (0.47) $ (0.57) $ (0.46) $ (1.22) $ (1.58)
Weighted average number of shares
outstanding .................................... 6,026 6,117 7,701 7,725 7,744
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 5,244 $ 6,871 $ 3,537 $ 310 $ 66
Working capital ................................ 5,695 7,178 3,500 1,349 (13)
Total assets ................................... 11,878 13,344 10,087 12,509 11,085
Long-term debt, including current portion ...... 453 77 13 1,112 961
Redeemable preferred stock ..................... -- -- -- 8,982 17,125
Total stockholders' equity (deficit) ........... 10,087 11,290 8,166 (1,197) (11,656)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that
involve risks and uncertainties. Actual results may differ significantly from
the results discussed in the forward-looking statements. For a discussion of
factors that might affect forward-looking statements, see the discussion below
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Forward-Looking Statements."
The Company manufactures and markets high-performance filters to service
providers and original equipment manufacturers in the mobile wireless
telecommunications industry. The Company's product, the SuperFilter, combines
high-temperature superconductors with cryogenic cooling technology to produce a
filter with significant advantages over conventional filters. From 1987 to 1997,
the Company was engaged primarily in research and development and generated
revenues primarily from government research contracts. The Company began
full-scale commercial production of the SuperFilter in 1997 and shipped more
than 120 units in 1999. The Company has incurred cumulative losses of $47.1
million from inception to December 31, 1999.
RESULTS OF OPERATIONS
1999 AS COMPARED WITH 1998
Total net revenues decreased by $861,000, or 11%, from $8.0 million in
1998 to $7.1 million in 1999. Lower government contract revenues were only
partially offset by increased commercial product revenues.
Government contract revenues decreased by $970,000, or 16%, from $6.0
million in 1998 to $5.1 million in 1999. This decrease is attributable to the
completion of certain government programs.
Commercial product revenues increased by $99,000, or 5%, from $2.0
million in 1998 to $2.1 million in 1999. While product shipments increased from
83 units in 1998 to 123 units in 1999, the average unit price decreased by 29%
due to competitive pricing pressures from other superconductor filter companies.
Product revenues were also affected by a non-cash sales discount of $124,000 to
one customer. This discount represents the value of warrants vesting during 1999
previously granted to a customer in connection with a long-term sales contract.
For further discussion of this contract, please see the subsection entitled
"Long-Term Sales Contract" below in Item 7 of this Report.
The cost of commercial product revenues increased by $975,000, or 17%,
from $5.9 million for 1998 to $6.8 million in 1999, and results from the larger
number of commercial product shipments, partially offset by lower manufacturing
costs.
Contract research and development expenses decreased by $1.3 million, or
27%, from $4.7 million in 1998 to $3.4 million in 1999 and is attributable to
the decrease in government contract activity.
Other research and development expenses increased by $586,000, or 50%,
from $1.2 million in to $1.7 million in 1999. This increase is due to the
Company's efforts in expanding market opportunities through product line
enhancement and development of the SuperFilter(R) product line.
Selling, general and administrative expenses increased by $266,000, or
5%, from $5.4 million in 1998 to $5.7 million in 1999, due to increased
promotional and sales efforts relating to the Company's SuperFilter(R) products.
Interest income decreased by $58,000 or 73%, from $79,000 in 1998 to
$21,000 in 1999 due to less cash available for investment purposes.
Interest expense increased by $233,000 or 376%, from $62,000 in 1998 to
$295,000 in 1999. This increase occurred as the Company entered into new working
capital financing agreements and increased borrowings for working capital needs
in 1999.
1998 AS COMPARED WITH 1997
Net revenues decreased by $334,000, or 4%, from $8.3 million in 1997 to
$8.0 million in 1998, due to a decrease in government contract revenues and
sublicense royalties offset by an increase in commercial product revenues.
Government contract revenues decreased by $2.1 million, or 26% from $8.1
million in 1997 to $6.0 million in 1998, which is primarily attributable to the
completion of certain government programs and the transition period associated
with entering into new government contracts. Government contract revenues
constituted 97% and 76% of net revenues in 1997 and 1998, respectively.
Commercial product revenues from the sale of the Company's SuperFilter
products increased by $1.8 million, or 1017%, from $175,000 in 1997 to $2.0
million in 1998. A substantial portion of the increase results from the shipment
of 83 SuperFilter systems in 1998 compared to 1 system in 1997.
Sublicense royalties were $38,000 in 1997. There were no sublicense
royalties in 1998, as the Company did not offer any new sublicense agreements on
its patents during this time period and collected only minimal amounts under
existing licenses.
The cost of commercial product revenues was $5.9 million in 1998.
Included in the cost of commercial product revenues are all direct costs of
manufacturing, manufacturing overhead and related start-up costs. In 1997 the
cost of commercial product
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<PAGE> 14
revenue was zero because the units were manufactured with previously expensed
research and development materials.
Contract research and development expenses decreased by $1.5 million, or
25%, from $6.2 million in 1997 to $4.7 million in 1998. This decrease is
attributable to the decrease in government contract revenue that is directly
related to contract expenses.
Other research and development expenses decreased by $648,000, or 36%,
from $1.8 million in 1997 to $1.2 million in 1998. This decrease is the result
of the Company's continued focus on commercial production and ramp-up of
manufacturing capacity.
Selling, general and administrative expenses increased by $1.3 million,
or 33%, from $4.1 million in 1997 to $5.4 million in 1998. This increase is due
to increased labor-related expenses attributable to the expansion of the
Company's sales force, as well as increased efforts in the Company's marketing
program, which included advertising and trade shows.
Interest income decreased by $196,000, or 71%, from $275,000 in 1997 to
$79,000 in 1998, as a result of the reduction in the interest-earning investment
balances used to fund and expand operations. Interest expense increased by
$32,000, or 107%, from $30,000 in 1997 to $62,000 in 1998, as the Company
entered into new financing agreements in 1998.
FLUCTUATIONS IN PERIODIC RESULTS
A significant portion of the Company's revenues has historically
consisted of government research and development contract revenues. The Company
is still in the early stages of marketing its SuperFilter product for the
commercial markets and expects that government contract revenue will continue to
account for a significant portion of total net revenues over the next several
quarters. Government contract revenues have historically fluctuated from period
to period. This variability is attributable to government contract budgeting and
funding patterns, as the government procurement process is lengthy and may
involve competing budget considerations, making the timing of the Company's
revenues difficult to predict.
As the Company continues to focus on its commercial products, commercial
revenues are expected to increase as a percentage of revenues over the next
several quarters; however, there can be no assurance that such commercial
revenue will increase. Furthermore, as the Company attempts to achieve
commercialization of products, it could encounter seasonally or other currently
unforeseen factors causing additional variability in its results.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has financed its operations and investing
activities primarily through the public and private sales of preferred and
common stock and to a lesser extent the issuance of debt instruments, capital
lease arrangements and revolving lines of credit. Net proceeds from these
transactions totaled $55.9 million through December 31, 1999.
For the year ended December 31, 1999, net cash used in operations
totaled $9.7 million. The significant portion of the operating use of cash
related to funding operating losses totaling $10.9 million, or $9.2 million net
of non-cash adjustments. Other operating uses of cash related to increases in
certain assets and paydown of liabilities, net totaling $852,000, partially
offset by decreased accounts receivables totaling $349,000. During 1998, cash
used in operations totaled $10.3 million, primarily related to operating losses
totaling $8.2 million net of non-cash items, and increases in accounts
receivables and inventories totaling $891,000 and $2.0 million, respectively.
These uses were partially offset by an increase in liabilities totaling $1.1
million.
Net cash provided by investing activities totaled $285,000 in 1999.
Acquisitions of equipment totaled $615,000 and related to the Company's
continued emphasis to build its manufacturing capacity. This was 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 1998 cash used by
investing activities totaled $1.3 million. Purchase of equipment totaled $3.4
million and related to building the Company's manufacturing capacity. These
expenditures were offset by proceeds from the sale of investment securities
totaling $2.1 million.
Net proceeds provided by financing activities totaled $9.2 million for
the year ended December 31, 1999, and primarily consisted of the net proceeds
from the sale of Series C and D convertible preferred stock, which totaled $6.2
million. Also, in June 1999 the Company entered into a new revolving line of
credit that is not to exceed the lesser of (i) $2.5 million or (ii) 80% of
eligible accounts receivable. The line bears interest at the prime rate (8.5% at
December 31, 1999) plus 1% and is renewable annually. The Company is required to
maintain certain minimum tangible net worth, debt and other financial and
business covenants. Borrowings under the revolving line of credit is
collateralized by substantially all the Company's assets. During 1999, $1.5
million had been borrowed under this line and was outstanding at December 31,
1999. No additional amounts were available for borrowing under this line of
credit at December 31, 1999. Amounts due under the prior revolving line of
credit totaled $847,000 and were paid in full by June 1999. During 1999, the
Company borrowed $2.4 million from the majority preferred stock shareholder. The
amounts were borrowed under demand notes bearing interest at 8%. Demand notes
totaling $1.9 million were exchange for shares of Series C and D convertible
preferred stock. The remaining demand note for $500,000 outstanding at December
31, 1999 and was subsequently exchanged for 153,846 shares of common stock in a
public offering of the Company's common stock in February 2000. At December 31,
1999 amounts due under capital lease obligations totaled $961,000. Principal
payments on capitalized lease obligations in 1999 totaled $190,000. Net proceeds
provided by financing activities totaled $10.5 million for the year ended
December 31, 1998 and resulted from the sale of the Series A, A-1 and B
redeemable preferred stock totaling $8.8 million and borrowings under a
revolving line of credit totaling $1.8 million.
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<PAGE> 15
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 $7.5 million and
153,846 shares of common stock were exchanged for short term indebtedness
totaling $500,000 payable to the majority preferred stock holder. Net proceeds
to the Company totaled $7.4 million. Concurrent with the offering, the holders
of the Series A-2, A-3 and C 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 stock holders warrants to
purchase 250,000 shares of common stock at $3.58.
Also, subsequent to December 31, 1999, holders of the remaining
outstanding Series B-1 and D preferred stock elected to convert their holdings
into 3,175,409 shares of common stock and warrants and options to purchase
1,013,485 and 433,287 shares of common stock were exercised, resulting in net
proceeds to the Company of $5.9 million.
In March 2000, the Company secured a one-year loan commitment from a
large stockholder for an additional $5.0 million of working capital. At its
option, the stockholder will lend the funds directly to the Company or
unconditionally guarantee a loan from a commercial bank or other institutional
lender. The loan commitment expires earlier than one year upon the Company's
receipt of $10,000,000 or more of equity financing. If the Company requests that
the loan be funded and the stockholder elects to make the loan directly, the
loan would be unsecured and bear interest at four percent over the prime rate of
PNC Bank (the Company's primary lender). The Company paid a $12,500 fee for the
loan commitment.
The Company had no firm cash commitments as of December 31, 1999 for
capital expenditures. However, to meet the anticipated increase in demand for
its products, the Company estimates that it will spend between $1.5 million and
$3.5 million for additional manufacturing equipment in 2000. In addition,
increased sales will require that higher inventory and accounts receivable
balances be maintained. Although revenues are expected to increase in 2000,
through March 2000 the Company has continued to incur losses and expects to
continue to incur losses for the remainder of the year. The Company believes
that its current cash resources and lines of credit are adequate to fund its
operations for at least the next twelve months. Thereafter, the Company may be
required to raise additional capital, which may not be available on acceptable
terms, if at all. Any inability to obtain needed financing could have a material
adverse effect on our business and operating results.
LONG-TERM SALES AGREEMENT
On August 27, 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. Under the terms of the agreement, U.S.
Cellular will purchase a minimum of 100 SuperFilter(R) Systems by December 31,
2000 and may purchase up to 400 additional SuperFilter(R) systems by August 27,
2004. In connection with this agreement, the Company issued to U.S. Cellular a
warrant to purchase up to 1,000,000 shares of common stock at $4.00 per share.
U.S. Cellular earns the right to exercise the warrant (a concept also known as
vesting) at the rate of one share of common stock for every $25 of
SuperFilter(R) purchases. The warrant expires August 27, 2004.
The Company is recording a portion of the fair value of the warrant
each quarter as a non-cash charge. For 1999 this charge has been recorded as a
discount to its commercial revenue. The vested portion of the warrant during any
given quarter depends on the volume of sales to U.S. Cellular, market price of
the Company's stock, and expected volatility during that quarter. The Company
calculates the dollar value of the portion vesting during the quarter using the
Black-Scholes option-pricing model and the closing price of the Company's common
stock on the NASDAQ on the last trading day of the quarter.
As a result, the Company cannot reasonably predict the amount or timing
of future non-cash charges relating to this warrant. However, the Company
expects the amount of these charges to increase significantly in 2000 because of
the significant rise in the market price of the common stock during the first
quarter of 2000. The 1999 charge of $124,000 was based on the vesting of 48,980
warrants and market prices of $3.13 to $5.00 per share of common stock. The
right to purchase another 951,020 shares was still unvested as of January 1,
2000, and the common stock traded as high as $115 per share between January 1,
2000 and March 24, 2000.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of the derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, the type of hedge
transaction. SFAS 133 is effective for fiscal years beginning after June 15,
2000. We do not anticipate that the adoption of this new standard will have a
material effect on our earnings or our financial position, but we will continue
to evaluate the impact of SFAS 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", which provides the SEC's views on applying generally accepted
accounting principals to selected revenue recognition issues. The Company's
present revenue recognition policy is in compliance with SAB 101.
NET OPERATING LOSS CARRYFORWARD
At December 31, 1999, the Company had a federal net operating loss
carryforward of approximately $37.5 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
15
<PAGE> 16
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 the Company is able to utilize them.
MARKET RISK
The Company is exposed to various market risks, including changes in
interest rates. Market risk is the potential loss arising from adverse changes
in market rates and prices. The Company does not enter into derivatives of other
financial instruments for trading or speculation purposes.
The Company relies on short-term variable rate debt obligations. As of
December 31, 1999, the Company had $1.5 million outstanding under a variable
rate revolving line of credit. The variable rate obligations are based on the
lenders' prime rate plus 1%. Assuming an increase of one-half of a percentage
point in the lenders' prime rate on January 1, 2000, and no principal payments
for the remainder of the year, the Company's total interest expenses would
increase by less than $25,000 for 2000 as compared to 1999.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
which reflect the Company's current views about future events and financial
results. The Company has made these statements in reliance on the safe harbor
created by that Private Securities Litigation Reform Act of 1995. They include
statements regarding the Company's views on future financial performance,
capital requirements, financing sources, product development, market growth and
similar matters. Forward-looking statements are generally identified by phrases
such as "anticipates," "believes," "estimates," "expects," "intends," "plans"
and similar words. Such 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 factors which could affect forward-looking statements include, but
are not limited to, the need for additional capital to execute the Company's
long-term business plan, limited manufacturing experience, the need for
widespread market acceptance of the SuperFilter, reliance on a single product
line, dependence on a limited number of wireless network operators as customers
and other factors discussed in Exhibit 99 to this Annual Report entitled
"Disclosure Regarding Forward-Looking Statements." This list and Exhibit 99 do
not constitute a comprehensive list of all the factors which may affect
forward-looking statements. The Company does not undertake any obligation to
update or revise any forward-looking statements or the list of factors which
could affect those statements.
INFLATION
The Company does not foresee any material impact on its operations from
inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All information required by this item is listed in the Index to
Financial Statements in Part IV, Item 14(a)1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers and directors of the
Company is incorporated by reference to the information set forth under the
caption "Business--Executive Officers and Directors" and under the caption
"Proposal One: Election of Directors" in the Company's Proxy Statement for the
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's year ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is incorporated by
reference to the information set forth under the caption "Executive
Compensation" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's year ended December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the information set forth under
the caption "Voting Securities of Principal Stockholders and Management" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be filed
with the Commission within 120 days after the end of the Company's year ended
December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth under the caption
"Executive Compensation -Certain Transactions" in the Company's Proxy Statement
for the Annual Meeting of Stockholders to be filed with the Commission within
120 days after the end of the Company's year ended December 31, 1999.
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Index to Financial Statements. The following financial
statements of the Company and the Report of
PricewaterhouseCoopers LLP, Independent Accountants, are
included in Part IV of this Report on the pages
indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants .............. F-1
Balance Sheet as of December 31, 1998 and 1999.. F-2
Statement of Operations for the years ended
December 31, 1997, 1998 and 1999 ............. F-3
Statement of Stockholders' Equity for the years
ended December 31, 1997, 1998 and 1999........ F-4
Statement of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 ............. F-5
Notes to Financial Statements .................. F-6
2. Financial Statement Schedule.
Report of Independent Public Accountants on
Financial Statement Schedules................. F-18
Schedule II - Valuation and Qualifying Accounts. F-19
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto
3. Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company(10)
3.2 Bylaws of the Registrant(11)
4.1 Form of Common Stock Certificate(1)
4.2 Form of Series A-2 Preferred Stock Certificate(9)
4.3 Form of Series A-3 Preferred Stock Certificate(9)
4.4 Form of Series B-1 Preferred Stock Certificate(9)
4.5 Form of Series C Preferred Stock Certificate(9)
4.6 Form of Representative's Warrant Agreement(1)
4.7 Form of warrant issued to Van Kasper & Company(2)
4.8 Form of warrant issued to holders Series A-2 and Series A-3 Preferred
Stock(9)
4.9 Form of warrant issued to holders of Series B-1 Preferred Stock(9)
4.10 Form of warrant issued to holders of Series C Preferred Stock(9)
4.11 Form of warrant issued in connection with the Exchange Agreement
dated February 26, 1999(9)
4.12 Form of warrant issued to Silicon Valley Bank dated
December 21, 1998(9)
4.13 Series C Preferred Stock Purchase Agreement dated March 5, 1999(9)
4.14 Second Amended and Restated Stockholder Rights Agreement dated
February 26, 1999(9)
4.15 Amended and Restated Registration Rights Agreement dated February 26,
1999(9)
4.16 Registration Rights Agreement with Silicon Valley Bank dated December
21, 1998(9)
4.17 Certificate of Designation for Series D Preferred Stock(11)
4.18 Third Amended and Restated Stockholders Rights Agreement(11)
4.19 Form of Series D Warrant(11)
4.20 Form of Series D Stock Certificate(11)
4.21 Warrant Issued to PNC Bank, National Association in connection with
Credit Agreement(11)
4.22 Registration Rights Agreement to United States Cellular
Corporation(12)
4.23 Form of Warrant to United States Cellular Corporation(12)
4.24 Warrant Purchase Agreement dated December 1, 1999 with
Wilmington Securities Corporation
4.25 Warrant Purchase Agreement dated December 1, 1999 with PNC Bank
4.26 Warrant Purchase Agreement dated January 12, 2000 with PNC Bank
4.27 Warrant Purchase Agreement dated February 9, 2000 with
Wilmington Securities, Inc.
