<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________.
Commission File Number 0-21074
SUPERCONDUCTOR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0158076
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
460 WARD DRIVE,
SANTA BARBARA, CALIFORNIA 93111-2356
(Address of principal executive offices & zip code)
(805) 683-7646
(Registrant's telephone number including area code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 20, 2000 there were 17,785,608 shares of the Registrant's
Common Stock outstanding.
<PAGE> 2
SUPERCONDUCTOR TECHNOLOGIES INC.
INDEX TO FORM 10-Q
Three and Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Statement of Operations.............................................. 3
Balance Sheet........................................................ 4
Statement of Cash Flows.............................................. 5
Notes to Financial Statements........................................ 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.. 12
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings........................................... 12
ITEM 2 - Sales of Unregistered Securities............................ 13
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits...................................................... 13
(b) Reports on Form 8-K........................................... 14
SIGNATURE ...................................................................... 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERCONDUCTOR TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
-----------------------
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Commercial product revenues $ 659,000 $ 1,561,000 $ 1,325,000 $ 4,166,000
Government contract revenues 1,381,000 1,040,000 3,674,000 3,308,000
Less non-cash charge for warrants
and other sales discounts (70,000) (316,000) (70,000) (1,294,000)
Sub license royalties -- -- 10,000 10,000
------------ ------------ ------------ ------------
Total net revenues 1,970,000 2,285,000 4,939,000 6,190,000
------------ ------------ ------------ ------------
Costs and expenses:
Cost of commercial product revenues 1,953,000 7,862,000 4,655,000 12,007,000
Contract research and development 897,000 913,000 2,425,000 2,676,000
Other research and development 392,000 749,000 1,324,000 1,873,000
Selling, general and
administrative(1) 1,541,000 2,053,000 4,223,000 5,946,000
Non-cash warrant and
other non-recurring charges -- -- -- 609,000
------------ ------------ ------------ ------------
Total costs and expenses 4,783,000 11,577,000 12,627,000 23,111,000
------------ ------------ ------------ ------------
Loss from operations (2,813,000) (9,292,000) (7,688,000) (16,921,000)
Interest income 12,000 41,000 13,000 215,000
Interest expense (59,000) (67,000) (213,000) (453,000)
------------ ------------ ------------ ------------
Net loss (2,860,000) (9,318,000) (7,888,000) (17,159,000)
Less:
Redeemable preferred stock dividends (264,000) -- (634,000) --
Deemed distribution attributable
to the inducement to convert
preferred stock and beneficial
conversion feature (241,000) -- (366,000) (1,548,000)
------------ ------------ ------------ ------------
Net loss available to
common stockholders ($ 3,365,000) ($ 9,318,000) ($ 8,888,000) ($18,707,000)
============ ============ ============ ============
Basic and diluted loss
per common share ($ 0.43) ($ 0.53) ($ 1.15) ($ 1.20)
============ ============ ============ ============
Weighted average number of
common shares outstanding 7,750,749 17,692,751 7,741,425 15,525,933
============ ============ ============ ============
</TABLE>
(1) Excludes non-cash warrant and other non-recurring charges of $609,000
for the nine months ended September 30, 2000.
See accompanying notes to the financial statements
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SUPERCONDUCTOR TECHNOLOGIES INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 66,000 $ 39,031,000
Accounts receivable 1,590,000 1,418,000
Inventory 2,745,000 4,634,000
Prepaid expenses and other current assets 452,000 408,000
------------- -------------
Total current assets 4,853,000 45,491,000
Property and equipment, net of accumulated depreciation
of $8,054,000 and $8,950,000, respectively 4,097,000 4,691,000
Patents and licenses, net of accumulated amortization
of $1,521,000 and $1,701,000, respectively 1,927,000 1,881,000
Other assets 208,000 112,000
------------- -------------
Total assets $ 11,085,000 $ 52,175,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,953,000 $ --
Accounts payable 1,796,000 1,646,000
Accrued expenses 906,000 3,931,000
Current portion of debt and
capitalized lease obligations 211,000 209,000
------------- -------------
Total current liabilities 4,866,000 5,786,000
Long-term debt and capitalized lease obligations 750,000 597,000
Other -- 5,237,000
------------- -------------
Total liabilities 5,616,000 11,620,000
------------- -------------
Redeemable convertible preferred stock
Series A-2 shares, 64,584 and none,
issued and outstanding
Series A-3 shares, 12,500 and none,
issued and outstanding
Series B-1 shares, 50,000 and none,
issued and outstanding
Series C shares, 41,667 and none,
issued and outstanding
Series D shares, 106,000 and none,
issued and outstanding 17,125,000 --
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.001 par value,
2,000,000 shares authorized, Series E
convertible preferred stock, none and
37,500 shares authorized, issued and
outstanding; liquidation preference
of $37,507,000 -- --
Common stock, $.001 par value,
30,000,000 and 75,000,000 shares
authorized, 7,739,218 and 17,782,168
shares issued and outstanding 8,000 18,000
Capital in excess of par value 35,426,000 110,362,000
Deferred warrant charges -- (5,576,000)
Accumulated deficit (47,090,000) (64,249,000)
------------- -------------
Total stockholders' equity (deficit) (11,656,000) 40,555,000
------------- -------------
Total liabilities and stockholders' equity $11,085,000 $ 52,175,000
============= =============
</TABLE>
See accompanying notes to the financial statements
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SUPERCONDUCTOR TECHNOLOGIES INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
OCTOBER 2, SEPTEMBER 30,
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 7,888,000) ($17,159,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 1,000,000 1,327,000
Warrant charges 167,000 1,676,000
Accrued loss on sales contract -- 5,300,000
Changes in assets and liabilities:
Accounts receivable 410,000 172,000
Inventory (645,000) (1,889,000)
Prepaid expenses and other current assets (5,000) (66,000)
Patents and licenses (57,000) (134,000)
Other assets 4,000 87,000
Accounts payable and accrued expenses (660,000) 517,000
------------ ------------
Net cash used in operating activities (7,674,000) (10,169,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (990,000) (1,490,000)
Proceeds from sale/leaseback of property and equipment 900,000 --
------------ ------------
Net cash used for investing activities (90,000) (1,490,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) borrowings 587,000 (1,454,000)
Payments on long-term obligations (144,000) (156,000)
Proceeds from sale of preferred and common stock 8,075,000 52,234,000
------------ ------------
Net cash provided by financing activities 8,518,000 50,624,000
------------ ------------
Net increase in cash and cash equivalents 754,000 38,965,000
Cash and cash equivalents at beginning of period 310,000 66,000
------------ ------------
Cash and cash equivalents at end of period $ 1,064,000 $ 39,031,000
============ ============
Supplemental schedule of non-cash financing activities:
Common stock options issued for
past services in lieu of accounts payable $ 14,000 $ 72,000
Issuance of warrants in connection
with bank and lease agreements 112,000 131,000
Conversion of note payable for common stock -- 500,000
Redeemable preferred stock exchanged for common shares -- 17,125,000
Equipment acquired through issuance of capital lease 34,000 --
Redeemable preferred stock dividends accrued not paid 95,000 --
Equity issuance costs accrued not paid -- 2,431,000
</TABLE>
See accompanying notes to the financial statements
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SUPERCONDUCTOR TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The unaudited financial information furnished herein has been prepared
in accordance with generally accepted accounting principles and reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to fairly state the Company's financial
position, the results of its operations and its cash flows for the periods
presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements. This quarterly report
on Form 10-Q should be read in conjunction with the Company's Form 10-K for the
year ended December 31, 1999, including but not limited to Exhibit 99 entitled
"Disclosure Regarding Forward-Looking Statements." The results of operations for
the quarter and nine months ended September 30, 2000 are not necessarily
indicative of results for the entire fiscal year ending December 31, 2000.
The Company reports on a 13-week quarter period ending on the Saturday
nearest the calendar quarter end. The Company's fiscal year-end is December 31.
Certain reclassifications have been made to the 1999 financial
statements to conform to 2000 presentation.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first out) or
market and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
----------- ------------
<S> <C> <C>
Raw Materials $ 428,000 $1,660,000
Work-in-Progress 1,688,000 2,308,000
Finished Goods 629,000 666,000
---------- ----------
Total Inventory $2,745,000 $4,634,000
========== ==========
</TABLE>
3. SHORT TERM BORROWINGS
The Company had a revolving line of credit that matured on June 17,
2000. The Company is in negotiations with the bank to renew the line of credit.
4. STOCKHOLDERS' EQUITY
On September 29, 2000, the Company received a $37,500,000 private equity
investment from the sale of 37,500 shares of a newly created Series E
Convertible Preferred Stock and warrants to purchase up to an additional
1,044,568 shares of common stock. Proceeds net of issuance costs totaled
approximately $35,100,000.