10.1 Technology Agreement between the Registrant and Lockheed Corporation
dated January 8, 1988(1)*
10.2 Technical Information Exchange Agreement between the Registrant and
Philips dated September 1989(1)
10.3 Standard Industrial Lease between the Registrant and UML Real Estate
Partnership dated January 1, 1990 Sublease between Registrant and
Consolidated Packaging Machinery Company d.b.a. Industrial Automation
Corporation dated October 25, 1989(1)
10.4 Form of Consulting Agreement(1)
10.5 Form of Employee Proprietary Information Agreement(1)
10.6 1992 Director Option Plan(1)
10.7 Form of Indemnification Agreement(1)
10.8 License Agreement between the Registrant and the University of
Arkansas dated April 9, 1992, as amended(1)
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
10.9 Loan and Security Agreement between the Registrant and Silicon Valley
Bank dated May 17, 1991, as amended(1)
10.10 1992 Stock Option Plan(1)
10.11 Proprietary Information & Patents Inventions Agreement among the
Registrant, E-Systems, Inc. and various other parties; Purchase Order
dated October 10, 1991(1)
10.12 Joint Venture Company (JDC) Agreement between the Registrant and
Sunpower Incorporated dated April 2, 1992(1)*
10.13 Government Contract issued to Registrant by the Defense Advanced
Research Projects Agency through the Office of Naval Research dated
September 4, 1991(1)
10.14 License Agreement between the Registrant and E.I. DuPont de Nemours
and Company dated December 1992(2)*
10.15 Note and Warrant Purchase Agreement dated December 28, 1992(1)
10.16 Superconductor Technologies Inc. Purchase Agreement(3)*
10.17 Loan and Security Agreement between Registrant and Silicon Valley
Bank dated August 26, 1994(4)
10.18 Form of Distribution Agreement(4)
10.19 Amended and Restated 1988 Stock Option Plan, as amended, with form of
stock option agreement(4)
10.20 Loan and Security Agreement between Registrant and Silicon Valley
Bank dated June 27, 1995(5)
10.21 Joint Venture Agreement between Registrant and Analeptic Technologies
(S) Pet Ltd., dated May 20, 1996(6)*
10.22 Employment Offer Letter to M. Peter Thomas dated April 3, 1997(7)
10.23 Employment Agreement with E. Ray Cotton dated July 1, 1997(8)
10.24 Amendment dated December 21, 1998 to the Loan and Security Agreement
between Registrant and Silicon Valley Bank dated August 26, 1994(9)
10.25 PNC Bank, National Association Credit Agreement(11)
10.26 United States Cellular Corporation Purchase Agreement(12)
10.27 1999 Stock Option Agreement(13)
10.28 Note dated December 1, 1999 with Wilmington Securities Corporation
10.29 Term Note dated January 12, 2000 with PNC Bank
10.30 Second Amendment to Credit Agreement dated January 12, 2000 between
Registrant and PNC Bank
23 Consent of Independent Accountants
24 Power of Attorney (included on signature page hereto)
27 Financial Data Schedule
99 Disclosure Regarding Forward-Looking Statements
</TABLE>
- --------------------------------------
(1) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-56714).
(2) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-56714).
(3) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1993.
(4) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1994.
(5) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1995.
(6) Incorporated by reference from the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-10569).
(7) Incorporated by reference from the Registrant's Report on Form 10-Q
filed on May 8, 1997 for the quarter ended March 29, 1997. The
exhibit listed is incorporated by reference to Exhibit 10.1 of
Registrant's Report on Form 10-Q.
(8) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1997.
(9) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1998.
(10) Incorporated by reference from Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended April 3, 1999
(11) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended July 3, 1999.
(12) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended October 2, 1999.
(13) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-90293)
* Confidential treatment has been previously granted for certain
portions of these exhibits.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the last quarter
of the year ended December 31, 1999.
(c) Exhibits.
See Item 14(a) above.
18
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Superconductor Technologies Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Superconductor Technologies Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States that require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
February 22, 2000, except as to Note 13,
which is as of March 29, 2000
F-1
<PAGE> 20
SUPERCONDUCTOR TECHNOLOGIES INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS DECEMBER 31, DECEMBER 31, 1999
1998 1999 PROFORMA
------------ ------------ -------------
(NOTE 7)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 310,000 $ 66,000
Accounts receivable, net of allowance for doubtful accounts of
$30,000 in 1998 and none in 1999 1,939,000 1,590,000
Inventory 2,719,000 2,745,000
Prepaid expenses and other current assets 173,000 452,000
------------ ------------
Total current assets 5,141,000 4,853,000
Property and equipment, net of accumulated depreciation
of $6,985,000 and $8,054,000, respectively 5,114,000 4,097,000
Patents and licenses, net of accumulated amortization
of $1,285,000 and $1,521,000, respectively 2,070,000 1,927,000
Other assets 184,000 208,000
------------ ------------
Total assets $ 12,509,000 $ 11,085,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 628,000 $ 1,953,000
Accounts payable 2,280,000 1,796,000
Accrued expenses 699,000 906,000
Current portion of long-term debt and capitalized lease obligatio 185,000 211,000
------------ ------------
Total current liabilities 3,792,000 4,866,000
Long-term debt and capitalized lease obligations 932,000 750,000
------------ ------------
Total liabilities 4,724,000 5,616,000
Redeemable convertible preferred stock:
Series A shares, 645,833 and none, issued and outstanding
Series A-1 shares, 125,000 and none, issued and outstanding
Series B shares, 500,000 and none, issued and outstanding
Series A-2 shares, none and 64,584, issued and outstanding
Series A-3 shares, none and 12,500, issued and outstanding
Series B-1 shares, none and 50,000, issued and outstanding
Series C shares, none and 41,667, issued and outstanding
Series D shares, none and 106,000, issued and outstanding 8,982,000 17,125,000 $ --
(Aggregate liquidation preference of $20,340,000)
Commitments and contingencies
Stockholders' Equity
Common stock, $.001 par value, 30,000,000 shares authorized,
7,722,591 and 7,739,218 shares issued and outstanding
and 13,373,118 shares issued and outstanding pro forma 8,000 8,000 14,000
Capital in excess of par value 35,010,000 35,426,000 52,545,000
Accumulated deficit (36,215,000) (47,090,000) (47,090,000)
------------ ------------ -----------
Total stockholders' equity (deficit) (1,197,000) (11,656,000) $ 5,469,000
------------ ------------ ===========
Total liabilities and stockholders' equity (deficit) $ 12,509,000 $ 11,085,000
============ ============
</TABLE>
See accompanying notes to the financial statements.
F-2
<PAGE> 21
SUPERCONDUCTOR TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net Revenues:
Government contract revenues $ 8,104,000 $ 6,029,000 $ 5,059,000
Commercial product revenues, net of 175,000 1,954,000 2,053,000
non-cash sales discount of $124,000 in 1999
Sub license royalties 38,000 -- 10,000
------------ ------------ ------------
Total net revenues 8,317,000 7,983,000 7,122,000
------------ ------------ ------------
Costs and expenses:
Cost of commercial product revenues -- 5,873,000 6,848,000
Contract research and development 6,218,000 4,693,000 3,427,000
Other research and development 1,809,000 1,161,000 1,747,000
Selling, general and administrative 4,076,000 5,435,000 5,701,000
------------ ------------ ------------
Total costs and expenses 12,103,000 17,162,000 17,723,000
------------ ------------ ------------
Loss from operations (3,786,000) (9,179,000) (10,601,000)
Interest income 275,000 79,000 21,000
Interest expense (30,000) (62,000) (295,000)
------------ ------------ ------------
Net loss (3,541,000) (9,162,000) (10,875,000)
Less:
Redeemable preferred stock
dividends -- (271,000) (908,000)
Deemed Distribution
attributable to beneficial conversion feature -- -- (456,000)
------------ ------------ ------------
Net loss available to common stockholders $ (3,541,000) $ (9,433,000) $(12,239,000)
============ ============ ============
Basic and diluted loss per share: $ (0.46) $ (1.22) $ (1.58)
============ ============ ============
Weighted average number of
shares outstanding 7,701,435 7,724,829 7,744,008
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE> 22
SUPERCONDUCTOR TECHNOLOGIES INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------
SHARES AMOUNT
------------ ------------
<S> <C> <C>
Balance at December 31, 1996 7,575,660 $ 8,000
Exercise of stock options 123,921 --
Net loss -- --
------------ ------------
Balance at December 31, 1997 7,699,581 8,000
Exercise of stock options 23,010 --
Cumulative dividends on redeemable preferred stock not paid -- --
Net loss -- --
------------ ------------
Balance at December 31, 1998 7,722,591 8,000
Cumulative dividends on redeemable
preferred stock not paid -- --
Issuance of warrants -- --
Exercise of stock options 16,627 --
Net loss -- --
------------ ------------
Balance December 31, 1999 7,739,218 8,000
Assumed conversion of mandatory redeemable
convertible preferred stock 5,633,900 6,000
------------ ------------
Balance at December 31, 1999 Proforma 13,373,118 $ 14,000
============ ============
<CAPTION>
CAPITAL IN
EXCESS OF PAR ACCUMULATED
VALUE DEFICIT TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 34,794,000 ($23,512,000) $ 11,290,000
Exercise of stock options 417,000 -- 417,000
Net loss -- (3,541,000) (3,541,000)
------------ ------------ ------------
Balance at December 31, 1997 35,211,000 (27,053,000) 8,166,000
Exercise of stock options 70,000 -- 70,000
Cumulative dividends on redeemable preferred stock not paid (271,000) -- (271,000)
Net loss -- (9,162,000) (9,162,000)
------------ ------------ ------------
Balance at December 31, 1998 35,010,000 (36,215,000) (1,197,000)
Cumulative dividends on redeemable
preferred stock not paid (95,000) -- (95,000)
Issuance of warrants 491,000 -- 491,000
Exercise of stock options 20,000 -- 20,000
Net loss -- (10,875,000) (10,875,000)
------------ ------------ ------------
Balance December 31, 1999 35,426,000 (47,090,000) (11,656,000)
Assumed conversion of mandatory
redeemable convertible preferred stock 17,119,000 -- 17,125,000
------------ ------------ ------------
Balance December 31, 1999 Proforma $ 52,545,000 $(47,090,000) $ 5,469,000
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE> 23
SUPERCONDUCTOR TECHNOLOGIES INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,541,000) $ (9,162,000) $(10,875,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 995,000 941,000 1,306,000
Compensation expense associated with stock options granted -- -- 14,000
Loss on disposal of property and equipment -- -- --
Warrants and stock issued for services and refinancing -- -- 321,000
Changes in assets and liabilities:
Accounts receivable 551,000 (891,000) 349,000
Note receivable from related party 150,000 -- --
Inventory (175,000) (2,042,000) (329,000)
Prepaid expenses and other current assets 37,000 (27,000) (155,000)
Patents and licenses (171,000) (145,000) (94,000)
Other assets (35,000) (113,000) 3,000
Accounts payable and accrued expenses 596,000 1,135,000 (277,000)
Billings in excess of costs and earnings on uncompleted contracts (306,000) -- --
------------ ------------ ------------
Net cash used in operating activities (1,899,000) (10,304,000) (9,737,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 2,173,000 2,099,000 --
Purchases of property and equipment (1,429,000) (3,372,000) (615,000)
Proceeds from sale of property and equipment -- -- 900,000
------------ ------------ ------------
Net cash (used in) provided by investing activities 744,000 (1,273,000) 285,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 1,786,000 3,200,000
Payments on long-term obligations (423,000) (118,000) (190,000)
Net proceeds from sale of preferred and common stock 417,000 8,781,000 6,198,000
------------ ------------ ------------
Net cash provided by (used in) financing activities (6,000) 10,449,000 9,208,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,161,000) (1,128,000) (244,000)
Cash and cash equivalents at beginning of period 2,599,000 1,438,000 310,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,438,000 $ 310,000 $ 66,000
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE> 24
SUPERCONDUCTOR TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
Superconductor Technologies Inc. (the "Company") was incorporated in
Delaware on May 11, 1987 and maintains its headquarters in Santa Barbara,
California. The Company, which operates in a single industry segment,
manufactures and markets high-performance filters to service providers and
original equipment manufacturers in the mobile wireless telecommunications
industry. The Company's product, the SuperFilter, combines high-temperature
superconductors with cryogenic cooling technology to produce a filter with
significant advantages over conventional filters. From 1987 to 1997, the
Company was engaged primarily in research and development and generated
revenues primarily from government research contracts. The Company began
full-scale commercial production of the SuperFilter in 1997 and shipped more
than 120 units in 1999. The Company was considered a development stage
enterprise until 1999.
The Company continues to be involved as either contractor or
subcontractor on a number of contracts with the United States government. These
contracts have been and continue to provide a significant source of revenues for
the Company. For the years ended December 31, 1997, 1998 and 1999, government
related contracts accounted for 97%, 76% and 71%, respectively, of the Company's
revenues.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
original maturities of three months or less.
Accounts Receivable
The Company sells predominantly to agencies of the United States
government and to entities in the wireless industry. The Company grants
uncollateralized credit to its customers. The Company performs ongoing credit
evaluations of its customers before granting uncollateralized credit.
Revenue Recognition
Contract revenues are principally generated under research and
development contracts. Contract revenues are recognized utilizing the
percentage-of-completion method measured by the relationship of costs incurred
to total estimated contract costs. If the current contract estimate were to
indicate a loss, utilizing the funded amount of the contract, a provision would
be made for the total anticipated loss. Revenues from research related
activities are derived primarily from contracts with agencies of the United
States government. Credit risk related to accounts receivable arising from such
contracts is considered minimal. These contracts include cost-plus, fixed price
and cost sharing arrangements and are generally short-term in nature.
All payments to the Company for work performed on contracts with
agencies of the U.S. government are subject to adjustment upon audit by the
Defense Contract Audit Agency. Based on historical experience and review of
current projects in process, management believes that adjustments arising from
the audits will not have a significant effect on the financial position, results
of operations or cash flows of the Company.
Commercial revenues are principally derived from the sale of the
Company's SuperFilter(R) products principally to wireless service providers and
are generally recognized once all of the following conditions have been met: a)
an authorized purchase order has been received in writing, b) the customer's
credit worthiness has been established, c) shipment of the product to the
customer's designated location has occurred, d) title has transferred and e) if
stipulated by the contract, customer acceptance has occurred.
Warranties
The Company recognizes the estimated cost of warranty expense at the
time of revenue recognition. Warranty reserves are reviewed periodically and
adjusted based on actual and anticipated experience.
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs incurred solely in connection with research and development
contracts are charged to contract research and development expense. Other
research and development costs are charged to research and development expense.
Inventories
Inventories are stated at the lower of cost or market, costs are being
primarily determined using standard costs, which approximate costs utilizing the
first-in, first-out method. Provision for excess, obsolete or slow moving
inventory is made based on management's analysis of inventory levels and sales
forecasts.
F-6
<PAGE> 25
Property and Equipment
Property and equipment are recorded at cost. Property and equipment and
furniture and fixtures are depreciated using the straight-line method over their
estimated useful lives ranging from three to twelve years. Leasehold
improvements and assets financed under capital leases are amortized over the
shorter of their useful lives or the lease term. Expenditures for additions and
major improvements are capitalized. Expenditures for repairs and maintenance and
minor improvements are charged to expense as incurred. When property or
equipment is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts. Gains or losses from retirements and
disposals are recorded as other income or expense.
Patents and Licenses
Patents and licenses are recorded at cost and are amortized using the
straight-line method over their estimated useful lives or seventeen years,
whichever is shorter.
Long-Lived Assets
The realizability of long-lived assets is evaluated periodically as
events or circumstances indicate a possible inability to recover the carrying
amount. Such evaluation is based on various analyses, including cash flow and
profitability projections. The analyses necessarily involve significant
management judgment. In the event the projected undiscounted cash flows are less
than net book value of the assets, the carrying value of the assets will be
written down to their fair value.
Income Taxes
The Company accounts for taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of changes
in the tax law or rates. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Marketing Costs
All costs related to marketing and advertising the Company's products
are expensed as incurred or at the time the advertising takes place.
Net Loss Per Share
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, deemed distribution and
accretion of redemption value on redeemable preferred stock for the period.
Diluted net loss per share is computed by dividing net 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 when their effect is antidilutive.
Stock-based Compensation
As permitted under Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation", the Company has elected
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" in accounting for its stock options and other stock-based
employee awards. Pro forma information regarding net loss and loss per share, as
calculated under the provisions of SFAS 123, are disclosed in the notes to the
financial statements. The Company accounts for equity securities issued to
non-employees in accordance with the provisions of SFAS 123 and Emerging Issues
Task Force No. 96-18.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The significant estimates in the preparation of the financial
statements relate to the assessment of the carrying amount of accounts
receivable, inventory, intangibles and estimated provisions for warranty costs.
Actual results could differ from those estimates and such differences may be
material to the financial statements.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due to the
short-term nature of these instruments. The Company estimates that the carrying
amount of the
F-7
<PAGE> 26
debt approximates fair value based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Comprehensive Income" ("SFAS 130").
SFAS 130 was effective for the Company during 1998. The Company has no items of
other comprehensive income in any period and is consequently not required to
report comprehensive income.
Segment Information
The Company operates in a single business segment, the research,
development and manufacture of high temperature superconducting products for the
wireless communications industry. Net revenues derived principally from
government research and development contracts are presented separately on the
statement of income for all periods presented. Management views its government
research and development contracts as a supplementary source of revenue to fund
its development of high temperature superconducting products. No other single
customer accounted for more than 10% of net revenues.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the 1999 presentation.
Certain Risks and Uncertainties
During 1998 and 1999 the Company sold more than 200 SuperFilter units,
but the Company has continued to incur operating losses. The Company's long
term prospects are dependent upon the continued and increased market acceptance
for this product.
NOTE 3--MANAGEMENT'S PLAN
In order to penetrate the market for its SuperFilter(R) products, during
1998 and 1999 the Company undertook significant efforts in both the marketing
and manufacturing of its product. The Company performed trials with over 30
wireless service providers, including all of the top 10 domestic wireless
service providers. In order to support the market interest in its product, the
Company also established a manufacturing infrastructure, which previously had
not been in place. During 1998 and 1999, the Company sold over 200 units but
continued to incur operating losses. Thus, capital formation continues to be an
integral part of the Company's business plans.