The preferred stock is non-voting, has a stated value and a liquidation
preference of $1,000 per share, and is convertible into common stock at an
initial conversion price of $17.95 per common share until June 29, 2001. After
that date, the preferred stock is convertible at the lower of $17.95 per common
share or the market price of the common stock at the time of conversion, subject
to a floor. The preferred stock automatically converts into common stock on the
second anniversary of the closing. Based on the current conversion price of
$17.95 per common share, the preferred stock is convertible into 2,089,136
shares of common stock. The optional and automatic conversions of preferred
stock are limited to a maximum of 3,544,656 shares of common stock. The
preferred stock carries a 7% premium, payable upon conversion in cash or common
stock subject to certain limitations, at the Company's option.
In connection with the sale of the preferred stock, the Company also
issued two five-year warrants to purchase shares of common stock at an exercise
price of $21.54 per share. The first warrant is for the purchase of 313,370
shares and is exercisable immediately. The second warrant is for the purchase of
up to 731,198 additional shares of common stock if the preferred stock is held
for at least one year. The warrant is not exercisable until the first
anniversary date and size of the warrant will be reduced proportionately to
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<PAGE> 7
reflect any conversions of the preferred stock prior to the first anniversary
date. Both warrants contain "weighted average" antidilution provisions which
adjust the warrant exercise price and number of shares in the event the Company
sells equity securities at a discount to then prevailing market prices. The
amount of the adjustment depends on the size of the below-market transaction and
the amount of the discount to the market price. The warrant exercise price
cannot be reduced below a minimum of $18.91 as the result of adjustments under
this provision.
The Company is prohibited from paying any dividends on, or repurchasing
any shares of, common stock as long as any of the shares of the preferred stock
remain outstanding. The Company has filed with the Securities and Exchange
Commission a registration statement for resale of the shares of common stock
issuable upon conversion of the preferred stock and exercise of the warrants.
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 Redeemable Convertible
Preferred Stock converted their holdings into 2,458,491 shares of common stock.
As inducement to convert the preferred shares, the Company issued the preferred
stockholders warrants to purchase 250,000 shares of common stock at $3.58 per
share. The fair value of the warrants was estimated using the Black-Scholes
option-pricing model and was accounted for as a deemed distribution of
$1,548,000 to the preferred stockholders for determining the loss per common
share in the first quarter and full year of 2000. Also during the nine months
ended September 30, 2000, the holders of the outstanding Series B-1 and D
preferred shares elected to convert their holdings into 3,175,410 shares of
common stock.
During the nine months ended September 30, 2000, the Company (i) issued
options to purchase 849,845 shares of common stock under the Company's stock
option plans and (ii) cancelled options in connection with employment
terminations to purchase 100,860 shares of common stock. Options for 783,174
shares of common stock were exercised for $3,427,000 during the period. At
September 30, 2000, options to purchase 1,848,363 shares of common stock were
issued and outstanding under the Company's stock option plans. The outstanding
options expire by the end of September 2010. The exercise prices for these
options range from $2.313 to $49.375 per share, for an aggregate exercise price
of approximately $23.0 million. At September 30, 2000, there were 761,000 shares
of common stock available for granting future options.
Including the warrants issued in connection with the conversion of the
preferred stock described above, warrants to purchase 1,152,173 shares of common
stock were exercised resulting in net proceeds to the Company of $3,969,000.
At September 30, 2000, the following warrants to purchase shares of
common stock were outstanding:
<TABLE>
<CAPTION>
Number of Common Shares
--------------------------- Price Per Expiration
Total Exercisable Share Date
----------- ----------- --------- -----------------
<S> <C> <C> <C>
1,000,000 418,280 $ 4.00 August 27, 2004
62,500 62,500 3.00 June 18, 2004
33,333 33,333 3.00 December 1, 2004
27,692 27,692 3.25 January 12, 2005
1,044,568 313,370 21.54 September 29, 2005
</TABLE>
5. WARRANTS ISSUED TO U.S. CELLULAR
In August 1999, the Company entered into a warrant agreement with United
States Cellular Corporation ("U.S. Cellular") where the exercise of a warrant to
purchase up to 1,000,000 shares of common stock was conditioned upon future
product purchases by U.S. Cellular. Under the terms of the warrant,U.S. Cellular
vests in the right to purchase one share of common stock at $4 per share for
every $25 of SuperFilter systems purchased from the Company. The warrant is
immediately exercisable with respect to any vested shares and expires August 27,
2004. The estimated fair value, using the Black-Scholes option pricing model, of
the vested warrants is first recorded as a non-cash sales discount up to the
amount of the related sales with the excess value, if any, recorded in operating
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<PAGE> 8
costs. For product purchases through September 30, 2000 U.S. Cellular has vested
in the right to exercise the warrant and purchase a total of 106,280 shares of
common stock. In connection with such sales, the Company has recorded non-cash
charges of $316,000 and $1,719,000 for the three and nine months ended September
30, 2000.
In September 2000, the Company received a $7.8 million noncancelable
purchase order from U.S. Cellular for SuperFilter systems to be shipped over the
next nine quarters. In consideration for the purchase order, the Company amended
the August 1999 warrant agreement and vested 312,000 warrants to US Cellular.
The vested warrants are immediately exercisable, not subject to forfeiture, and
US Cellular has no other obligations to the Company. The cost of providing
products under the purchase order, plus the $5.6 million fair value of the
vested warrants, exceeds related revenue by $5.3 million. The resulting loss has
been reflected in the results of operations for the three and nine months ended
September 30, 2000.
The fair value of the warrants was calculated to be $5,635,000 using the
Black-Scholes option pricing model, utilizing a volatility factor of 85%,
risk-free interest rate of 6.01%, and an expected life of 3.92 years. The fair
value of these warrants, which represents future sales discounts, will be
reflected as reduction to revenues as recognized when SuperFilter systems are
shipped over the next nine quarters, but, will not effect future operating
results because the loss was accrued in the third quarter upon receipt of the
$7.8 million purchase order.
As of September 30, 2000 U.S. Cellular has 581,720 unvested warrants
that can be earned from future product orders through August 27, 2004.
6. EARNINGS PER SHARE
The computation of per share amounts for the quarter and nine months
ended September 30, 2000 and October 2, 1999 is based on the average number of
common shares outstanding for the period. Options and warrants to purchase
4,016,456 and 3,884,747 shares of common stock during the quarter and nine month
periods ended September 30, 2000 and October 2, 1999, respectively, were not
considered in the computation of diluted earnings per share because their
inclusion would be antidilutive. Preferred stock convertible into 2,089,136 and
5,059,820 common shares was also not considered in the computation of diluted
earnings per share for the quarter and nine months ended September 30, 2000 and
October 2, 1999, respectively, because their inclusion would also be
antidilutive.
7. CONCENTRATION OF CUSTOMERS AND SUPPLIERS
Our two largest customers accounted for 78% and 74% of our gross
commercial product revenues for the three and nine months ended September 30,
2000, respectively.
We currently purchase substrates for growth of high-temperature
superconductor thin-films from one supplier because of the quality of its
substrates.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition", which outlines
the basic criteria that must be met to recognize revenue and provide guidance
for the presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the Securities and
Exchange Commission. The effective date of this pronouncement is the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. We believe
that adopting SAB 101 will not have a material impact on our financial position
and results of operations.
In June 1998, The Financial Accounting Standards Board Issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." The
statement requires the recognition of all derivatives as either assets or
liabilities in the balance sheet and the measurement of these instruments at
fair value. The accounting for changes in the fair value of a derivative depends
on the planned use of the derivative and the resulting designation. Because
the Company does not currently hold any derivative instruments and does not
engage in hedging activities, the impact of the adoption of SFAS No. 133 is not
currently expected to have a material impact on financial position, results of
operations or cash flows. The Company will be required to implement SFAS No. 133
in the first quarter of fiscal 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and
uncertainties. We have made these statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Our
forward-looking statements relate to future events or our future performance and
include, but are not limited to, statements concerning:
- our business strategy;
- the timing of and plans for the introduction of new products and
enhancements;
- plans for hiring additional personnel and expanding our
facilities; and
- the adequacy of our funding.
Other statements about our plans, objectives, expectations and
intentions contained in this report that are not historical facts may also be
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "could," "should," "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and other
comparable terminology. Because these forward-looking statements involve risks
and uncertainties, actual results could differ materially from those expressed
or implied by these forward-looking statements for a number of reasons. We refer
you to Exhibit 99 to our 1999 Annual Report on Form 10-K entitled "Disclosure
Regarding Forward-Looking Statements" and our other SEC filings for a
description of some of the uncertainties and factors that may affect our
forward-looking statements. We assume no obligation to update any
forward-looking statements.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED OCTOBER 2, 1999
AND SEPTEMBER 30, 2000
Total net revenues increased by $315,000, or 16%, from $2.0 million in
the third quarter of 1999 to $2.3 million in the third quarter of 2000. Net
revenues increased by $1.3 million, or 25%, from $4.9 million in the first nine
months of 1999 to $6.2 million in the same period this year. These increases are
due to higher commercial product revenues, partially offset by lower government
contract revenues.