The Company has continued to secure
financing to support its growth and implement its business plan. In 1999, the
Company successfully completed private placements of preferred stock raising
$8.5 million. Additional cash was provided by the sale and leaseback of certain
production equipment with a net book value of $944,000 for cash proceeds of
$900,000. In June 1999 the Company entered into a new revolving line of credit
that is not to exceed the lesser of (i) $2.5 million or (ii) 80% of eligible
accounts receivable. The line bears interest at the prime rate (8.5% at December
31, 1999) plus 1% and is renewable annually. During 1999, $1.5 million had been
borrowed under this line and was outstanding at December 31, 1999. No additional
amounts were available for borrowing under this line of credit at December 31,
1999. During 1999, the Company borrowed $2.4 million from the majority preferred
stock shareholder. The amounts were borrowed under demand notes bearing interest
at 8%. Demand notes totaling $1.9 million were exchanged for shares of Series
C and D convertible preferred stock. The remaining demand note for $500,000
outstanding at December 31, 1999 was subsequently exchanged for 153,846
shares of common stock in a public offering of the Company's common stock in
February 2000.
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 $7.5 million and
153,846 shares of common stock were exchanged for short term indebtedness
totaling $500,000 payable to the majority preferred stock holder. Net
proceeds to the Company totaled $7.4 million. Concurrent with the offering, the
holders of the Series A-2, A-3 and C 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 stock holders warrants to
purchase 250,000 shares of common stock at $3.58.
Subsequent to December 31, 1999, (i) warrants and options to purchase
1,013,485 and 433,287 shares of common stock were exercised, resulting in net
proceeds to the Company of $5.9 million, and (ii) the holders of the remaining
outstanding series B-1 and D preferred shares elected to convert their holdings
into 3,175,409 shares of common stock.
F-8
<PAGE> 27
In March 2000, the Company secured a one-year loan commitment from a
large stockholder for an additional $5.0 million of working capital. At its
option, the stockholder will lend the funds directly to the Company or
unconditionally guarantee a loan from a commercial bank or other institutional
lender. The loan commitment expires earlier than one year upon the Company's
receipt of $10,000,000 or more of equity financing. If the Company requests
that the loan be funded and the stockholder elects to make the loan directly,
the loan would be unsecured and bear interest at four percent over the prime
rate of PNC Bank (the Company's primary lender). The Company paid a $12,500 fee
for the loan commitment. The Company believes that its current cash resources
and lines of credit are adequate to fund its operations for at least the next
twelve months. Thereafter, the Company may be required to raise additional
capital, which may not be available on acceptable terms, if at all. Any
inability to obtain needed financing could have a material adverse effect on our
business and operating results.
NOTE 4--PATENTS AND LICENSES
The Company has focused its development efforts on thallium barium
calcium copper oxide ("TBCCO") materials and, to a lesser extent, on yttrium
barium copper oxide ("YBCO") materials. Several U.S. patents have been issued to
the University of Arkansas covering TBCCO, and effective from April 9, 1992 the
Company has an exclusive worldwide license (including the right to sublicense)
under these patents, subject to the University of Arkansas' right to conduct
research related to the patents. The consideration for the license included
$250,000 in cash, prepaid royalties of $750,000 through April 1995 and an
aggregate of 400,000 shares of Series D preferred stock valued at $1,382,000
(such Series D shares were subsequently converted into 200,000 shares of common
stock). Since April 1995, the Company has been obligated to pay royalties of 4%
on the value of TBCCO raw material components sales of TBCCO-based products,
subject to a $100,000 annual minimum beginning after April 1997, and royalties
of 35% of sublicense revenues received by the Company. In the event that the
Company fails to pay minimum annual royalties, the license automatically becomes
non-exclusive. The license terminates upon expiration of the right to claim
damages for infringement of all the patents covered. The license is being
amortized over thirteen years, which represents the estimated useful life of the
patent and the underlying material (TBCCO). As the Company places reliance on
its exclusive license, total or partial loss of the license could have a
material adverse effect on manufacturing, sales or operating results.
NOTE 5--SHORT TERM BORROWINGS AND NOTES PAYABLE
On June 18, 1999, the Company entered into a new credit agreement, which
includes a revolving line or credit maturing on June 17, 2000. The revolving
line of credit is not to exceed the lesser of (i) $2.5 million or (ii) 80% of
eligible accounts receivable. The revolving line of credit bears interest at the
prime rate (8.5% at December 1, 1999) plus 1%. The Company is required to
maintain certain minimum tangible net worth, debt and other financial and
business covenants. Borrowings under the revolving line of credit are
collateralized by substantially all of the Company's assets. The agreement is
renewable annually. All outstanding borrowings under all previous agreements
were paid at June 18, 1999. In connection with the new credit agreement, the
Company issued warrants for the purchase of 62,500 shares of common stock at a
price of $3 per share for a five year period. At December 31, 1999, the Company
has $1,453,000 outstanding under this agreement. On December 1, 1999, the credit
was amended to waive noncompliance and modify certain financial covenants for
future periods. Five year warrants to purchase 33,333 shares of common stock at
$3.00 per share were issued in connection with this amendment. On January 12,
2000, the credit facility was amended to include a $1.5 million term note. The
term note bears interest at the prime rate (8.5% at January 12, 2000) plus 4%.
Five year warrants to purchase 27,692 shares of common stock at $3.25 per share
were issued in connection with this amendment. This term loan was paid in full
on February 11, 2000.
During 1999, the Company borrowed $2.4 million from a large stockholder.
These borrowings were due on demand and bore interest at 8%. Notes totaling $1.9
million were used to purchase shares of Series C and D Convertible Preferred
Stock. A demand note for $500,000 remained outstanding at December 31, 1999 and
was subsequently used to purchase 153,846 shares of common stock on February 11,
2000. A five-year warrant to purchase 20,000 shares of common stock at $3.00 per
share was issued in connection with this borrowing.
The fair values of the warrants issued in connection with borrowings
were estimated using the Black-Scholes option pricing model and were accounted
for as debt issuance costs and either expensed immediately or amortized over the
term of the related agreement.
NOTE 6--INCOME TAXES
The Company has incurred a net loss in each year of operation since
inception resulting in no current or deferred tax expense for the years ended
December 31, 1997, 1998 and 1999.
The benefit for income taxes differs from the amount obtained by
applying the federal statutory income tax rate to loss before benefit for income
taxes for the years ended December 31, 1997, 1998 and 1999 as follows:
F-9
<PAGE> 28
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Tax benefit computed at
Federal statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes due to:
Change in valuation allowance (41.2) (41.8) (39.8)
State taxes, net of federal benefit 5.8 5.8 5.8
Nondeductible expenses (0.1) (0.1) --
Other 1.5 2.1 --
----------- ----------- -----------
-- -- --
=========== =========== ===========
</TABLE>
The significant components of deferred tax assets (liabilities) at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Loss carryforwards $ 6,569,000 $ 9,709,000 $ 14,063,000
Capitalized research and development 1,874,000 2,175,000 2,318,000
Depreciation 1,712,000 1,726,000 1,599,000
Tax credits 1,044,000 1,402,000 1,150,000
Inventory 37,000 56,000 86,000
Other -- -- (910,000)
Less: valuation allowance (11,236,000) (15,068,000) (18,306,000)
------------ ------------ ------------
Net deferred tax asset $ -- $ -- $ --
============ ============ ============
</TABLE>
The valuation allowance increased by $1,459,000, $3,832,000 and
$3,238,000 in 1997, 1998 and 1999, respectively.
As of December 31, 1999, the Company has net operating loss
carryforwards for federal and state income tax purposes of approximately
$37,344,000 and $15,447,000, respectively, which expire in the years 2000
through 2019. In addition, the Company has research and development and other
tax credits for federal and state income tax purposes of approximately $666,000
and $484,000, respectively, which expire in the years 2002 through 2019.
Due to the uncertainty surrounding the realization of the favorable tax
attributes of such net operating loss carryforwards in future tax returns, the
Company has recorded a valuation allowance against its otherwise recognizable
deferred tax assets. Accordingly, no deferred tax asset has been recorded in the
accompanying balance sheet.
Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss and research credit
carryforwards may be subject to an annual limitation against income in future
periods. As a result of the annual limitation, if any, a portion of these
carryforwards may expire before ultimately becoming available to reduce future
tax liabilities.
NOTE 7--STOCKHOLDERS' EQUITY
Preferred Stock
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is authorized to issue up to 2,000,000 shares of preferred stock (par
value $.001 per share) in one or more series and to fix the rights, preferences,
privileges, and restrictions, including the dividend rights, conversion rights,
voting rights, redemption price or prices, liquidation preferences, and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change of
control of the Company without further action of the stockholders. The issuance
of preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others.
Redeemable convertible preferred stock issued and outstanding
consists of the following:
<TABLE>
<CAPTION>
December 31
---------------------------
1998 1999
----------- -----------
Redeemable Convertible Preferred Stock --
<S> <C> <C>
Series A Convertible Preferred Stock $ 4,004,000
Series A-1 Convertible Preferred Stock 1,025,000 --
Series B Convertible Preferred Stock 3,953,000 --
Series A-2 Convertible Preferred Stock $ 4,043,000
Series A-3 Convertible Preferred Stock -- 1,035,000
</TABLE>
F-10
<PAGE> 29
<TABLE>
<S> <C> <C>
Series B-1 Convertible Preferred Stock -- 3,999,000
Series C Convertible Preferred Stock -- 2,923,000
Series D Convertible Preferred Stock -- 5,581,000
----------- -----------
$ 8,982,000 $17,581,000
=========== ===========
</TABLE>
Redeemable Convertible Preferred Stock
The Company completed a private placement of Series A and Series A-1
Redeemable Cumulative Convertible Preferred Stock, with three different closing
dates, to a certain investor over the first nine months of 1998. Each share of
Series A and A-1 preferred stock was convertible into two shares of common
stock, carries a cumulative dividend of 6% per annum, had voting rights,
liquidation preferences and was not redeemable by the Company prior to March 26,
2001. Thereafter, the Company may redeem the preferred stock at 110% of the
liquidation preference plus accrued dividends. Subsequent to March 26, 2005,
until fully redeemed, the holders of the Series A and A-1 preferred stock had
the option to cause the Company to redeem their preferred stock at their
liquidation preference plus accrued dividends. On March 26, 1998, the Company
raised approximately $3,000,000 from the sale of 500,000 shares of Series A
preferred stock at $6.00 per share, and issued warrants to purchase up to
100,000 shares of common stock at an exercise price of $4.00 per share. On
August 11, 1998, the Company raised approximately $1,000,000 from the sale of
125,000 shares of Series A-1 preferred stock at $8.00 per share with warrants to
purchase up to 66,667 shares of common stock at an exercise price of $4.00 per
share. On September 3, 1998 the Company raised approximately $875,000 from the
sale of 145,833 shares of Series A preferred stock at $6.00 per share with no
warrants.
On September 2, 1998, the Company completed a private placement of
500,000 shares of Series B Redeemable Cumulative Convertible Preferred Stock to
certain investors at $8.00 per share. Each share of Series B preferred stock
carries a cumulative dividend rate of 7% per annum, was convertible into two
shares of common stock, had voting rights and liquidation preferences. The
Series B preferred stock was not redeemable prior to September 2, 2001.
Thereafter, the Company could redeem the Series B Preferred stock at 110% of the
liquidation preference plus accrued dividends. Subsequent to September 2, 2005,
until fully redeemed, the holders of the Series B preferred stock have the
option to cause the Company to redeem the Preferred stock at their liquidation
preference plus accrued dividends. The proceeds of the offering, net of offering
expenses, totaled approximately $4 million. The Series B preferred stock is not
redeemable prior to September 2, 2001. The Company also issued warrants to
purchase up to 120,000 shares of common stock at $5.70 per share.
On February 26, 1999, the Company entered into an agreement to exchange
all of the then outstanding redeemable preferred stock and related warrants for
shares in a new series of preferred stock and modified warrants. The impact of
the exchange under prevailing practice at that time was to eliminate the
redemption provision of the then outstanding redeemable preferred stock.
The Series A preferred stock and related warrants were exchanged for
64,584 shares of Series A-2 preferred stock and warrants to purchase 100,000
shares of common stock. The Series A-1 preferred shares and related warrants
were exchanged for 12,500 shares of Series A-3 preferred shares and warrants to
purchase 66,667 shares of common shares. The Series B preferred stock and
related warrants were exchanged for 50,000 shares of Series B-1 preferred stock
and warrants to purchase 120,000 shares of common stock. The warrants received
in the exchange generally have the same terms as the warrants surrendered. In
connection with the exchange, the Company issued to the preferred stock holders
warrants to purchase up to 75,000 shares of common stock at $7.00 per share.
However, in March 2000, the staff of the Securities and Exchange Commission has
determined that preferred stock with terms that treat a change in control, as an
event of liquidation should be classified in the mezzanine section of the
balance sheet as mandatory redeemable preferred stock. Accordingly, all series
of convertible preferred stock outstanding at December 31, 1999 have been
reported in the accompanying historical balance sheet of the Company as
mandatory redeemable preferred stock. As further described below, as of March
29, 2000, all outstanding shares of preferred stock have been converted into
5,633,900 shares of common stock and have been reflected in the accompanying pro
forma balance sheet as if the conversion had occurred on December 31, 1999.
Each share of the Series A-2, Series A-3 and Series B-1 Convertible
Preferred Stock is convertible into twenty shares of common stock and has voting
rights. The Series A-2 Convertible Preferred Stock carries a cumulative annual
dividend of 6% per share and a liquidation preference of $72 per share until
March 26, 2001, and $60 per share plus accrued dividends, thereafter. Each share
of the Series A-3 Convertible Preferred Stock carries a cumulative annual
dividend of 6% per share and a liquidation preference of $96 per share until
March 26, 2000, and $80 per share plus accrued dividends, thereafter. Each share
of the Series B-1 Convertible Preferred Stock carries a cumulative annual
dividend of 7% per share and has a liquidation preference of $80 per share plus
unpaid dividends.
On March 5, 1999, the Company completed a private placement of 41,667
shares of Series C Convertible Preferred Stock to certain investors at $72 per
share. The gross proceeds of the offering totaled $3 million. Each share of
preferred stock, carries a cumulative dividend of 7% per annum, has voting
rights and a liquidation preference of the greater of $86.40 or $72 per share
plus accrued dividends. A five-year warrant to purchase 120,000 shares of common
stock at $4.50 per share was also issued in connection with this financing.
On June 23, 1999, the Company entered into a private equity financing
agreement providing for the sale of securities in two traunches with gross
proceeds of up to $5.3 million. Under the first transaction, which took place on
June 25, 1999, the Company sold 77,296 shares of Series D Convertible Preferred
Stock at $50 per share, which resulted in gross proceeds of approximately $3.9
million. Under the second transaction, which took place on August 17, 1999, the
Company sold 28,704 shares of Series D Convertible Preferred Stock at $50 per
share, resulting in gross proceeds of approximately $1.4 million. Each share is
convertible into twenty shares of common stock, and carries a cumulative
dividend of 6% per annum, has voting rights
F-11
<PAGE> 30
and a liquidation preference of $65 per share until December 17, 2003 and $50
per share plus accrued dividends thereafter. In connection with this financing,
the company also issued five year warrants for the purchase of up to 212,000
shares of common stock at $3.00 per share. The Company granted the Series D
investors registration rights with respect to the common stock underlying the
Series D preferred stock and related warrants.
The Company recorded an accounting deemed distribution in 1999 totaling
$456,000 relating to the issuance of the Series C and D Convertible Preferred
Stock, which at issuance, was convertible at a discount from the market price
for the Company's common stock. The accounting deemed distribution is a non-cash
accounting entry for determining net loss available to common stockholders and
the related net loss per share.
Cumulative unpaid dividends on the preferred stock outstanding at
December 31, 1999 totaled $813,000.
The issuance of the Series D Convertible Preferred Stock resulted in an
anti-dilution adjustment to the Series A-2, A-3, B-1 and C Convertible Preferred
Stock. Following the completion of the Series D financing, the total number of
common shares issuable upon conversion of the Company's outstanding preferred
stock is as follows:
<TABLE>
<CAPTION>
Common Stock Issuable
Shares of Preferred Upon Conversion
------------------- ---------------
<S> <C> <C>
Series A-2 64,584 1,322,539
Series A-3 12,500 263,852
Series B-1 50,000 1,055,409
Series C 41,667 872,100
Series D 106,000 2,120,000
---------
5,633,900
=========
</TABLE>
Stock Options
The Company has four stock option plans, the 1992 Stock Option Plan, the
nonstatutory 1992 Directors Stock Option Plan, and the 1998 and 1999 Stock
Option Plans (collectively, the "Stock Option Plans"). The 1988 Stock Option
Plan expired in October 1998. Stock awards may be made to directors, key
employees, consultants, and non-employee directors of the Company under the
Stock Option Plans at prices no less than 100% of the market value on the date
of grant. The stock options become exercisable in installments over four years,
beginning one year after the date of grant, and expire not more than ten years
from the date of grant, with the exception of 10% or greater stockholders which
may have options granted at prices no less than the market value on the date of
grant, and expire not more than five years from the date of grant. At December
31, 1999, options for 1,141,284 shares of common stock were exercisable.
At December 31, 1999, 918,660 shares of common stock were available for
future grants and 1,882,552 options had been granted but not yet exercised.
Option activity during the three years ended December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996 1,499,301 $ 5.746
Granted 845,302 $ 3.524
Canceled (882,494) $ 6.048
Exercised (8,437) $ 0.800
---------
Outstanding at December 31, 1997 1,453,672 $ 4.333
Granted 450,950 $ 4.733
Canceled (124,315) $ 5.038
Exercised (15,010) $ 1.991
---------
Outstanding at December 31, 1998 1,765,297 $ 4.406
Granted 391,873 $ 3.423
Cancelled (257,991) $ 1.193
Exercised (16,627) $ 4.668
---------
Outstanding at December 31, 1999 1,882,552 $ 4.194
=========
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable stock options:
F-12
<PAGE> 31
<TABLE>
<CAPTION>
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable as of Average
Exercise Prices as of 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
- --------------- -------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$0.8000 - $3.1250 476,798 7.12 $2.8830 290,537 $2.9064
$3.1880 - $3.7500 484,850 7.79 $3.6282 261,220 $3.6671
$3.8750 - $4.8750 461,733 7.46 $4.4192 268,604 $4.6223
$4.9290 - $7.5000 421,421 7.37 $5.7718 287,798 $5.9522
$7.6250 - $7.6250 37,750 6.43 $7.6250 33,125 $7.6250
--------- ------- ------- --------- -------
1,882,552 7.42 $4.1935 1,141,284 $4.3894
========= =========
</TABLE>
In October 1997, the Board of Directors approved a Stock Option
Repricing Program for all directors. The Repricing Program was offered on an
optional basis to reprice the outstanding options held by the directors to
$3.125, the closing price of the Company's common stock as quoted on The NASDAQ
Stock Market on October 29, 1997. Three directors submitted 13 grants totaling
232,500 shares for repricing. The original grants were canceled and new options
were issued totaling 155,002 shares. There was no recognizable compensation
expense as a result of the Repricing Program.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the stock-based compensation other than for non-employees. If the Company
had elected to recognize compensation expense for employee awards based upon the
fair value at the grant date consistent with the methodology prescribed by SFAS
123, the Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss:
As reported $(3,541,000) $(9,162,000) $(10,875,000)
Pro forma $(4,268,000) $(9,963,000) $(11,689,000)
Loss per share:
As reported $ (0.46) $ (1.22) $ (1.58)
Pro forma $ (0.56) $ (1.33) $ (1.69)
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended December 31, 1997, 1998 and 1999, respectively:
dividend yields of zero percent each year; expected volatilities of 51, 50 and
75 percent; risk-free interest rates of 6.12, 5.31 and 5.62 percent; and
expected life of 3.50, 3.9 and 4.0 years. The weighted average fair value of
options granted in 1997, 1998 and 1999 for which the exercise price equals the
market price on the grant date was $1.47, $2.08 and $1.80, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Warrants
In March 1993, in conjunction with the Company's initial public
offering, the Company issued to the underwriter a warrant to purchase up to
120,750 shares of common stock at an exercise price equal to 120% of the
offering price. The Underwriter's Warrant was exercisable for a four-year period
beginning March 9, 1994. These warrants expired in 1998. Also in connection with
the Company's initial public offering all series of preferred stock warrants
were automatically converted into common stock warrants at a rate of two shares
to one. In November 1996, in conjunction with the Company's secondary offering,
the Company issued to the underwriter warrants to purchase up to 150,000 shares
of common stock at an exercise price equal to 120% of the offering price or
$4.50 per share. These warrants are exercisable for a four-year period beginning
November 22, 1997.