Commercial product revenues increased by $902,000, or 137%, from
$659,000 in the third quarter of 1999 to $1.6 million in the third quarter of
2000. For the first nine months of 2000, commercial product revenues increased
to $4.2 million from $1.3 million in the same period last year, an increase of
$2.8 million or 214%. These increases are the result of higher sales of our
SuperFilter products and a shift in the product mix to higher priced units. We
expect commercial product revenues to increase as a percentage of total revenues
over the next several quarters. However, there can be no assurance that such
commercial product revenues will increase. Furthermore, as we increase
commercialization of our products we could encounter seasonality or other
currently unforeseen factors causing additional variations in our results.
Government contract revenues decreased by $341,000, or 25%, from $1.4 million in
the third quarter of 1999 to $1.0 million in the third quarter of 2000. For the
first nine months of 2000 government contract revenues decreased by $366,000, or
10%, from $3.7 million in the same period of 1999 to $3.3 million in 2000 due to
a decrease in the number of contracts in process.
Our commercial product revenues are generated primarily from sales of
our SuperFilter product line which combines specialized superconducting filters
with a proprietary cryogenic cooler (and, in many cases, a low noise amplifier)
in a highly compact system. The Company began shipping its first TWO-Pak
SuperFilter in late 1997 and later introduced the SIX-Pak SuperFilter in early
1999.
Our backlog for delivery of SuperFilter products in the fourth quarter
of 2000 totaled $644,000 at September 30, 2000; as compared with no backlog at
December 31,1999 or October 2, 1999. Also, in the third quarter of 2000, we
received a $7.8 million purchase order for the delivery of product over nine
quarters beginning in the fourth quarter of 2000. We are currently discussing
with this customer how many systems will be delivered in the fourth quarter of
2000 under this purchase order.
Net revenues were also affected by sales discounts on commercial product
sales totaling $70,000 for the quarter and nine months ended October 2, 1999 as
compared with $316,000 and $1.3 million for the quarter and nine months of 2000,
respectively. The majority of this discount represents the value of warrants
vesting in the current period previously granted to a customer with a long-term
supply agreement. For further discussion please see the subsection below
entitled "Non-Cash Charges for Warrants Issued to U.S. Cellular".
We currently have negative gross margins on our SuperFilter products at
current sales levels due to fixed manufacturing costs. Based on current prices,
expected product mix and costs, we estimate that we will achieve positive
gross margins (excluding the effect of non-cash warrant charges) when product
sales reach approximately 200 systems per quarter. We do not expect to reach
this level until sometime in 2001.
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<PAGE> 10
Cost of commercial product revenues includes all direct costs,
manufacturing overhead and related start-up costs. For the three and nine months
ended September 30, 2000, they also include a loss of $5.3 million related to
the purchase order received from U.S. Cellular. For further discussion please
see the subsection below entitled "Non-Cash Charges for Warrants Issued to U.S.
Cellular." The cost of commercial product revenues increased by $5.9 million, or
over 100%, from $2.0 million for the third quarter of 1999 to $7.9 million in
the third quarter of 2000. The cost of commercial product revenues increased by
$7.4 million, or over 100%, from $4.7 million for the first nine months of 1999
to $12.0 million for the first nine months of this year. These increases
primarily result from the loss accrued on the purchase order received form U.S.
Cellular in September 2000 as more fully described below. The remainder of the
increases results from increased units shipments and higher costs associated
with ramping up the Company's manufacturing abilities, partially offset by lower
material costs and the effect of increased manufacturing efficiencies.
Contract research and development expenses increased by $16,000, or 2%,
from $897,000 in the third quarter of 1999 to $913,000 in the third quarter of
2000. Contract research and development expenses increased by $251,000, or 10%,
from $2.4 million in the first nine months of 1999 to $2.7 million in the first
nine months of 2000. Contract research and development expenses as a percentage
of related revenues totaled 88% and 81% for the quarter and nine months ended
September 30, 2000, as compared with 65% and 66% in the comparable periods in
the prior year. These increases in the current year are due to the increased
expenses associated with a completed contract and the effect of comparing fixed
expenses as compared to a lower revenue base.
Other research and development expenses increased by $357,000, or 91%,
from $392,000 in the third quarter of 1999 to $749,000 in the third quarter of
2000. Other research and development expenses increased by $549,000 or 41%, from
$1,324,000 in the first nine months of 1999 to $1,873,000 in the first nine
months of 2000. These increases are due to the Company's efforts in expanding
market opportunities through product line enhancement and development of the
SuperFilter product line and cost reduction efforts.