On March 26, 1998, August 11, 1998, and September 2, 1998, in
conjunction with the Company's private placements, the Company issued warrants
to purchase up to 100,000 shares, 66,667 shares and 120,000 shares of common
stock, respectively,
F-13
<PAGE> 32
at an exercise price of $4.00, $4.00 and $5.70 per share, respectively. These
warrants are exercisable for a five-year from date of issuance. These warrants
were exchanged for like warrants with generally the same terms and conditions in
connection with the February 26, 1999 preferred stock exchange.
In December 1998, the Company amended its Loan and Security Agreement to
include a revolving line of credit. For this commitment, the Company issued
warrants to purchase 40,000 shares of common stock at a price of $4.00 per
share. These warrants are exercisable for a five-year period beginning December
21, 1998.
In connection with the redeemable preferred stock exchange which
occurred on February 26, 1999("Exchange Warrants") the Company issued warrants
to purchase 75,000 shares of common stock at $7.00. These warrants are
exercisable for a five-year period beginning February 26, 1999.
On March 5, 1999, June 25, 1999 and August 17, 1999, in conjunction the
Series C and D Convertible Preferred Stock private placements, the Company
issued warrants to purchase up to 120,000, 154,592 and 57,408 shares of common
stock, respectively, at exercise prices of $4.50, $3.00 and $3.00 per share,
respectively. These warrants are exercisable for a five-year period from date of
issuance.
On March 19, 1999, the Company issued warrants to purchase 25,180 shares
of common stock at a price of $4.17 per share in connection with entering into a
master lease agreement. These warrants are exercisable over a five-year period.
In connection with a new credit agreement on June 18, 1999, the Company
issued warrants to purchase 62,500 shares of common stock at a price of $3.00
per share and are exercisable over a five-year period.
On December 1, 1999, the Company's lender agreed to modify the terms of
its credit agreement with the Company in exchange for the issuance of warrants
to purchase 33,333 shares of its common stock at $3.00 per share. These warrants
are exercisable over a five-year period.
In connection with a $500,000 loan made to the Company on December 1,
1999, the Company issued warrants to purchase 20,000 shares of common stock at
$3.00 per share. These warrants are exercisable over a five-year period.
In August 1999 the Company issued warrants to United States Cellular
Corporation to purchase 1,000,000 shares of common stock at a price of $4.00 per
share. These warrants are subject to vesting conditional on U.S. Cellular's
purchases of the Company's commercial products. At December 31, 1999, warrants
to purchase 48,980 shares of common stock had vested and are exercisable under
the agreement. These warrants are exercisable until August 27, 2004.
The Company also had warrants outstanding to purchase 3,750 shares of
common stock at $4.50 per share, which expire on March 5, 2004.
The Series D Convertible Preferred Stock financing, together with the
warrants to U.S. Cellular Corporation, resulted in an adjustment to the warrants
issued in connection with the Company's Series B-1 preferred stock. The total
number of shares issuable upon exercise of such warrants increases from 120,000
to 129,057 as a result of such adjustments and the exercise price of the
warrants was reduced from $5.72 per share to $5.30 per share.
The following is a summary of outstanding fully vested warrants at
December 31, 1999:
<TABLE>
<CAPTION>
Warrants related to Number of Price
issuance of preferred stock Common Shares per Share Expiration Date
- --------------------------- ------------- --------- ---------------
<S> <C> <C> <C>
Series A-2 100,000 $ 4.00 March 26, 2003
Series A-3 66,667 4.00 August 11, 2003
Series B-1 129,057 5.30 September 2003
Series C 120,000 4.50 March 5, 2004
Series D 212,000 3.00 August 15, 2004
Exchange Warrants 75,000 7.00 February 26, 2004
Warrants related to
borrowings, lease and
sales agreement
150,000 4.50 November 22, 2001
40,000 4.00 December 21, 2003
62,500 3.00 June 18, 2004
33,333 3.00 December 1, 2004
48,980 4.00 August 27, 2004
25,180 4.17 March 18, 2004
20,000 3.00 November 30, 2004
3,750 4.50 March 4, 2004
</TABLE>
F-14
<PAGE> 33
Dividend Restrictions
The Company has never paid a cash dividend on its common stock and does
not expect to do so in the foreseeable future. Series A-2, Series A-3, Series
B-1, Series C and Series D Preferred Stock earn cumulative dividends at the
rates of 6%, 6%, 7% 7%, and 6% per annum and have a liquidation preference
greater than their recorded value. While the preferred stocks are outstanding,
the Company is limited in its ability to pay dividends on its common stock.
Also, dividends cannot be paid without the written consent of its equipment
leasing line provider and its lender.
NOTE 8--LONG-TERM SALES AGREEMENT
In August 1999, the Company signed a five-year agreement with United
States Cellular Corporation ("U.S. Cellular"), one of the nation's ten largest
cellular service providers. Under the terms of the agreement, U.S. Cellular will
purchase a minimum of 100 SuperFilter(R) Systems by December 31, 2000 and may
purchase up to an additional 400 SuperFilter(R) systems by August 27, 2004. As
part of the agreement the Company issued warrants to U.S. Cellular providing for
the purchase of up to one million shares of common stock at a price of $4.00 per
share, under which one share vests for every $25 worth of SuperFilter(R) system
purchases made by U.S. Cellular. These warrants expire August 27, 2004. Due to
the terms of the warrant agreement the Company is required to account for these
as variable warrants. In each period in which the warrant shares are earned, a
non-cash charge will be recorded for the fair value of the warrant shares that
are earned or vested in the period. Fair value of the warrant shares at the time
of vesting will be calculated by using the Black-Scholes option-pricing model.
During 1999, 48,980 warrants were earned resulting in a non-cash charge of
$124,000. At December 31, 1999, 951,020 warrants remain to be earned that may
result in future non-cash charges. The Company cannot reasonably predict the
amount or timing of future non-cash commercial discounts relating to the
warrant. However, the Company expects the amount of these charges to increase
significantly in 2000 because of the significant rise in the market price of the
common stock during the first quarter of 2000. The 1999 charge of $124,000
recorded as a discount to its commercial revenue was based on the vesting of
48,980 warrants and market prices of $3.13 to $5.00 per share of common stock.
The right to purchase another 951,020 shares was still unvested as of January 1,
2000, and the common stock traded as high as high $115 per share between January
1, 2000 and March 24, 2000.
NOTE 9--EMPLOYEE SAVINGS PLAN
In December 1989, the Board of Directors approved a 401(k) savings plan
(the "401(k) Plan") for the employees of the Company that became effective in
1990. Eligible employees may elect to make contributions under the terms of the
401(k) Plan; however, contributions by the Company are made at the discretion of
management. The Company has made no contributions to the Plan.
NOTE 10--COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its offices and production facilities under
non-cancelable operating leases that expire at various times over the next ten
years. Generally leases contain escalation clauses for increases in annual
renewal options and require the Company to pay utilities, insurance, taxes and
other operating expenses.
In March 1999, the Company entered into a master lease agreement for
$1.5 million in lease financing. Under this agreement, the Company entered into
agreements for the sale and leaseback of certain production equipment with a net
book value of $944,000 for cash proceeds of $900,000. The loss of $44,000
realized on the sales transaction has been deferred and is being charged against
income over the lease term. The Company has purchase and lease renewal options
at fair market value. To help insure the Company's performance under the terms
of the lease agreement, the lessor has a collateral interest in its assets
subject to previously granted liens. In connection with entering into this
lease, the Company issued four year warrants for the purchase of 25,180 shares
of common stock at $4.17 per share. Fair value of the warrants were calculated
by using the Black-Scholes option-pricing model and are being amortized over the
term of the lease.
For the years ended December 31, 1997, 1998 and 1999, rent expense was
$318,000, $499,000, and $749,000, respectively.
Capital Leases
The Company leases certain property and equipment under capital lease
arrangements that expire at various dates through 2003. The leases bear
interest at various rates ranging from 13.01% to 18.84%.
The minimum lease payments under operating and capital lease obligations
are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, 1999 Operating Leases Capital Leases
----------------- ---------------- --------------
<S> <C> <C>
2000 $ 828,000 $ 341,000
2001 729,000 337,000
2002 721,000 337,000
2003 514,000 241,000
2004 452,000 --
Thereafter 2,436,000 --
---------- ----------
Total payments $5,680,000 1,256,000
==========
</TABLE>
F-15
<PAGE> 34
<TABLE>
<S> <C>
Less: amount representing interest (295,000)
----------
Present value of minimum lease 961,000
Less: current portion 211,000
----------
Long term portion $ 750,000
==========
</TABLE>
Other Matters
In the normal course of business, the Company, from time to time, is a
defendant in certain litigation, claims and inquiries. In addition, the Company
makes various commitments and can incur contingent liabilities. While it is not
feasible to predict the outcomes of these matters, the Company is not presently
aware of nor expects that any sum it may be required to pay in connection with
these matters would have a material effect on its financial position or results
of operations.
NOTE 11--EARNINGS PER SHARE
The computation of per share amounts for 1997, 1998 and 1999 is based on
the average number of common shares outstanding for the period. Options and
warrants to purchase 1,724,422, 2,241,964 and 3,920,039 shares of common stock
during 1997, 1998 and 1999, respectively, were not considered in the computation
of diluted EPS because their inclusion would have been antidilutive. Also, the
preferred stock convertible into 2,541,680 and 5,633,900 shares of common stock
at December 31, 1998 and 1999 was not considered in the computation of diluted
EPS because its inclusion would have been antidiluive.
NOTE 12--DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS AND SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES
Balance sheet data
<TABLE>
<CAPTION>
December 31
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Accounts receivable:
Accounts receivable-trade $ 1,043,000 $ 793,000
U.S. government accounts receivable-billed 926,000 317,000
U.S. government accounts receivable-unbilled -- 480,000
Less: allowance for doubtful accounts (30,000) --
----------- -----------
$ 1,939,000 $ 1,590,000
=========== ===========
Inventories:
Raw materials $ 817,000 $ 428,000
Work-in-process 1,666,000 1,688,000
Finished goods 236,000 629,000
----------- -----------
$ 2,719,000 $ 2,745,000
=========== ===========
Property and Equipment:
Equipment $10,099,000 $ 9,985,000
Leasehold improvements 1,915,000 2,064,000
Furniture and fixtures 85,000 102,000
----------- -----------
12,099,000 12,151,000
Less: Accumulated Depreciation and Amortization (6,985,000) (8,054,000)
----------- -----------
$ 5,114,000 $ 4,097,000
=========== ===========
Accrued Expenses
Compensation related $ 583,000 $ 669,000
Other 116,000 237,000
----------- -----------
$ 699,000 $ 906,000
=========== ===========
</TABLE>
F-16
<PAGE> 35
Unbilled accounts receivable represent costs and profits in excess of
billed amounts on contracts-in-progress at year-end. Such amounts are billed
based upon the terms of the contractual agreements. Such amounts are
substantially collected within one year.
At December 31, 1998 and 1999, equipment includes $1,177,000 and
$1,211,000 of assets financed under capital lease arrangements, net of $158,000
and $281,000 of accumulated amortization, respectively. Depreciation expense
amounted to $772,000, $713,000 and $1,126,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for interest $ 30,000 $ 62,000 $ 232,000
Non-cash investing and financing activities:
Equipment acquired through issuance of capital lease -- -- $ 34,000
Issuance of warrants in connection with debt and lease agreements -- -- $ 491,000
Redeemable preferred stock dividends accrued not paid -- $ 271,000 $ 95,000
Conversion of notes payable to purchase preferred stock -- -- $1,875,000
Disposal of fully depreciated property and equipment -- $ 277,000 --
</TABLE>
NOTE 13--SUBSEQUENT EVENTS
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 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 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 will
be accounted for as a deemed distribution of $1,548,000 to the preferred
stockholders for determining loss per share in the first quarter and full year
of 2000.
Subsequent to December 31, 1999, (i) warrants and options to purchase
1,013,485 and 433,287 shares of common stock were exercised, resulting in net
proceeds to the Company of $5.9 million, and (ii) the holders of the remaining
outstanding Series B-1 and D preferred shares elected to convert their holdings
into 3,175,409 shares of common stock.
After considering the sales of common shares and shares issued upon
exercise of warrants and options the Company has 13,986,138 common shares
outstanding at March 17, 2000.
In March 2000, the Company secured a one-year loan commitment from a
large stockholder for an additional $5.0 million of working capital. At its
option, the stockholder will lend the funds directly to the Company or
unconditionally guarantee a loan from a commercial bank or other institutional
lender. The loan commitment expires earlier than one year upon the Company's
receipt of $10,000,000 or more of equity financing. If the Company requests
that the loan be funded and the stockholder elects to make the loan directly,
the loan would be unsecured and bear interest at four percent over the prime
rate of PNC Bank (the Company's primary lender). The Company paid a $12,500 fee
for the loan commitment.
F-17
<PAGE> 36
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
and Stockholders of
Superconductor Technologies Inc:
Our audits of the financial statements referred to in our report dated February
22, 2000, except as to Note 13, which is as of March 29, 2000 appearing in this
1999 Annual Report on Form 10-K of Superconductor Technologies Inc. also
included an audit of the financial statements schedules listed in Item 14(a)(2)
of the Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
February 22, 2000, except as to Note 13
Which is as of March 29, 2000
F-18
<PAGE> 37
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------------------------
Beginning Charged to cost and Charged to other Ending
Balance expenses accounts Deductions(1) Balance
----------- ------------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
Allowance for Doubtful Accounts $ 30,000 -- -- $ (30,000) --
Reserve for Inventory Obsolescence 140,000 $ 131,000 -- (70,000) $ 201,000
Deferred Tax Asset Valuation Allowance 15,068,000 3,238,000 -- -- 18,306,000
Year Ended December 31, 1998
Allowance for Doubtful Accounts -- 30,000 -- -- 30,000
Reserve for Inventory Obsolescence 93,000 47,000 -- -- 140,000
Deferred Tax Asset Valuation Allowance 11,236,000 3,832,000 -- -- 15,068,000
Year Ended December 31, 1997
Allowance for Doubtful Accounts 306,000 -- -- (306,000) --
Reserve for Inventory Obsolescence 52,000 41,000 -- -- 93,000
Deferred Tax Asset Valuation Allowance 9,873,000 1,363,000 -- -- 11,236,000
</TABLE>
(1) Relates to the write-off of accounts receivable or disposal of obsolete
inventory.
This schedule contains summary financial information extracted from
the consolidated balance sheet at December 31, 1999, 1998, and 1997 and the
consolidated statement of operation for the years then ended and is qualified in
its entirety by reference to such financial statement.
F-19
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 30th day of
March 2000.
SUPERCONDUCTOR TECHNOLOGIES INC.
By: /s/ M. Peter Thomas
-------------------------------------
M. Peter Thomas
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints M. Peter Thomas and Martin S.
McDermut and each of them, jointly and severally, his attorneys-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ M. Peter Thomas President, Chief Executive Officer and Director March 30, 2000
- ------------------------- (Principal Executive Officer)
M. Peter Thomas
/s/ Martin S. McDermut Vice President, Finance and Administration March 30, 2000
- ------------------------- Chief Financial Officer
Martin S. McDermut (Principal Financial and Accounting Officer)
/s/ Glenn E. Penisten Chairman of the Board March 30, 2000
- -------------------------
Glenn E. Penisten
/s/ Robert P. Caren Director March 30, 2000
- -------------------------
Robert P. Caren
/s/ E. Ray Cotten Senior Vice President, March 30, 2000
- ------------------------- Sales and Marketing and Director
E. Ray Cotten
Director March 30, 2000
- -------------------------
Dennis Horowitz
/s/ Richard M. Johnston Director March 30, 2000
- -------------------------
Richard M. Johnston
/s/ John D. Lockton Director March 30, 2000
- -------------------------
John D. Lockton
/s/ Joseph C. Manzinger Director March 30, 2000
- -------------------------
Joseph C. Manzinger
/s/ J. Robert Schrieffer Director March 30, 2000
- -------------------------
J. Robert Schrieffer
</TABLE>
<PAGE> 39
Securities and Exchange Commission
Washington, D.C. 20549
Superconductor Technologies Inc.