Selling, general and administrative expenses increased by $512,000, or
33%, from $1.5 million in the third quarter of 1999 to $2.1 million in the third
quarter of 2000. Selling, general and administrative expenses increased by $1.7
million, or 41%, from $4.2 million in the first nine months of 1999 to $5.9
million in the first nine months of 2000. These increases result primarily from
increased corporate development, domestic and international marketing and sales
efforts, management recruitment activities, occupancy expenses, the
implementation of a management incentive program, liability insurance premiums
and expenses associated with distributing annual meeting information to a larger
shareholder base.
Other non-cash warrant charges and other non-recurring charges totaled
zero in the current quarter and $609,000 in the first nine months of 2000. This
charge primarily relates to the vesting of warrants issued to a customer as
described above and represents the excess of the value of the vesting warrants
over the related sales. The remainder of these charges consists of the write off
of deferred offering expenses in the second quarter of 2000.
Interest income totaled $41,000 and $215,000 in the quarter and nine
months ended September 30, 2000, respectively, and increased as compared with
the corresponding periods in the prior year due to higher levels of cash
available for investment.
Interest expense increased by $8,000, or 14%, from $59,000 in the third
quarter of 1999 to $67,000 in the third quarter of 2000. Interest expense
increased by $240,000, or over 100%, from $213,000 in the first nine months of
1999 to $453,000 in the first nine months of 2000. These increases resulted from
entering into new financing agreements in 1999 and 2000.
We had a net loss available to common stockholders of $9.3 million, or
$0.53 per common share, in the current quarter as compared with $3.4 million, or
$0.43 per common share, in the same period last year. For the first nine months
of 2000, we had a net loss available to common stockholders of $18.7 million, or
$1.20 per common share, as compared with $8.9 million, or $1.15 per common
share, for the first nine months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by approximately $39.0 million from
$66,000 on December 31, 1999 to $39 million on September 30, 2000. The increase
results from the cash received from private placements of convertible preferred
stock and related warrants and common stock to institutional investors and the
proceeds from the exercise of outstanding warrants and stock options. These
amounts were partially offset by cash used in operations and investing
activities and the pay down of the line of credit.
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<PAGE> 11
For the nine months ended September 30, 2000, net cash used in
operations totaled $10.2 million. We used a significant portion of this cash to
fund net losses of $17.2 million, or $8.9 million net of non-cash adjustments.
Our other operating uses of cash relate primarily to increases in inventories of
$1.9 million. In the same period in 1999, cash used in operations totaled $7.7
million. We used this cash primarily to fund operating losses totaling $6.7
million net of non-cash adjustments, inventory increases totaling $645,000 and
decreased liabilities of $660,000, partially offset by decreases in accounts
receivables totaling $410,000.
Net cash used in investing activities totaled $1.5 million in the nine
months ended September 30, 2000 and primarily related to the purchase of
manufacturing equipment. In the same period in 1999, net cash used by investing
activities totaled $90,000. In the 1999 period, acquisitions of equipment
totaling $990,000 were offset by the proceeds from the sale and leaseback of
certain production equipment with a net book value of $944,000 for cash proceeds
of $900,000.
In the nine months ended September 30, 2000, net cash provided by
financing activities totaled $50.6 million. Cash received from private sales of
common stock and preferred stock, as well as from the exercise of outstanding
warrants and stock options, totaled $52.2 million. This was partially offset by
the pay down of $1.6 million on our line of credit and principal payments on
other debt obligations. In the same period in 1999, cash provided by financing
operations totaled $8.5 million and primarily resulted from private sales of
preferred stock and short term borrowings, partially offset by payments due on
long-term obligations.
On September 29, 2000, we received a $37.5 million private equity
investment from the sale of 37,500 shares of a newly created Series E
Convertible Preferred Stock and warrants to purchase up to an additional
1,044,568 shares of common stock. Proceeds net of issuance costs totaled $35.1
million.
The preferred stock is non-voting, has a stated value and liquidation
preference of $1,000 per share, and is convertible into common stock at an
initial conversion price of $17.95 per common share until June 29, 2001. After
that date, the preferred stock is convertible at the lower of $17.95 per common
share or the market price of the common stock at the time of conversion, subject
to a floor. The preferred stock automatically converts into common stock on the
second anniversary of the closing. Based on the current conversion price of
$17.95 per common share, the preferred stock is convertible into 2,089,136
shares of common stock. The optional and automatic conversions of preferred
stock are limited to a maximum of 3,544,656 shares of common stock. The
preferred stock carries a 7% premium, payable upon conversion in cash or common
stock subject to certain limitations, at our option.
In connection with the sale of the preferred stock, we also issued two
five-year warrants to purchase shares of common stock at an exercise price of
$21.54 per share. The first warrant is for the purchase of 313,370 shares and is
exercisable immediately. The second warrant is for the purchase of up to 731,198
additional shares of common stock if the preferred stock is held for at least
one year. The warrant is not exercisable until the first anniversary date and
size of the warrant will be reduced proportionately to reflect any conversions
of the preferred stock prior to the first anniversary date. Both warrants
contain "weighted average" antidilution provisions which adjust the warrant
exercise price and the number of shares issuable under the warrant in the event
we sell equity securities at a discount to then prevailing market prices. The
amount of the adjustment depends on the size of the below-market transaction and
the amount of the discount to the market price. The warrant exercise price
cannot be reduced below a minimum of $18.91 as the result of adjustments under
this provision.
We are prohibited from paying any dividends on, or repurchasing any
shares of, common stock as long as any shares of the preferred stock remain
outstanding. We have filed with the Securities and Exchange Commission a
registration statement for resale of the shares of common stock issuable upon
conversion of the preferred stock and exercise of the warrants.
In the first nine months of 2000, the holders of the Series A-2, A-3,
B-1, C and D Redeemable Convertible Preferred Stock converted their holdings
into 5,633,901 shares of common stock. As an inducement to convert their
preferred shares into common stock, we issued the Series A-2, A-3 and C
preferred stockholders warrants to purchase 250,000 shares of common stock. The
issuance of these warrants is considered a deemed distribution to the preferred
stockholders and, therefore, the fair market value of the warrants of $1.5
million is considered in the computation of the net loss per share for the nine
months ended September 30, 2000.
We had a revolving line of credit that matured on June 17, 2000. We are
in negotiations with the bank to renew the line of credit.
At September 30, 2000, we had cash commitments for the purchase of fixed
assets totaling $604,000. To meet the anticipated continued increase in demand
for our products, we anticipate that we will spend an additional $1.0 to $1.5
million for manufacturing equipment in 2000. In addition, increased sales will
require that higher inventory and accounts receivable balances be maintained.
Although we expect revenues to increase for the remainder of 2000, we expect to
continue incurring losses during that period. We
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<PAGE> 12
expect our existing cash resources, together with our line of credit and
anticipated cash flows from operations, to be sufficient to meet our working
capital and capital expenditure needs beyond the next year.
NON-CASH CHARGES FOR WARRANTS ISSUED TO U.S. CELLULAR
In August 1999, the Company entered into a warrant agreement with United
States Cellular Corporation ("U.S. Cellular") where the exercise of warrants to
purchase up to 1,000,000 shares of common stock was conditioned upon future
product purchases by U.S. Cellular. Under the terms of the warrant, U.S.
Cellular vests in the right to purchase one share of common stock at $4 per
share for every $25 of SuperFilter systems purchased from the Company. The
warrant is immediately exercisable with respect to the vested portion and
expires August 27, 2004. The estimated fair value, using the Black-Scholes
option pricing model, of the vested portion of the warrant is first recorded as
a non-cash sales discount up to the amount of the related sales with the excess
value, if any, recorded in operating costs. For product purchases through
September 30, 2000, U.S. Cellular has vested in the right to purchase a total of
106,280 shares. In connection with such sales, the Company has recorded non-cash
charges of $316,000 and $1,719,000 for the three and nine months ended September
30, 2000.
In September 2000, the Company received a $7.8 million non-cancelable
purchase order from U.S. Cellular for SuperFilter systems to be shipped over the
next nine quarters. In consideration for the purchase order, the Company amended
the August 1999 warrant agreement and vested 312,000 warrants to US Cellular.
The vested warrants are immediately exercisable, not subject to forfeiture, and
US Cellular has no other obligations to the Company. The cost of providing
products under the purchase order, plus the $5.6 million fair value of the
vested warrants, exceeds related revenue by $5.3 million. The resulting loss has
been reflected in the results of operations for the three and nine months ended
September 30, 2000.