Exhibits to Form 10-K
For Fiscal Year Ended December 31, 1999
Commission File No. 0-21074
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company(10)
3.2 Bylaws of the Registrant(11)
4.1 Form of Common Stock Certificate(1)
4.2 Form of Series A-2 Preferred Stock Certificate(9)
4.3 Form of Series A-3 Preferred Stock Certificate(9)
4.4 Form of Series B-1 Preferred Stock Certificate(9)
4.5 Form of Series C Preferred Stock Certificate(9)
4.6 Form of Representative's Warrant Agreement(1)
4.7 Form of warrant issued to Van Kasper & Company(2)
4.8 Form of warrant issued to holders Series A-2 and Series A-3 Preferred
Stock(9)
4.9 Form of warrant issued to holders of Series B-1 Preferred Stock(9)
4.10 Form of warrant issued to holders of Series C Preferred Stock(9)
4.11 Form of warrant issued in connection with the Exchange Agreement
dated February 26, 1999(9)
4.12 Form of warrant issued to Silicon Valley Bank dated
December 21, 1998(9)
4.13 Series C Preferred Stock Purchase Agreement dated March 5, 1999(9)
4.14 Second Amended and Restated Stockholder Rights Agreement dated
February 26, 1999(9)
4.15 Amended and Restated Registration Rights Agreement dated February 26,
1999(9)
4.16 Registration Rights Agreement with Silicon Valley Bank dated December
21, 1998(9)
4.17 Certificate of Designation for Series D Preferred Stock(11)
4.18 Third Amended and Restated Stockholders Rights Agreement(11)
4.19 Form of Series D Warrant(11)
4.20 Form of Series D Stock Certificate(11)
4.21 Warrant Issued to PNC Bank, National Association in connection with
Credit Agreement(11)
4.22 Registration Rights Agreement to United States Cellular
Corporation(12)
4.23 Form of Warrant to United States Cellular Corporation(12)
4.24 Warrant Purchase Agreement dated December 1, 1999 with
Wilmington Securities Corporation
4.25 Warrant Purchase Agreement dated December 1, 1999 with PNC Bank
4.26 Warrant Purchase Agreement dated January 12, 2000 with PNC Bank
4.27 Warrant Purchase Agreement dated February 9, 2000 with
Wilmington Securities, Inc.
10.1 Technology Agreement between the Registrant and Lockheed Corporation
dated January 8, 1988(1)*
10.2 Technical Information Exchange Agreement between the Registrant and
Philips dated September 1989(1)
10.3 Standard Industrial Lease between the Registrant and UML Real Estate
Partnership dated January 1, 1990 Sublease between Registrant and
Consolidated Packaging Machinery Company d.b.a. Industrial Automation
Corporation dated October 25, 1989(1)
10.4 Form of Consulting Agreement(1)
10.5 Form of Employee Proprietary Information Agreement(1)
10.6 1992 Director Option Plan(1)
10.7 Form of Indemnification Agreement(1)
10.8 License Agreement between the Registrant and the University of
Arkansas dated April 9, 1992, as amended(1)
10.9 Loan and Security Agreement between the Registrant and Silicon Valley
Bank dated May 17, 1991, as amended(1)
10.10 1992 Stock Option Plan(1)
10.11 Proprietary Information & Patents Inventions Agreement among the
Registrant, E-Systems, Inc. and various other parties; Purchase Order
dated October 10, 1991(1)
10.12 Joint Venture Company (JDC) Agreement between the Registrant and
Sunpower Incorporated dated April 2, 1992(1)*
10.13 Government Contract issued to Registrant by the Defense Advanced
Research Projects Agency through the Office of Naval Research dated
September 4, 1991(1)
10.14 License Agreement between the Registrant and E.I. DuPont de Nemours
and Company dated December 1992(2)*
10.15 Note and Warrant Purchase Agreement dated December 28, 1992(1)
10.16 Superconductor Technologies Inc. Purchase Agreement(3)*
10.17 Loan and Security Agreement between Registrant and Silicon Valley
Bank dated August 26, 1994(4)
10.18 Form of Distribution Agreement(4)
10.19 Amended and Restated 1988 Stock Option Plan, as amended, with form of
stock option agreement(4)
10.20 Loan and Security Agreement between Registrant and Silicon Valley
Bank dated June 27, 1995(5)
10.21 Joint Venture Agreement between Registrant and Analeptic Technologies
(S) Pet Ltd., dated May 20, 1996(6)*
10.22 Employment Offer Letter to M. Peter Thomas dated April 3, 1997(7)
10.23 Employment Agreement with E. Ray Cotton dated July 1, 1997(8)
10.24 Amendment dated December 21, 1998 to the Loan and Security Agreement
between Registrant and Silicon Valley Bank dated August 26, 1994(9)
10.25 PNC Bank, National Association Credit Agreement(11)
10.26 United States Cellular Corporation Purchase Agreement(12)
10.27 1999 Stock Option Agreement(13)
10.28 Note dated December 1, 1999 with Wilmington Securities Corporation
10.29 Term Note dated January 12, 2000 with PNC Bank
10.30 Second Amendment to Credit Agreement dated January 12, 2000 between
Registrant and PNC Bank
23 Consent of Independent Accountants
24 Power of Attorney (included on signature page hereto)
27 Financial Data Schedule
99 Disclosure Regarding Forward-Looking Statements
- --------------------------------------
(1) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-56714).
(2) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-56714).
(3) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1993.
(4) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1994.
</TABLE>
<PAGE> 41
(5) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1995.
(6) Incorporated by reference from the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-10569).
(7) Incorporated by reference from the Registrant's Report on Form 10-Q
filed on May 8, 1997 for the quarter ended March 29, 1997. The
exhibit listed is incorporated by reference to Exhibit 10.1 of
Registrant's Report on Form 10-Q.
(8) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1997.
(9) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1998.
(10) Incorporated by reference from Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended April 3, 1999
(11) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended July 3, 1999.
(12) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended October 2, 1999.
(13) Incorporated by reference from the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-90293)
* Confidential treatment has been previously granted for certain
portions of these exhibits.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the last quarter
of the year ended December 31, 1999.
(c) Exhibits.
See Item 14(a) above.
18
<PAGE> 1
EXHIBIT 4.24
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT
WITH A VIEW TO THE DISTRIBUTION THEREOF, AND SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT OR REGULATION A
NOTIFICATION UNDER SUCH ACT COVERING SUCH SECURITIES OR SUPERCONDUCTOR
TECHNOLOGIES INC. (THE "COMPANY") RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE
COUNSEL FOR THE COMPANY) STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
No. BR-1 Right to Purchase 20,000
December 1, 1999 Shares of Common Stock
Void After December 1, 2004
SUPERCONDUCTOR TECHNOLOGIES INC.
WARRANT
THIS CERTIFIES THAT, subject to the terms of this agreement, Wilmington
Securities, Inc., (the "HOLDER") is entitled to subscribe for and purchase from
Superconductor Technologies Inc., a Delaware corporation (the "COMPANY"), at the
Warrant Price defined in Section 2 herein, twenty thousand (20,000) fully paid
and non-assessable shares of the Company's common Stock (the "COMMON Stock"),
such price and such number of shares being subject to adjustment upon occurrence
of the contingencies set forth in this Warrant.
Upon delivery of this Warrant (with the Notice of Exercise in the form
attached hereto as EXHIBIT A), together with payment of the Warrant Price of the
shares of Common Stock thereby purchased, which payment may be made by
converting this Warrant, or any portion thereof, pursuant to Section 3 below
("WARRANT CONVERSION"), at the principal office of the Company or at such other
office or agency as the Company may designate by notice in writing to the holder
hereof, the holder of this Warrant shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. All shares of Common
Stock which may be issued upon the exercise of this Warrant will, upon issuance,
by fully paid and non-assessable and free from all taxes, liens and charges with
respect thereto.
This Warrant is subject to the following terms and conditions:
1. Term of Warrant.
This Warrant may be exercised in whole or in part, at anytime after
issuance and prior to the first to occur of the following:
(a) 5;00 p.m., Pacific Standard Time, December 1, 2004; or
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(b) The consummation of any transaction or Series of transactions
(collectively, the "TRANSACTION"), including without limitation, the sale,
transfer or disposition of all or substantially all of the Company's assets or
the merger of the Company with or into, or consolidation with, any other
corporation, whereby the holders of the Company's voting securities prior to the
Transaction do not hold more than 50% of the voting securities of the surviving
entity following consummation of the Transaction (a "CHANGE OF CONTROL").
Upon the occurrence of any of the events described in clause (a) above, this
Warrant, to the extent not exercised, shall terminate. Upon the occurrence of
any of the events described in clause (b) above, this Warrant, to the extent not
otherwise exercised, shall be deemed to have been automatically converted
pursuant to Section 3 and thereafter the Holder shall participate in the
Transaction on the same terms as other holders of Common Stock.
2. Warrant Price. The exercise price of this Warrant (the "WARRANT
PRICE") shall equal $3.00 per share.
3. Payment by Warrant Conversion. The Holder may exercise the purchase
right represented by this Warrant with respect to a particular number of shares
of Common Stock (the "SHARES") subject to this Warrant ("CONVERTED WARRANT
SHARES") and elect to pay for a number of Shares through Warrant Conversion by
specifying such election in the Notice of Exercise attached hereto as EXHIBIT A.
In such event, the Company shall deliver to the Holder (without payment by the
Holder of any Warrant Price or any cash or other consideration) that number of
Shares equal to the quotient obtained by dividing (x) the value of this Warrant
(or the specified portion hereof) on the date of exercise, which value shall be
determined by subtracting (A) the aggregate Warrant Price of the Converted
Warrant Shares immediately prior to the exercise of the Warrant from (B) the
aggregate fair market value of the Converted Warrant Shares issuable upon
exercise of this Warrant (or the specified portion hereof) on the date of
exercise, by (y) the fair market value of one Share on the date of exercise. For
purposes of this Section 3, fair market value of a Share and of a Converted
Warrant Share as of a particular date shall be determined as follows:
(a) if such share is then quoted on The Nasdaq National Market, the
simple average of the closing sales prices as reported on The Nasdaq National
Market for the ten (10) consecutive trading days prior to such date;
(b) if such share is publicly traded and is then listed on a national
securities exchange, the simple average of the closing sale prices on the
principal national securities exchange on which the share is listed or admitted
to trading for the ten (10) consecutive trading days prior to such date;
(c) if such share is publicly traded but is not quoted on The Nasdaq
National Market nor listed or admitted to trading on a national securities
exchange, the simple average of the closing bid prices for the ten (10)
consecutive trading days prior to such date, as reported by The Wall street
Journal or other widely available reporting source, for the over-the-counter
market; or
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<PAGE> 3
(d) If none of the foregoing is applicable, the value shall be the
fair market value thereof, as determined in good faith by the Board of Directors
of the Company.
4. Adjustment of Purchase Price and Number of Shares; Limitation on
Exercise.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Warrant Price shall be subject to adjustment from time to
time in accordance with the following provision; provided that, no such
adjustment shall be made if a corresponding adjustment is made pursuant to the
Company's Amended and Restated Certificate of Incorporation.
(a) Reclassification, Consolidation or Merger. In case of any
reclassification or change of outstanding securities of the class issuable upon
exercise of this Warrant (other than as a result of a subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation (other than a Change of Control as provided in Section
1 (b) hereof), the Company, or such successor corporation, as the case may be,
shall execute a new Warrant, providing that the holder of this Warrant shall
have the right to exercise such new Warrant and procure upon such exercise in
lieu of each share of Common Stock theretofore issuable upon exercise of this
Warrant the kind and amount of shares of stock, other securities, money and
property receivable upon such reclassification, change, consolidation or merger
by a holder of one share of Common Stock. Such new Warrant shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4. The provisions of this subsection
(a) shall similarly apply to successive reclassifications, changes,
consolidations and mergers.
(b) Subdivision or Combination of Shares. If at any time on or after
the date of this Warrant the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares, the Warrant Price in effect
immediately prior to such subdivision shall subdivide its outstanding shares of
Common Stock into a greater number of shares, the Warrant Price in effect
immediately prior to such subdivision shall be proportionately reduced and the
number of shares receivable upon exercise of the Warrant shall be
proportionately increased; and, conversely, if at any time on or after the date
of this Warrant the outstanding number of shares of Common Stock shall be
combined into a smaller number of shares, the Warrant Price in effect
immediately prior to such combination shall be proportionately increased and the
number of shares receivable upon exercise of the Warrant shall be
proportionately decreased.
(c) Adjustment of Number of Shares. Upon each adjustment in the
Warrant Price, the number of Shares of Common Stock purchasable hereunder shall
be adjusted, to the nearest whole share, to the product obtained by multiplying
the number of Shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
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<PAGE> 4
5. Notices.
(a) Upon any adjustment of the Warrant Price and any increase or
decrease in the number of shares of Common Stock purchasable upon the exercise
of this Warrant, then, and in each such case, the Company, within thirty (30)
days thereafter, shall give written notice thereof to the registered holder of
this Warrant (the "NOTICE"). The Notice shall be mailed to the address of such
as shown on the books of the Company, and shall state the Warrant Price as
adjusted and the increased or decreased number of shares purchasable upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation of each.
(b) In the event that the Company shall propose at any time to effect
a Change of Control, the Company shall send to the Holder at least ten (10)
days' prior written notice of the date when the same shall take place.
(c) Each such written notice shall be given by first class mail,
postage prepaid, addressed to the Holder at the address as shown on the books of
the Company for the Holder.
6. Investment Letter. Upon exercise or conversion of this Warrant in
accordance with the provisions hereof, the Holder shall either (i) execute and
deliver to the Company an investment letter in the form attached hereto as
Exhibit A or (ii) deliver to the Company an opinion of counsel for the Holder
reasonably satisfactory to the Company, stating that such exercise or conversion
is exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended (the "SECURITIES ACT").
7. Regstrictions on Transfer. Certificates representing any of the
Common Stock acquired pursuant to the provisions of this Warrant shall have
endorsed thereon legends substantially in the following form, as appropriate.
(a) Unless such shares of Common Stock are received in a transaction
registered under the Securities Act and qualified (if necessary) under
applicable state securities laws:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT."
(b) Any legend required to be placed thereon by any applicable state
securities laws.
8. Compliance with Act. The Holder, by acceptance hereof, agrees that
this Warrant and the Common Stock to be issued upon the exercise or conversion
hereof are being
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<PAGE> 5
acquired solely for its own account and not as a nominee for any
other party and not with a view toward the resale or distribution
thereof and that it will not offer, sell or otherwise dispose of this
Warrant or any of the Common Stock to be issued upon the exercise or
conversion hereof except in accordance herewith and under
circumstances which will not result in a violation of the Securities
Act or of applicable state securities laws.
9. Miscellaneous.
(a) The terms of this Warrant shall be binding upon and shall inure
to the benefit of any successors or assigns of the Company and of the holder or
holders hereof and of the Common Stock issued or issuable upon the exercise
hereof.
(b) No holder of this Warrant, as such, shall be entitled to vote or
receive dividends or be deems to be a stockholder of the Company for any
purpose, nor shall anything contained in this Warrant be construed to confer
upon the holder of this Warrant, as such, any rights of a stockholder of the
Company or any right to vote, give or withhold consent to any corporate action,
receive notice of meetings, receive dividends or subscription rights, or
otherwise.
(c) Receipt of this Warrant by the holder hereof shall constitute
acceptance of and agreement to the foregoing terms and conditions.
(d) The Company will not, by amendment of its Restated Certificate of
Incorporation or through any other means, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the holder of this Warrant against impairment.
(e) Upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant and, in the case
of any such loss, theft or distribution, upon delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, upon surrender and cancellation of such Warrant, the Company at
its expense will execute and deliver, in lieu thereof, a new Warrant of like
date and tenor.
(f) This Warrant shall be nontransferable, other than pursuant to (I)
a transfer not involving a change in beneficial ownership, and (ii) any transfer
by any Holder to (A) any individual or entity controlled by, controlling, or
under common control with, such Holder or (B) any individual or entity with
respect to which such Holder (or any person controlled by, controlling, or under
common control with, such Holder) has the power to direct investment decisions.
(g) This Warrant or any provision of this Warrant may be amended,
waived, discharged or terminated by a statement in writing signed by the party
against which enforcement of the amendment, waiver, discharge or termination is
sought.
(h) This Warrant shall be governed by the laws of the State of
Delaware.
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[SIGNATURE PAGE FOLLOWS]
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<PAGE> 7
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
Dated: December 1, 1999
----------------
SUPERCONDUCTOR TECHNOLOGIES INC.
/s/ M. Peter Thomas
------------------------------------------
M. Peter Thomas, Chief Executive Officer
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<PAGE> 8
EXHIBIT A
NOTICE OF EXERCISE
TO: Superconductor Technologies Inc.
1. The undersigned hereby elects to purchase shares of the Common Stock
of SUPERCONDUCTOR TECHNOLOGIES INC. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full, together with all applicable transfer taxes, if any.
2. The undersigned hereby elects to exercise the purchase right with
respect to ______ Shares of such Common Stock through Warrant Conversion, as set
forth in Section 3 of the Attached Warrant.
3. Please issue a certificate or certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
--------------------------------
(Name)
--------------------------------
--------------------------------
(Address)
4. The undersigned represents that the aforesaid shares of common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares. In support thereof, the undersigned has executed the Investment
Representation Statement attached hereto as Exhibit A.
Signature of Holder
--------------------------------
By:
-----------------------------
Title:
--------------------------
Date:
---------------------------
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<PAGE> 9
EXHIBIT A TO NOTICE OF EXERCISE
SUPERCONDUCTOR TECHNOLOGIES INC.
WARRANT EXERCISE
INVESTMENT REPRESENTATION STATEMENT
PURCHASER :
COMPANY : Superconductor Technologies Inc.
SECURITY : Common Stock
NUMBER OF SHARES :
DATE :_____________________,________
In connection with the purchase of the above-listed Securities, I, the
Purchase, represent to the Company the following:
(a) I am an accredited investor within the meaning of Rule 501 under the
Securities Act of 1933, as amended (the "Securities Act") and have such
knowledge and experience in financial business matters that I am capable of
evaluating the merits and risks of the purchase of the Securities.
(b) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the company to reach
an informed and knowledgeable decision to acquire the Securities. In making my
decision to acquire the Securities, I am not relying on representations of any
officer, director, stockholder or agent of the Company. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act.
(c) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, and that
reliance by the company on such an exemption is predicated in part on the
representations set forth in this letter.
(d) I further understand that the Securities must be hold indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. I understand that the
Company is under no obligation to register the Securities. In addition, I
understand that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not requited in the opinion of counsel for
the Purchaser satisfactory to the Company or unless the Company receives a
no-action letter from the Securities and Exchange Commission.
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<PAGE> 10
(e) I am familiar with the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, including, among other things: (1)
the resale occurring not less than one year after the later of the date the
securities were sold by the Company or the date they were sold by an affiliate
of the Company, within the meaning of Rule 144; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than two
years, (2) the availability of certain public information about the Company, (3)
the sale being made through a broker in an unsolicited "broker's transaction" or
in transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934), and (4) the amount of securities being sold
during any three month period not exceeding the specified limitations stated
therein, if applicable.
(f) I further understand that at the time I wish to sell the Securities
there may be no public market upon which to make such a sale, and that, even if
such a public market exists, the Company may not be satisfying the current
public information requirements of Rule 144, and that, in such event, I would be
precluded from selling the Securities under Rule 144 even if the one-year
minimum holding period had been satisfied.
(g) I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Signature of Purchaser
--------------------------------
By:
-----------------------------
Title
--------------------------
Date
----------------------------
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<PAGE> 1
EXHIBIT 4.25
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: SUPERCONDUCTOR TECHNOLOGIES INC.
a Delaware corporation
Number of Shares: 33,333
Class of Stock: Common
Initial Exercise Price: $3.00
Issue Date: December 1, 1999
Expiration Date: December 1, 2004
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, PNC BANK, NATIONAL ASSOCIATION ("Holder")
is entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth herein
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 Method of Exercise. Holder may exercise this Warrant by delivering a
duly executed Notice of Exercise in substantially the form attached as Appendix
1 to the principal office of the Company. Unless Holder is exercising the
conversion right set forth in Section 1.2, Holder shall also deliver to the
Company a check for the aggregate Warrant Price for the Shares being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant Section 1.4.
1.3 No Rights as Shareholder. This Warrant does not entitle Holder to
any voting rights as a shareholder of the Company prior to the exercise hereof.
1.4 Fair Market Value. If the Shares are traded in a public market, the
fair market value of the Shares shall be the closing price of the Shares (or the
closing price of the
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<PAGE> 2
Company's stock into which the Shares are convertible) reported for the business
day immediately before Holder delivers its Notice of Exercise to the Company. If
the Shares are not traded in a public market, the Board of Directors of the
Company shall determine fair market value in its reasonable good faith
judgement. The foregoing notwithstanding, if Holder advises the Board of
Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment-banking firm is
greater than that determined by the Board of Directors, then all fees and
expenses of such investment-banking firm shall be paid by the Company. In all
other circumstances, such fees and expenses shall be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares are no so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in case of mutilation, or surrender and cancellation of this Warrant, the
Company at Holders' expense shall execute and deliver, in lieu of this Warrant,
a new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
1.7.1 "Acquisition". For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets of the Company, or any reorganization, consolidation, or merger of the
Company where the holders of the Company's securities before the transaction
beneficially own less than 50% of the outstanding voting securities of the
surviving entity after the transaction.
1.7.2 Assumption of Warrant. Upon the closing of any Acquisition the
successor entity shall assume the obligations f this Warrant, and this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly.
1.7.3 Nonassumption. If upon the closing of any Acquisition of the
successor entity does not assume the obligations of this Warrant and the Holder
has not otherwise exercised this Warrant in full, then the unexercised portion
of this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter the Holder shall participate in the Acquisition on
the same terms as other holders of the same class of securities of the Company.
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<PAGE> 3
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides of the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend of subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares of this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 No Impairment The Company shall not, by amendment of its Articles of
Incorporation or through a 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 under this Warrant by the Company, but shall at all times
in good faith assist in carrying out of all the provisions of this Article 2 and
in taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
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<PAGE> 4
2.5 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder amount computed by
multiplying the fractional interest by the fair market value of a full Share.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder as follows:
All Shares which may be issued upon the exercise of the purchase right
represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or re-capitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the company shall use
commercially reasonable efforts to give Holder (1) at least 20 days prior
written notice of the date on which a record will be taken for such dividend,
distribution, or subscription rights (and specifying the date on which the
holders of common stock will be entitled thereto) or for determining rights to
vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in
the case of the matters referred to in (c) and (d) above at least 20 days prior
written notice of the date when the same will take place (and specifying the
date on which the holders of common stock will be entitled to exchange their
common stock for securities or other property deliverable upon the occurrence of
such event); and (3) in the case of the matter referred to in (e) above, the
same notice as to given to the holders of such registration rights.
-4-
<PAGE> 5
3.3 Information Rights. So long as the Holder holds this Warrant and/or
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) within forty-five (45) days after the end of each of the first three
quarters of each fiscal year, the Company's quarterly, unaudited financial
statements.
3.4 Registration Under Securities Act of 1933, as Amended. The Company
agrees that the Shares or, if the Shares are convertible into common stock of
the Company, such common stock, shall be subject to the registration rights set
forth on Exhibit A, if attached.
ARTICLE 4 MISCELLANEOUS.
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or
in part, at any time and from time to time on or before the Expiration Date set
forth above.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO
RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or Holder
represents that is has complied with rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provide with a copy of Holder's notice of proposed sale.
-5-
<PAGE> 6
4.4 Transfer Procedure Subject to the provisions of Section 4.2, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for re-issuance to the transferee(s) and Holder if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to
the Holder, or vise versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waved,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorney's Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to its
principles regarding conflicts of law.
"COMPANY"
SUPERCONDUCTOR TECHNOLOGIES INC.
By /s/ M. Peter Thomas
--------------------------------
Name M. Peter Thomas
--------------------------------
(Print)
Title: Chairman of the Board,
President or Vice President
-6-
<PAGE> 7
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase_____________of the
Series_________ Preferred Stock of____________________________________
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the purchase price of such shares in full.
1. The undersigned hereby elects to convert The attached Warrant
into Shares in the manner specified in the Warrant. This conversion is
exercised with respect to ` of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or .certificates representing said
shares in the name of the undersigned or in such other name as is
specified below:
--------------------------------
(Name)
--------------------------------
--------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely
for its own account and not as a nominee for any other party and not
with a view toward the resale or distribution thereof except in
compliance
--------------------------------
(Signature)
--------------------------------
(Date)
-7-
<PAGE> 8
EXHIBIT A
Registration Rights
The shares (if common stock), or the common stock issuable upon
conversion of the Shares, shall be entitled to "piggy back" registration rights
in accordance with the terms of the Third Amended and Restated Stockholder
Rights Agreement (the "Agreement") entered into between the Company and certain
investors in connection with the Company's Series D Preferred Stock financing in
substantially the form attached hereto as Exhibit B. In the event of an
underwritten offering in which the managing underwriter selected determines that
marketing factors require a limitation on the number of shares to be included in
the registration be limited, the shares to be sold shall be allocated first to
the holders of Registrable Securities obtained in connection with the company's
Preferred Stock financings, with the remainder, if any, being allocated on a pro
rata (based on the number of shares held by such holders on a fully-diluted
basis) among the Holder, and other holders of registration rights unrelated to
the Company's Preferred Stock financings.
The Company agrees that no amendments will be made to the Agreement
which would have an adverse impact on Holder's registration rights thereunder
without the consent of Holder, provided however, that the Company may grant
registration rights superior to or on par with those of the Holder in connection
with Preferred Stock financings without obtaining the consent of the Holder. By
acceptance of the Warrant to which this Exhibit A is attached, Holder shall be
deemed to be a party to the Agreement.
-8-
<PAGE> 1
EXHIBIT 4.26
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: SUPERCONDUCTOR TECHNOLOGIES INC.
a Delaware corporation
Number of Shares: 27,692
Class of Stock: Common
Initial Exercise Price: $3.25(1)
Issue Date: January 12, 2000
Expiration Date: January 12, 2005
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, PNC BANK, NATIONAL ASSOCIATION ("Holder")
is entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth herein
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
1.1 Method of Exercise. Holder may exercise this Warrant by delivering a
duly executed Notice of Exercise in substantially the form attached as Appendix
1 to the principal office of the Company. Unless Holder is exercising the
conversion right set forth in Section 1.2, Holder shall also deliver to the
Company a check for the aggregate Warrant Price for the Shares being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant Section 1.4.
1.3 No Rights as Shareholder. This Warrant does not entitle Holder to
any voting rights as a shareholder of the Company prior to the exercise hereof.
- ---------------------
(1) Which shall be adjusted to equal the Purchase Price as defined in that
certain Securities Purchase Agreement between the Company and the State of
Wisconsin dated January 4, 2000.
-1-
<PAGE> 2
1.4 Fair Market Value. If the Shares are traded in a public market, the
fair market value of the Shares shall be the closing price of the Shares (or the
closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgement. The foregoing notwithstanding, if Holder
advises the Board of Directors in writing that Holder disagrees with such
determination, then the Company and Holder shall promptly agree upon a reputable
investment banking firm to undertake such valuation. If the valuation of such
investment-banking firm is greater than that determined by the Board of
Directors, then all fees and expenses of such investment-banking firm shall be
paid by the Company. In all other circumstances, such fees and expenses shall be
paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares are no so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in case of mutilation, or surrender and cancellation of this Warrant, the
Company at Holders' expense shall execute and deliver, in lieu of this Warrant,
a new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
1.7.1 "Acquisition". For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets of the Company, or any reorganization, consolidation, or merger of the
Company where the holders of the Company's securities before the transaction
beneficially own less than 50% of the outstanding voting securities of the
surviving entity after the transaction.
1.7.2 Assumption of Warrant. Upon the closing of any Acquisition the
successor entity shall assume the obligations f this Warrant, and this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly.
1.7.3 Nonassumption. If upon the closing of any Acquisition of the
successor entity does not assume the obligations of this Warrant and the Holder
has not otherwise exercised this Warrant in full, then the unexercised portion
of this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter the Holder shall participate in the Acquisition on
the same terms as other holders of the same class of securities of the Company.
-2-
<PAGE> 3
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides of the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend of subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares of this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 No Impairment The Company shall not, by amendment of its Articles of
Incorporation or through a 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 under this Warrant by the Company, but shall at all times
in good faith assist in carrying out of all the provisions of this Article 2 and
in taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
-3-
<PAGE> 4
2.5 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder amount computed by
multiplying the fractional interest by the fair market value of a full Share.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder as follows:
All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or re-capitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the company shall use
commercially reasonable efforts to give Holder (1) at least 20 days prior
written notice of the date on which a record will be taken for such dividend,
distribution, or subscription rights (and specifying the date on which the
holders of common stock will be entitled thereto) or for determining rights to
vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in
the case of the matters referred to in (c) and (d) above at least 20 days prior
written notice of the date when the same will take place (and specifying the
date on which the holders of common stock will be entitled to exchange their
common stock for securities or other property deliverable upon the occurrence of
such event); and (3) in the case of the matter referred to in (e) above, the
same notice as to given to the holders of such registration rights.
-4-
<PAGE> 5
3.3 Information Rights. So long as the Holder holds this Warrant and/or
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) within forty-five (45) days after the end of each of the first three
quarters of each fiscal year, the Company's quarterly, unaudited financial
statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
agrees that the Shares or, if the Shares are convertible into common stock of
the Company, such common stock, shall be subject to the registration rights set
forth on Exhibit A, if attached.
ARTICLE 4. MISCELLANEOUS.
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or
in part, at any time and from time to time on or before the Expiration Date set
forth above.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO
RULE 144 OR AN APINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or Holder
represents that is has complied with rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provide with a copy of Holder's notice of proposed sale.
-5-
<PAGE> 6
4.4 Transfer Procedure Subject to the provisions of Section 4.2, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for re-issuance to the transferee(s) and Holder if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to
the Holder, or vise versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waved,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorney's Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to its
principles regarding conflicts of law.
"COMPANY"
SUPERCONDUCTOR TECHNOLOGIES INC.
By /s/ M. Peter Thomas
-------------------------------
Name M. Peter Thomas
------------------------------
(Print)
Title: Chairman of the Board,
President or Vice President
-6-
<PAGE> 7
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase of the Series
Preferred Stock of .
pursuant to the terms of the attached Warrant, and tenders herewith
payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert he attached Warrant into
Shares in the manner specified in the Warrant. This conversion is exercised with
respect to `_____________ of the Shares covered by the Warrant.
(Strike paragraph that does not apply.)
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:
--------------------------------
(Name)
--------------------------------
--------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance
--------------------------------
(Signature)
--------------------------------
(Date)
-7-
<PAGE> 8
EXHIBIT A
REGISTRATION RIGHTS
The shares (if common stock), or the common stock issuable upon
conversion of the Shares, shall be entitled to "piggy back" registration rights
in accordance with the terms of the Third Amended and Restated Stockholder
Rights Agreement (the "Agreement") entered into between the Company and certain
investors in connection with the Company's Series D Preferred Stock financing in
substantially the form attached hereto as Exhibit B. In the event of an
underwritten offering in which the managing underwriter selected determines that
marketing factors require a limitation on the number of shares to be included in
the registration be limited, the shares to be sold shall be allocated first to
the holders of Registrable Securities obtained in connection with the company's
Preferred Stock financings, with the remainder, if any, being allocated on a pro
rata (based on the number of shares held by such holders on a fully-diluted
basis) among the Holder, and other holders of registration rights unrelated to
the Company's Preferred Stock financings.
The Company agrees that no amendments will be made to the Agreement
which would have an adverse impact on Holder's registration rights thereunder
without the consent of Holder, provided however, that the Company may grant
registration rights superior to or on par with those of the Holder in connection
with Preferred Stock financings without obtaining the consent of the Holder. By
acceptance of the Warrant to which this Exhibit A is attached, Holder shall be
deemed to be a party to the Agreement.
-8-
<PAGE> 1
EXHIBIT 4.27
No. WSI-100 Right to Purchase 250,000
February 9, 2000 Shares of Common Stock
WARRANT
SUPERCONDUCTOR TECHNOLOGIES INC.
This Certifies that subject to the terms of this agreement, Wilmington
Securities, Inc. (the "Warrantholder") is entitled to subscribe for and purchase
from Superconductor Technologies Inc, a Delaware corporation (The "Company"), at
the Warrant Price defined in Section 2 herein, Two Hundred Fifty Thousand
(250,000) fully paid and non-assessable shares of the Company's Common Stock
(the "Common Stock:"), such price and such number of shares being subject to
adjustment upon occurrence of the contingencies set forth in this Warrant.
This Warrant is issued pursuant to a Securities Purchase Agreement dated
as of January 4, 2000 between the Company and Warrantholder.
Upon delivery of this Warrant (with the Notice of Exercise in the form
attached hereto as (Exhibit A), together with payment of the Warrant Price of
the shares of Common Stock thereby purchased, at the principal office of the
Company or at such other office or agency as the Company may designate by notice
in writing to the holder hereof, the holder of this Warrant shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased. All shares of Common Stock which may be issued upon the exercise of
this Warrant will, upon issuance, be fully paid and non-assessable ad free from
all taxes, liens and charges with respect thereto.
This Warrant is subject to the following terms and conditions:
1. Term of Warrant.
This Warrant may be exercised in whole or in part, at any time after
issuance and prior to 5:00 p.m., Eastern Standard Time, February 8, 2005.
On February 8, 2005, this Warrant, to the extent not exercised, shall
terminate.
2. WARRANT PRICE. The exercise price of this Warrant (the "Warrant
Price) shall equal $3.575 per share.
3. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of this
Warrant and the Warrant Price shall be subject to adjustment from time to time
in accordance with the following provisions: provided that, no such adjustment
shall be made if a corresponding adjustment is made pursuant to the Company's
Amended and Restated Certificate of Incorporation.
-1-
<PAGE> 2
(a) Reclassification, Consolidate or Merger. In case of any
reclassification or change of outstanding securities of the class issuable upon
exercise of this Warrant (other than as a result of a subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation, the Company, or such successor corporation, as the
case may be, shall execute a new Warrant, providing that the holder of this
Warrant shall have the right to exercise such new Warrant and procure upon such
exercise in lieu of each share of Common Stock theretofore issuable upon
exercise of this Warrant the kind and amount of shares of stock, other
securities, money and property receivable upon such reclassification, change,
consolidation or merger by a holder of one share of Common Stock. Such new
Warrant shall provide for adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided for in this Section 3. The provisions
of this subsection (a) shall similarly apply to successive reclassifications,
changes, consolidations and mergers.
(b) Subdivision or Combination of Shares. If at any time on or after the
date of this Warrant the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares, the Warrant Price in effect
immediately prior to such subdivision shall be proportionately reduced and the
number of shares receivable upon exercise of the Warrant shall be
proportionately increased; and, conversely, if at any time on or after the date
of this Warrant the outstanding number of shares of Common Stock shall be
combined into a smaller number of shares, the Warrant Price in effect
immediately prior to such combination shall be proportionately increased and the
number of shares receivable upon exercise of the Warrant shall be
proportionately decreased.
(c) Adjustment of Number of Shares. Upon each adjustment in the Warrant
Price, the number of Shares of Common Stock purchasable hereunder shall be
adjusted, to the nearest whole share, to the product obtained by multiplying the
number of shares purchasable immediately prior to such adjustment in the Warrant
Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
4. NOTICES.
(a) Upon any adjustment of the Warrant Price and any increase or
decrease in the number of shares of Common Stock purchasable upon the exercise
of this Warrant, then, and in each such case, the Company, within thirty (30)
days thereafter, shall give written notice thereof to the registered holder of
this Warrant (the "Notice"). The Notice shall be mailed to the address of such
holder as shown on the books of the Company, and shall state the Warrant Price
as adjusted and the increased or decreased number of shares purchasable upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation of each.
(b) In the event that the Company shall propose at any time to effect a
change of control, the Company shall send to the Warrantholder at lease ten (10)
days' prior written notice of the date when the same shall take place.
(c) Each such written notice shall be given by first class mail, postage
prepaid, addressed to the Warrantholder at the address as shown on the books of
the Company for the Warrantholder.
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<PAGE> 3
5. INVESTMENT LETTER. Upon exercise or conversion of this Warrant in
accordance with the provisions hereof, the Warrantholder shall execute and
deliver to the Company an investment letter in the form attached hereto as
Exhibit B.
6. RESTRICTIONS ON TRANSFER. Certificates representing any of the Common
Stock acquired pursuant to the provisions of this Warrant shall have endorsed
thereon legends substantially in the following form, as appropriate.
(a) Unless such shares of Common Stock are received in a transaction
registered under the Securities Act and qualified (if necessary) under
applicable state securities laws:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH
SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM
THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SAID ACT."
(b) Any legend required to be placed thereon by any applicable state
securities laws.
7. COMPLIANCE WITH ACT. The Warrantholder, by acceptance hereof, agrees
that this Warrant and the Common Stock to be issued upon the exercise or
conversion hereof are being acquired solely for its own account and not as a
nominee for any other party and not with a view toward the resale or
distribution thereof and that it will not offer, sell or otherwise dispose of
this Warrant or any of the Common Stock to be issued upon the exercise or
conversion hereof except in accordance herewith and under circumstances which
will not result in a violation of the Securities Act or of applicable state
securities laws.
8. MISCELLANEOUS.
(a) The terms of this Warrant shall be binding upon and shall inure to
the benefit of any successors or assigns of the Company and of the holder or
holders hereof and of the Common Stock issued or issuable upon the exercise
hereof.
(b) No holder of this Warrant, as such, shall be entitled to vote or
receive dividends or be deemed to be a stockholder of the Company for any
purpose, nor shall anything contained in this Warrant be construed to confer
upon the holder of this Warrant, as such, any rights of a stockholder of the
Company or any right to vote, give or withhold consent to any corporate action,
receive notice of meetings, receive dividends or subscription right, or
otherwise.
(c) Receipt of this Warrant by the holder hereof shall constitute
acceptance of and agreement to the foregoing terms and conditions.
-3-
<PAGE> 4
(d) The Company will not, by amendment of its Amended and Restated
Certificate of Incorporation or through any other means, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant, but will at
all times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of this Warrant against impairment.
(e) Upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant and, in the case of
any such loss, theft or distribution, upon delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company, or, in the case of
any such mutilation, upon surrender and cancellation of such Warrant, the
Company at its expense will execute and deliver, in lieu thereof, a new Warrant
of like date and tenor.
(f) This Warrant shall be nontransferable, other than pursuant to a
distribution without consideration of the Warrant by the Warrantholder of any of
its partners or retired partners. (g) This Warrant or any provision hereof may
be amended, waived, discharged or terminated only by an instrument in writing
signed by the Company and the party against which enforcement of the amendment,
waiver, discharge or termination is sought.
(h) This Warrant shall be governed by the laws of the State of
California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
it's duly authorized officer.
Dated: February 9, 2000 SUPERCONDUCTOR TECHNOLOGIES INC.
By: M. Peter Thomas
--------------------------------
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<PAGE> 5
EXHIBIT A
NOTICE OF EXERCISE
TO: SUPERCONDUCTOR TECHNOLOGIES INC.
1. The undersigned hereby electors to purchase shares of the Common
Stock of Superconductor Technologies Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full, together with all applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as
specified below:
--------------------------------
(Name)
--------------------------------
--------------------------------
(Address)
3. The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares. In support thereof, the undersigned has executed the Investment
Representation Statement attached hereto as Exhibit B.
Signature of Warrantholder
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
Date:
-----------------------------
-5-
<PAGE> 6
EXHIBIT B
SUPERCONDUCTOR TECHNOLOGIES
WARRANT EXERCISES
INVESTMENT REPRESENTATION STATEMENT
Purchaser: ______________________________
Company: ______________________________
Security: ______________________________
Number of Shares: ______________________________
Date: ______________________________
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am an accredited investor within the meaning of Rule 501 under the
Securities Act of 1933, as amended (the "Securities Act") and have such
knowledge and experience in financial and business matters that I am capable of
evaluating the merits and risks of the purchase of the Securities.
(b) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. In making my decision to
acquire the Securities, I am not relying on representations of any officer,
director, stockholder or agent of the Company. I am purchasing these Securities
for my own account for investment purposes only and not with a view to, or for
the resale in connection with, any "distribution" thereof for purposes of the
Securities Act.
(c) I further understand that the Securities must be held indefinitely
unless registered under the Securities Act or unless an exemption from
registration is otherwise available. In addition, i understand that the
certificate evidencing the securities will be imprinted with a legend which
prohibits the transfer of Securities unless they are registered or such
registration is not required in the opinion of counsel for the purchaser
satisfactory to the Company or unless the Company receives a no-action letter
from the Securities and Exchange Commission.
(d) I am familiar with the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
restricted securities acquired, directly or indirectly, from the issuer thereof
(or from an affiliate of such issuer), in a non-public offering subject to the
satisfaction of certain conditions, including, among other things: (1) the
resale occurring not less than one year after the later of the date the
securities were sold by the
-6-
<PAGE> 7
Company or the date they were sold by an affiliate of the Company, within the
meaning of Rule 144; and, in the case of an affiliate, or of a non-affiliate
who has held the securities less than two years, (2) the availability of certain
public information about the Company, (3) the sale being made through a broker
in an unsolicited "broker's transaction" or in transactions directly with a
market maker (as said term is defined under the Securities Exchange Act of
1934), and (4) the amount of securities being sold during any three month
period not exceeding the specified limitations stated therein, if applicable.
(e) I further understand that at the time I wish to sell the Securities
there may be no public market upon which to make such a sale, and that, even if
such a public market exists, the Company may not be satisfying the current
public information requirements of Rule 144, and that, in such event, I would
be precluded from selling the Securities under Rule 144 even if the one-year
minimum holding period had been satisfied.
Signature of Purchaser:
Wilmington Securities, Inc.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
Date:
------------------------------
-7-
<PAGE> 1
EXHIBIT 10.28
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
SUPERCONDUCTOR TECHNOLOGIES INC.
DEMAND NOTE
$500,000 December 1, 1999
FOR VALUE RECEIVED, SUPERCONDUCTOR TECHNOLOGIES INC., A Delaware
corporation ("Company") promises to pay UPON DEMAND to WILMINGTON SECURITIES,
INC., a Delaware corporation ("Holder"), or its assigns, the principal sum of
Five Hundred Thousand Dollars ($500,000), or such lesser amount as shall equal
the outstanding principal amount hereof, together with interest from the date of
this Note on the unpaid principal balance at a rate equal to eight percent
(8.0%) per annum, computed on the basis of the actual number of days elapsed and
a year of 360 days. Company may repay this Note, in whole or in part, at any
time without prior notice to Holder.
If action is instituted to collect this Note, Company promises to pay
all costs and expenses, including without limitation, reasonable attorneys' fees
and costs, incurred by Holder in connection with such action. Company hereby
waives notice of default, presentment or demand for payment, protest or notice
of nonpayment or dishonor and all other notices or demands relative to this
instrument.
As partial consideration for the loan evidenced by this Note, the
Company agrees to issue to Holder a five-year warrant (the "Warrant") in the
form attached as Exhibit A providing Holder the right to purchase 20,000 shares
of Company Common Stock at a price of $3.00 per share.
The company hereby represents and warrants to the Holder that as of the
date of this Note the Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. The Company has
all requisite legal and corporate power and authority to execute and deliver
this Note and the Warrant and to carry out and perform its obligations under the
terms of this Note and the Warrant. The shares of Common Stock issuable upon
exercise of the Warrant have been validly reserved, and when issued in
compliance with the terms of the Warrant will be validly issued, fully paid and
nonassessable.
-1-
<PAGE> 2
By acceptance of this Note, the Holder hereby represents and warrants to
the Company as follows: (i) Holder is acquiring this Note and the Warrant for
investment for its own account, not as a nominee or agent, and not with the view
to, or for resale in connection with, any distribution thereof. Holder
understands that the Warrant and the Common Stock, if any, issuable upon
exercise thereof have not been, and will not be, registered under the Securities
Act of 1933, as amended (the "Securities Act") by reason of a specific exemption
form the registration provisions of the Securities Act, the availability of
which depends upon, among other things, the bona fide nature of the investment
intent and the accuracy of the Holder's representations as expressed herein.
Holder is an "accredited investor" within the meaning of Regulation D, Rule
501(a), promulgated by the Securities and Exchange Commission; (ii) Holder
acknowledges that the Warrant and the Common Stock, if any, issuable upon
exercise thereof, must be held indefinitely unless subsequently registered under
the Securities Act or unless an exemption from such registration is available.
Holder is aware of the provisions of Rule 144 promulgated under the Securities
Act which permit limited resale of shares purchased in a private placement
subject to the satisfaction of certain conditions, including, among other
things, the availability of certain current public information about the
Company, the resale occurring not less than one year after a party has purchased
and paid for the security to be sold, the sale being effected through a
"broker's transaction" or in transactions directly with a "market maker" and the
number of shares being sold during any three-month period not exceeding
specified limitations; (ii) Holder understands that no public market now exists
for any of the Warrants and that the Company has made no assurances that a
public market will ever exist for the Warrants; and (iv) Holder has had an
opportunity to discuss the Company's business, management and financial affairs
with its management. Holder has also had an opportunity to ask questions of
officers of the Company, which questions were answered to its satisfaction.
Holder understands that such discussions, as well as any written information
issued by the Company, were intended to describe certain aspects of the
Company's business and prospects but were not a thorough or exhaustive
description.
This Note and all actions arising out of or in connection with this Note
shall be governed by and construed in accordance with the laws of the State of
California, without regard to the conflicts of law provisions of the State of
California or of any other state.
IN WITNESS WHEREOF, Company has caused this Note to be issued as of the
date first written above.
SUPERCONDUCTOR TECHNOLOGIES INC.
A Delaware corporation
By: /s/ M. Peter Thomas
------------------------------
Name: M. Peter Thomas
Title: Chief Executive Officer
-2-
<PAGE> 1
EXHIBIT 10.29
TERM NOTE
$1,500,000.00 Pittsburgh, Pennsylvania
January 12, 2000
FOR VALUE RECEIVED, the undersigned SUPERCONDUCTOR TECHNOLOGIES INC., a
Delaware corporation (herein called the "Borrower"), hereby promises to pay to
the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank") the principal sum of
One Million Five Hundred Thousand U.S. Dollars (U.S. $1,500,000.00), which shall
be payable to the Bank upon the earlier of (i) June 12, 2000 or (ii) the closing
of an equity financing in which Borrower issues shares of common stock and
receives an aggregate of at least $3,000,000.00 in net proceeds from such
issuance.
The Borrower shall pay interest on the unpaid principal balance hereof
from time to time outstanding from the date hereof at the rate or rates per
annum specified by the Borrower pursuant to Section 2A.5 of, or as otherwise
provided in, as amended by the First Amendment dated December 1, 1999 and the
Second Amendment of even date herewith (the "Credit Agreement").
Upon the occurrence and during the continuation of an Event of Default,
the Borrower shall pay interest on the unpaid principal balance hereof at a rate
per annum (based on a year of 360 days and actual days elapsed) equal to three
hundred basis points (3% per annum) above the rate of interest otherwise
applicable hereto. Such interest rate will accrue before and after any judgment
has been entered
Subject to the provisions of the Credit Agreement, interest on this Term
Note will be payable on the first Business Day of each calendar month after the
date hereof and one the maturity date, and thereafter on demand.
If any payment or action to be made or taken hereunder shall be stated
to be or become due on a day which is not a Business Day, such payment or action
shall be made or taken on the next following Business Day and such extension of
time shall be included in computing interest or fees, if any, in connection with
such payment.
Subject to the provisions of the Credit Agreement, payments of principal
and interest shall be made without setoff, counterclaim or other deduction of
any nature at the office of the Bank located at 249 Fifth Avenue, Pittsburgh,
Pennsylvania 15222-2707, in lawful money of the United States of America in
immediately available funds.
This Note is the Term Note referred to in, and is entitled to the
benefits of, the Credit Agreement and the other Loan Documents, including the
representations, warranties, covenants, conditions, security interests and Liens
contained or granted therein. The Credit Agreement among other things contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events and also for prepayments, in certain circumstances, ion account of
principal hereof prior to maturity upon the terms and conditions therein
specified.
All capitalized terms used herein shall, unless otherwise defined
herein, have the same meanings given to such terms in the Credit Agreement.
-1-
<PAGE> 2
Except as otherwise provided in the Credit Agreement, the Borrower
waives presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note and the Credit Agreement.
This Note shall bind the Borrower and its successors and assigns, and
the benefits hereof shall inure to the benefit of the Bank and its successors
and assigns. All references herein to the "Borrower" and the "Bank" shall be
deemed to apply to the Borrower and the Bank, respectively, and their respective
successors and assigns.
IN WITNESS WHEREOF, the undersigned has executed this Note by its duly
authorized officers with the intention that it constitute a sealed instrument.
SUPERCONDUCTOR TECHNOLOGIES INC.
By: /s/ M. Peter Thomas
-----------------------------
Title: President and CEO
-----------------------------
-2-
<PAGE> 1
EXHIBIT 10.30
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of January 12, 2000 by and between SUPERCONDUCTOR TECHNOLOGIES INC., a
Delaware corporation ("Borrower"), and PNC BANK, NATIONAL ASSOCIATION, a
national banking association ("Bank"), with reference to the following facts:
A. Borrower and Bank are parties to that certain Credit Agreement dated
as of June 18, 1999 by and between the Borrower and the Bank as amended by that
certain First Amendment to Credit Agreement dated as of December 1, 1999 (as
amended, the "Credit Agreement"). The Credit Agreement and all related and
supporting documents collectively are referred to in this amendment as the "Loan
Documents."
B. Borrower has requested an additional credit facility from Bank, and
Bank has agreed, upon the terms and conditions set forth herein, to provide such
credit facility in the amount of One Million Five Hundred Thousand Dollars
($1,500,000.00) (`Term Loan').
NOW, THEREFORE, in consideration of the promises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
1. Defined Terms: Capitalized terms not otherwise defined herein shall
have the same meanings as set forth in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is hereby
amended as follows:
(a) The following definitions shall be added to Section 1.1
Second Amendment means the Second Amendment to Credit Agreement
dated as of January 12, 2000.
Term Closing date shall mean January 12, 2000 or the date upon
which all conditions specified in Section 3 hereof are satisfied or waived.
Term Loan shall have the meaning set forth in Section 2A.1.
Term Loan fee shall have the meaning set forth in Section 2A.2.
Term Maturity Date shall have the meaning set forth in Section
2A.3.
Term Note shall mean the Term Note in the form of Exhibit 1
hereto evidencing the Term Loan, together with all amendments,
extensions, renewals, replacements, refinancings, or refundings
thereof in whole or in part.
(b) The definition of Loan Documents is amended to add the following
"the Term Note".
(c) The definition of Note is amended to include the Term Note.
(d) The following section is added as Section 2A.
2A Term Loan
1
<PAGE> 2
2A.1 Term Loan Commitment. Subject to the terms and conditions
hereof, and relying upon representations and warranties herein set forth, Bank
agrees to make a term loan (the "term Loan") to the Borrower upon satisfaction
or waiver of the conditions set forth in the Second Amendment ("Term Closing
Date") in the amount of One Million Five Hundred Thousand Dollars
($1,500,000.00)
2A.2 Term Loan Facility Fee. The Borrower agrees to pay Bank, on
the Term Closing Date, as consideration for the Term Loan, a non-refundable
facility fee of $7,500.00 ("Term Loan Fee")
2A.3 Term Loan Note. The Obligation of Borrower to repay the
unpaid principal amount of the Term Loan together with interest thereon, shall
be evidenced by a Term Note dated the Term Closing Date in the form of Exhibit I
hereto. The outstanding principal on the Term Loan shall be due and payable upon
the earlier of (i) June 12, 2000 or (ii) the closing of an equity financing in
which Borrower issues shares of stock and receives an aggregate of at least
$3,000,000.00 in net proceeds from such issuance ("Term Maturity Date").
2A.4 Mandatory Prepayments. Upon the occurrence of any net
proceeds from equity contributions including but not limited to funds raised
through venture capital rounds, strategic investors or private placements of
equity, Borrower shall immediately make a prepayment on the Term Loan equal to
the amount of such net proceeds.
2A.5 Interest Rate/Payment - Term Loan. Except as set forth in
Section 3.2.1, the Term Loan shall bear interest at a fluctuating rate per annum
(computed on the basis of a year of 360 days) equal to (i) the Base Rate plus 4%
from the Term Loan Closing Date until May 12, 2000 and (ii) thereafter at a rate
equal to the Base Rate plus 5%.
2A.6 Use of Proceeds. The proceeds of the Term Loan shall be used
for general working capital purposes provided, however, that $500,000 of the
Term Loan shall be immediately used to pay down an overadvance currently
existing on the Revolving Credit Facility.
(e) Sections 3.2.1 and 3.2.2 are amended to add the words "and Term
Loan" after each reference to Revolving Credit Loan(s).
(f) Section 4.2 is amended to add "and Term Loan" after each
reference to Revolving Credit Loan(s) and to add "and Term Maturity Date" after
the reference to "Expiration Date" in the second line thereof.
(g) Section 4.3 is amended to add "and Term Loan" after each
reference to Revolving Credit Loan(s).
(h) Section 7.1 is amended to add "and Term Loan" after each
reference to Revolving Credit Loan(s).
(i) Section 8.1.1 is amended to add "or Term Loan" after each
reference to Revolving Credit Loan(s).
(j) Seciton 8.2 is amended to add "or Term Loan" after each reference
to Revolving Credit Loan(s).
(k) Section 8.6 is amended to add "or Term Loan" after Revolving
Credit Loan and to further add "and Term Maturity Date" after Expiration Date.
2
<PAGE> 3
3. Conditions to Effectiveness of Amendment.
This Amendment shall become effective, only upon:
(i) receipt by the Bank of the following (each of which shall be in
form and substance satisfactory to the Bank and its counsel):
(a) counterparts of this Amendment duly executed by Borrower and
the Bank;
(b) the Term Note
(c) the Warrant in the form of Exhibit 2A to the Second Amendment
duly executed by Borrower; and
(d) copies of resolutions of the Board of Directors or other
authorizing documents of the Borrower, authorizing the execution and delivery of
this Amendment;
(e) an Opinion of Borrower's counsel Wilson Sonsini Goodrich and
Rosati dated the date hereof and in form and substance satisfactory to Bank and
its counsel; and
(ii) completion of such other matters and delivery of such other
agreements, documents and certificates as Bank may reasonably request.
4. Collateral. The Intellectual Property Security Agreement and Security
Agreement are hereby amended to the extent necessary to include the Term Loan as
an obligation secured by all collateral set forth in each agreement.
5. Opinion of Counsel. Borrower agrees to deliver to Bank on or Before
February 1, 2000, an opinion of Borrower's counsel, Wilson Sonsini Goodrich and
Rosati in form and substance satisfactory to Bank and its counsel. The failure
to deliver said opinion to Bank would constitute an Event of Default.
6. Representations and Warranties. In order to induce the Bank to enter
into this Amendment, the Borrower represents and warrants to the Bank that the
following statements are true, correct and complete as of the effective date of
this Amendment:
(a) Corporate Power and Authority. The Borrower has all requisite
corporate power and authority to enter into this Amendment and the Warrant and
to carry out the transactions contemplated by, and perform its obligations
under, the Credit Agreement as amended by his Amendment (the "Amended
Agreement") and the Warrant. The Articles of Incorporation and Bylaws of the
Borrower have not been amended since the copies previously delivered to the
Bank.
(b) Authorization of Agreements. The execution and delivery of this
Amendment and the performance by the Borrower of the Amended Agreement have been
duly authorized by all necessary corporate action on the part of the Borrower.
(c) No Conflict. The execution and delivery by the Borrower of this
Amendment do not and will not contravene (i) any law or any governmental rule or
regulation applicable to the Borrower, (ii) the Articles of Incorporation or
Bylaws of the Borrower, (iii) any order, judgment or decree of any court or
other agency of government binding on the Borrower, or (iv) any material
agreement or instrument binding on the Borrower.
3
<PAGE> 4
(d) Governmental Consents. The execution and delivery by the Borrower
of this Amendment and the performance by the Borrower of the Amended Agreement
do not and will not require any registration with, consent or approval of, or
notice to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.
(e) Binding Obligation. This Amendment and the Amended Agreement have
been duly executed and delivered by the Borrower and are the binding obligations
of the Borrower, enforceable against the Borrower in accordance with their
respective terms, except in each case as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar
laws and equitable principles relating to or affecting creditors' rights.
(f) Incorporation of Representations and Warranties From Credit
Agreement. The representations and warranties contained in Section 5 of the
Credit Agreement are correct on and as of the effective date of this Amendment
as though made on and as of such date (except to the extent such representations
and warranties expressly refer to an earlier date, in which case they were true
and correct as of such earlier date). (g) Absence of Default. After giving
effect to this Amendment, no event has occurred and is continuing or will result
from the consummation of the transactions contemplated by this Amendment that
would constitute an Event of Default or a Potential Default.
7. Miscellaneous.
(a) Reference to and Effect on the Credit Agreement and the Other
Loan Documents.
(i) On and after the date hereof, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like
import referring to the Credit Agreement, and each reference in the other Loan
Documents to the "Credit Agreement," "thereunder", "thereof" or words of like
import referring to the Credit Agreement, shall mean and be a reference to the
Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full force and effect and
are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of the Bank
under the Credit Agreement or any of the other loan Documents.
(b) Fees and Expenses. All costs and expenses of the Bank, including,
but not limited to, reasonable attorneys' fees, incurred by the Bank in the
preparation and negotiation of this Amendment constitute costs and expenses in
connection with the amendment and restructuring of the Loan Documents, and as
such are payable by the borrower in accordance with Section 8.5 of the Credit
Agreement.
(c) Headings. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
(d) Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
PENNSYLVANIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
(e) Counterparts. The Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be
4
<PAGE> 5
deemed an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document.
[REMAINDER INTENTIONALLY LEFT BLANK]
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
SUPERCONDUCTOR TECHNOLOGIES INC.
By: /s/ M. Peter Thomas
-------------------------------
Title: President and CEO
--------------------------------
PNC BANK, NATIONAL ASSOCIATION
By:
--------------------------------
Title:
--------------------------------
6
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-50137 and 333-90393) of Superconductor
Technologies Inc. of our report dated February 22, 2000, except for Note 13,
which is as of March 29, 2000 relating to the financial statements and financial
statement schedules, which appears in this Form 10-K.
/s/ Pricewaterhousecoopers LLP
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet at December 31, 1999 and the statements of operations for the year then
ended and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
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<PAGE> 1
EXHIBIT 99
Disclosure Regarding Forward-Looking Statements
This Form 10-K includes "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. All statements other than statements of
historical fact included in this Form 10-K, including, without limitation, the
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" regarding: the Company's ability to
design, develop, manufacture and market products, including, without limitation,
its SuperFilter systems and cryogenic coolers; the ability of the Company's
products to achieve anticipated benefits; the Company's ability to achieve
product commercialization; the anticipated growth of its target markets; its
ability to achieve profitability; and other matters regarding the Company's
expectations, beliefs, intentions or strategies regarding the future are
forward-looking statements. All forward-looking statements included herein are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") are set forth in this exhibit as well as elsewhere in this Form
10-K.
WE NEED TO RAISE MONEY IN ORDER TO CONTINUE OPERATING.
We increased our sales and marketing departments and developed
manufacturing operations to support anticipated increased sales of our
SuperFilter(R) products. We need additional debt or equity financing to fully
implement our business plan. Our ability to obtain funding to satisfy our
ongoing capital requirements is not guaranteed, and if we fail to do so we may
have insufficient cash to fund future operations.
OUR FUTURE SUCCESS DEPENDS, IN LARGE PART, ON OUR ABILITY TO SUCCESSFULLY
DEVELOP AND INTEGRATE OUR 2.5G AND 3G WIRELESS PRODUCTS INTO THE WIRELESS
COMMUNICATIONS MARKET.
We have currently devoted a significant portion of our resources to the
development and perfection of our 2.5G and 3G wireless systems. We believe that
these systems will allow service providers and original equipment manufacturers
to derive even greater benefits from superconductor filter technology than they
do from our present generation networks. We expect that the future demands of
the wireless communications market will focus on the need for greater uplink
performance, better quality links and more handset power, without dramatically
decreasing battery life. We believe that our 2.5G and 3G wireless systems will
meet many of these market demands by offering the lowest power consumption (less
than 100 watts) currently available, a new space saving profile and the most
cost effective HTS platform in the 3G environment. However, we may not be able
to demonstrate the advantages that our systems bring to wireless communication
providers and original equipment manufacturers. Additionally, even if we do
demonstrate the benefits of our systems, they may not be accepted and integrated
into the wireless communications market efficiently or economically. If we are
unable to consistently achieve and demonstrate the benefits of our system, or if
our systems do not gain market acceptance, our financial condition could be
materially and adversely affected.
OUR MANUFACTURING EXPERIENCE IS LIMITED.
Manufacturing commercial quantities of superconducting or cryogenic
products for large-scale deployment at acceptable costs and on a timely basis
entails significant technological and engineering challenges. Previously, we
have sold products only in limited quantities, and primarily for limited
deployment. During 1999, we significantly increased our manufacturing capacity
in order to meet the increased demand for our products in wireless base station
systems, as well as to meet our expected future manufacturing requirements. If
we are unable to plan for and overcome the technological and engineering
challenges associated with increased manufacturing, we may not be able to
manufacture our products economically. To the extent we are not able to generate
a positive gross profit from the sale of our products, our financial condition
could be materially and adversely affected.
WE ARE DEPENDENT ON REVENUE FROM GOVERNMENT CONTRACTS.
A significant portion of our past net revenues have been from research
and development contract sales directly to the government or to resellers to the
government. Recently we have devoted substantial resources to penetrating the
domestic and global commercial markets. However, in the near future, we expect
to continue to be dependent on government funding
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for our research and development projects. Our current government contracts may
be reduced or terminated at any time, and our collection of future receivables
under any of our existing government contracts which have not yet been performed
is not guaranteed. Until we are able to introduce our products successfully into
the commercial markets, a significant loss of government funding could material
and adversely affect our financial condition.
GOVERNMENT CONTRACTS MAY BE TERMINATED OR SUSPENDED FOR NONCOMPLIANCE OR OTHER
EVENTS BEYOND OUR CONTROL.
The government may cancel virtually all of our government contracts and
are terminable at the option of the government. While we have complied with
applicable government rules and regulations and contract provisions in the past,
we could fail to comply in the future. If we fail to comply with government
procurement regulations or contract provisions, it could result in termination
of our government contracts, the imposition of substantial monetary fines or
damages, our suspension or debarment from doing business with the government and
in our possible civil or criminal liability. During the term of any suspension
or debarment by a government agency, we could be prohibited from competing for
or being awarded any contract by any government agency. The termination of our
significant government contracts, the imposition of fines, damages, suspension
or debarment, or the adoption of new or modified procurement regulations or
practices could adversely affect us.
Inventions conceived or actually reduced to practice under a government
contract generally result in the government obtaining a royalty-free, paid-up,
non-exclusive license to practice the invention. Similarly, technologies
developed in whole or in part at government expense generally result in the
government obtaining unlimited rights to use, duplicate or disclose technical
data produced under the contract. These licenses and rights may result in a loss
of potential revenues or the disclosure of our proprietary information, either
of which could materially and adversely affect our financial condition.
WE HAVE INCURRED SIGNIFICANT LOSSES AND EXPECT TO CONTINUE EXPERIENCING LOSSES
DUE TO SIGNIFICANT MARKETING, MANUFACTURING AND RESEARCH AND DEVELOPMENT COSTS.
We have incurred net losses every year and, as of December 31, 1999, had
an accumulated deficit of $47,090,000. We expect to continue to incur
significant operating losses over the next several quarters as we continue to
devote significant financial resources to commercializing our products,
expanding our operations and product development activities.
If we fail to successfully integrate our products into the market, our
financial condition could be materially and adversely affected.
WE ARE HIGHLY DEPENDENT ON OUR TECHNICAL WORK FORCE AND SENIOR MANAGEMENT.
Due to the specialized technical nature of our business, we are highly
dependent upon our attracting and retaining qualified technical personnel and
senior management, primarily in the areas of wireless communications and
cryogenics. The loss of the services of one or more members of the senior
management or technical teams could damage our ability to achieve our product
development and commercialization objectives. There is also intense competition
for qualified personnel in the areas of our activities and our inability to
attract and retain qualified personnel necessary for the development of its
business could materially and adversely affect our financial condition.
WE HAVE LIMITED MARKETING AND SALES CAPABILITIES.
To successfully market our products, we must continue to develop
appropriate marketing, sales, technical, customer service and distribution
capabilities, or enter into agreements with third parties to provide these
services. Our failure to develop these capabilities or obtain third-party
agreements could materially and adversely affect our financial condition.
OUR REVENUES ARE DEPENDENT UPON PATENTS AND PROPRIETARY RIGHTS WHICH MAY NOT BE
RESPECTED OR ENFORCEABLE.
We rely on a combination of patent, trademark, trade secret and
copyright law and internal procedures and nondisclosure agreements to protect
our intellectual property. These may be invalidated, circumvented or challenged.
In addition, the laws of some foreign countries in which our products may be
produced or sold do not protect our intellectual property rights to the same
extent as the laws of the United States. Our failure to protect our proprietary
information could adversely affect us.
WE ARE DEPENDENT ON SPECIFIC PATENTS AND LICENSES TO TECHNOLOGIES AND WE WILL
NEED ADDITIONAL TECHNOLOGIES THAT WE MAY NOT BE ABLE TO ACCESS.
We have an exclusive, worldwide license, in all fields of use, to formulations
covered by patents held by the University of Arkansas covering thallium barium
calcium cooper oxide, or TBCCO, the material upon which we primarily rely for
our high temperature superconductor products and product development. These
patents may 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. Under the terms of our exclusive license,
we agreed to assume litigation expenses for infringement actions, subject to a
right of setoff against future royalty obligations. If we are required to incur
significant expenses under this agreement it could materially and adversely
affect our financial condition. In addition, we granted each of DuPont and
Superconducting Core Technologies, Inc. and its affiliates, a non-exclusive
worldwide sublicense under our
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license with the University of Arkansas to develop and market TBCCO materials
and superconducting technologies. We cannot insure that the use of these
sublicenses, whether proper or improper, will not materially and adversely
affect our financial condition.
RIGHTS WE HAVE TO PATENTS AND PENDING PATENT APPLICATIONS MAY BE CHALLENGED.
We own or have rights under a number of patents and pending patent
applications related to the processing of TBCCO and YBCO. The patent
applications we filed may not result in patents being issued, and any patents
issued may not afford meaningful protection against competitors with similar
technology, and may be challenged by third parties. Because U.S. patent
applications are maintained in secret until patents are issued, and because
publications of discoveries in the scientific or patent literature tend to lag
behind actual discoveries by several months, we may not be the first creator of
inventions covered by issued patents or pending patent applications or the first
to file patent applications for such inventions. Moreover, other parties may
independently develop similar technologies, duplicate our technologies or, if
patents are issued to us or rights licensed by us, design around the patented
aspects of any technologies we developed or licensed. We have been issued
additional patents for specific compounds that we use. However, we may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine the priority of inventions, which could result in
substantial costs and expenses to us. Litigation may also be necessary to
enforce any patents held by or issued to us or to determine the scope and
validity of others' proprietary rights. The costs incurred by us in connection
with the prosecution or defense of any of our patents or patent applications
could cost us a significant amount. If we incur such costs it may materially and
adversely affect or financial condition.
THE RAPID RATE OF INVENTIONS AND DISCOVERIES IN THE SUPERCONDUCTIVITY FIELD HAS
RAISED MANY UNRESOLVED PATENT ISSUES THAT MAY NEGATIVELY AFFECT OUR BUSINESS.
The claims in granted patents often overlap and there are disputes
involving rights to inventions claimed in pending patent applications. As a
result, the patent situation in the high temperature superconductor field is
unusually complex. It is likely that there will be patents held by third parties
relating to our products or technology. We may need to acquire licenses to
design around or successfully contest the validity or enforceability of those
patents. It is also possible that because of the number and scope of patents
pending or issued, we may be required to obtain multiple licenses in order to
use a single material. If we are required to obtain multiple licenses, our costs
will increase. Furthermore, licenses may not be available on commercially
reasonable terms or at all. The likelihood of successfully contesting the
validity or enforceability of those patents is also uncertain; and, in any
event, we could incur substantial costs in defending the validity or scope of
our patents or challenging the patents of others.
THE RAPID TECHNOLOGICAL CHANGES OF OUR INDUSTRY MAY ADVERSELY AFFECT US IF WE DO
NOT KEEP PACE WITH ADVANCING TECHNOLOGY.
The field of superconductivity is characterized by rapidly advancing
technology. Our success depends upon our ability to keep pace with advancing
superconductor technology, including superconducting materials and processes and
industry standards. We have focused our development efforts on TBCCO and, to a
lesser extent, YBCO. TBCCO or YBCO may not ultimately be commercially
competitive against other currently known materials or materials that may be
discovered in the future. We intend to continue to develop and integrate
advances in wireless filter and cryogenic cooling technologies in the
manufacture of commercial quantities of products. However, our development
efforts may be rendered obsolete by research efforts and technological advances
made by others that prove more advantageous for the commercialization of
high-temperature superconductor products.
WE HAVE FOCUSED OUR EFFORTS ON ONE MATERIAL FOR OUR PRODUCTS, AND RELY PRIMARILY
ON SPECIFIC VENDORS FOR COMPONENTS OF THAT MATERIAL.
To date, we have principally focused our development efforts on TBCCO.
Although TBCCO has one of the highest critical temperatures of any
high-temperature superconductor material verified by the scientific community to
date, other materials are currently known to have advantages over TBCCO for some
applications. TBCCO may not ultimately prove commercially competitive against
YBCO or against other currently known materials. Furthermore, other materials
may be discovered with higher critical temperatures or other superior qualities,
and we may not be able to obtain the rights to those superior materials.
We currently purchase substrates for growth of high-temperature
superconductor thin-films from two primary suppliers because of the quality of
the substrate provided by them. A thin film is a thin layer of high-temperature
superconductor material. There are additional components that we source from a
single vendor due to the present volume. While we are aware of alternative
sources for our substrates, the establishment of relationships with additional
or replacement suppliers could be time consuming and result in a supply
interruption that harms our ability to manufacture our products in commercial
quantities. If this occurs, it could materially and adversely affect our
financial condition.
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BECAUSE OUR OPERATIONS ARE HOUSED IN A SINGLE U.S. FACILITY WE MAY BE SUBJECT TO
BUSINESS INTERRUPTION.
Our primary operations, including engineering, manufacturing, customer
service, distribution and general administration, are housed in a single
facility in Santa Barbara, California. Any material disruption in our
operations, whether due to fire, natural disaster or otherwise, could materially
and adversely affect our financial condition.
WE USE HAZARDOUS MATERIALS IN OUR OPERATIONS WHICH SUBJECTS US TO POTENTIAL
LIABILITY UNDER VARIOUS LAWS AND REGULATIONS.
We use hazardous materials in our research, development and
manufacturing operations. As a result, we are subject to stringent federal,
state and local regulations governing the storage, use and disposal of those
materials. Current or future laws and regulations may require us to make
substantial expenditures for preventive or remedial action, reduction of
chemical exposure, or waste treatment or disposal. We can be adversely affected
by the interpretation and enforcement of current or future environmental laws
and regulations. In addition, although we believe that our safety procedures for
handling and disposing of hazardous materials comply with state and federal
standards, there is the risk of accidental contamination or injury from these
materials. To date, we have not incurred substantial expenditures for preventive
action with respect to hazardous materials or for remedial action with respect
to any hazardous materials accident. However, if an accident occurs in the
future, we could be held liable for any resulting damages. Any liability that
might arise due to an accident or the costs related to defending against any
resulting lawsuit could exceed our resources or otherwise materially and
adversely affect our financial condition.
THE MARKET VALUE OF OUR SHARES OF COMMON STOCK WILL LIKELY BE DILUTED DUE TO THE
EXERCISE OF BELOW MARKET WARRANTS AND STOCK OPTIONS.
As of December 31, 1999, we had outstanding warrants and options to
purchase 3,920,039 shares of our common stock (2,227,751 of which were fully
exercisable) at prices that may be below the market value of our common stock on
the date of exercise. On that date, we also had outstanding shares of preferred
stock convertible into 5,633,900 shares of our common stock. The exercise and
conversion prices of the warrants, options and preferred stock are subject to
adjustment for future dilutive stock issuances and for recapitalizations, stock
combinations, stock dividends, stock splits and the like. We anticipate issuing
additional securities in the foreseeable future to satisfy our capital
requirements. In addition, to obtain benefits without spending cash, we have in
the past and may in the future offer stock to parties in connection with debt,
leasing, supply agreements or similar arrangements. In those cases, we 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 common stock that may dilute the interests of the current holders of
common stock.
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK.
We have never paid a cash dividend on our common stock and do not expect
to do so in the foreseeable future. Certain of our equipment financing
agreements limit our ability to pay cash dividends on the common stock.
THE MARKET PRICE OF OUR STOCK IS VOLATILE AND FLUCTUATES SIGNIFICANTLY
The market price of our common stock, like that of many other
high-technology companies, has fluctuated significantly and is likely to
continue to fluctuate in the future. Announcements by us or others regarding the
receipt of customer orders, quarterly variations in operating results,
additional equity financings, changes in recommendations of securities analysts,
results of customer field trials, scientific discoveries, technological
innovations, litigation, product developments, patent or proprietary rights,
government regulation and general market conditions may impact the market price
of our common stock. In addition, the securities markets have experienced
volatility that is often unrelated to the operating performance of particular
companies. In the past, following a period of volatility in the market price of
a company's securities, securities class action lawsuits have been instituted
against some companies. If any claims are brought, the costs of defending
against those claims could materially and adversely affect our financial
condition.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY
DELAY, DETER OR PREVENT A MERGER OR OTHER BUSINESS COMBINATION.
Our certificate of incorporation and bylaws contain provisions that
could delay, deter or prevent a merger, tender offer or other business
combination or change in control that some or a majority of the stockholders
might consider to be in their best interests, including offers or attempted
takeovers that might otherwise result in our stockholders receiving a premium
over the market price of the common stock. Our certificate of incorporation and
bylaws, among other things,
- - restrict the ability of stockholders to call stockholders meetings by
allowing only stockholders holding shares in the aggregate entitled to
cast not less than 10% of the votes at a meeting to call a meeting;
- - eliminate the right to call stockholders meetings if our shares of
capital stock are (A) designated as qualified for trading on the Nasdaq
National Market and (B) we have at least 800 holders of shares of our
capital stock;
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preclude stockholders from raising new business for consideration at
stockholders meetings unless the proponent has provided us notice not
less than 90 days prior to the meeting; and limit business which may be
conducted at stockholders meetings to those matters properly specified
in notices to us.
Moreover, we have not opted out of Section 203 of the Delaware General
Corporation Law, which prohibits mergers, sales of material assets and some
self-dealing transactions between the corporation and a holder of 15% or more of
a corporation's outstanding voting stock for a period of three years following
the date the stockholder became a 15% holder, subject to specified
qualifications. This may prevent or delay a change in control.
5