The fair value of the warrants was calculated to be $5,635,000 using the
Black-Scholes option pricing model, utilizing a volatility factor of 85%,
risk-free interest rate of 6.01%, and an expected life of 3.92 years. The fair
value of these warrants, which represents future sales discounts, will be
reflected as reduction to revenues as recognized when SuperFilter systems are
shipped over the next nine quarters, but, will not effect future operating
results because the loss was accrued in the third quarter upon receipt of the
$7.8 million purchase order.
As of September 30, 2000, U.S. Cellular has 581,720 unvested warrants
that can be earned from future product orders through August 27, 2004.
NET OPERATING LOSS CARRYFORWARD
At December 31, 1999, the Company had a federal net operating loss
carryforward of approximately $37 million. Section 382 of the Internal Revenue
Code imposes an annual limitation on the utilization of net operating loss
carryforwards based on a statutory rate of return (usually the "applicable
federal funds rate", as defined in the Internal revenue Code) and the value of
the corporation at the time of a "change of ownership" as defined by Section
382. We are currently evaluating the circumstances under which the exercise of
our outstanding warrants and options, combined with our private stock sales over
the last few years, may trigger a "change in ownership" under Section 382. If
this were to occur, it could significantly diminish the value of our net
operating loss carryforwards by limiting the rate at which we would be permitted
to offset them against any future taxable income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There was no material change in our exposure to market risk at September
30, 2000 as compared with our market risk exposure on December 31, 1999 except
that at September 30, 2000 we had $38.9 million invested in a money market
account yielding approximately 6.6%. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk" in our 1999
Annual Report on Form 10K.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation.
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<PAGE> 13
ITEM 2. SALE OF UNREGISTERED SECURITIES
On September 29, 2000, we received a $37.5 million private equity
investment from an institutional investor. The investor purchased 37,500 shares
of a newly created Series E Convertible Preferred Stock and related warrants to
purchase up to an additional 1,044,568 shares of common stock. We provided the
investor with copies of our most recent Annual Report (Form 10K), Quarterly
Report (Form 10Q) and Proxy Statement. The investor provided us with written
representations confirming its status as an "accredited investor" under
Regulation D and its intent to acquire the securities for its own account and
not with a view to resale or distribution in violation of the Securities Act of
1933. We did not engage in general solicitation or advertising, and the
securities issued in the transaction bear appropriate restrictive legends
concerning the registration requirements of the Securities Act of 1933. We
believe this transaction was exempt from the registration requirements of the
Securities Act of 1933 based on Regulation D and Section 4(2) of the Securities
Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Reference
Number Description Document
------- ----------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation (1)
3.2 Certificate of Designations, Preferences and Rights of Series E
Convertible Preferred Stock (2)
3.3 Bylaws, as amended (1)
4.1 Form of Common Stock Certificate (3)
4.2 Certificate of Designations, Preferences and Rights of Series E
Convertible Preferred Stock (2)
4.3 Warrant Issued to United States Cellular Corporation (4)
4.4 Warrant Issued to PNC Bank, National Association in connection
with Credit Agreement (4)
4.5 Warrant Purchase Agreement dated December 1, 1999 with PNC Bank (5)
4.6 Warrant Purchase Agreement dated January 12, 2000 with PNC Bank (5)
4.7 Initial Stock Purchase Warrant dated as of September 29, 2000
between the Company and RGC International Investors, LDC (2)
4.8 Incentive Stock Purchase Warrant dated as of September 29, 2000
by and between the Company and RGC International Investors, LDC (2)
10.1 Securities Purchase Agreement dated as of September 29, 2000
between the Company and RGC International Investors, LDC.
(Exhibits and Schedules Omitted) (2)
10.2 Registration Rights Agreement dated as of September 29, 2000
between the Company and RGC International Investors, LDC (2)
10.3 Amendment No. 1 to the United States Cellular Purchase Agreement (6)
10.4 Amendment No.2 to the Unites States Cellular Purchase Agreement (6)
(Schedule Omitted)
27 Financial Data Schedule --
</TABLE>
Exhibits followed by a number in parenthesis are incorporated by
reference to the similarly numbered Company document cited below:
(1) Registration Statement on Form S-3 filed October 25, 1000 (Reg. No.
333-48540).
(2) Current Report on Form 8-K filed on October 4, 2000.
(3) Registration Statement on Form S-1 (Reg. No. 33-56714).
(4) Quarterly Report on Form 10-Q for the quarter ended July 3, 1999.
(5) Annual Report on Form 10-K for the year ended December 31, 1999.
(6) Included with this filing.
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<PAGE> 14
(b) Reports on Form 8-K.
We did not file any Current Reports on Form 8-K during the quarter ended
September 30, 2000, but we did file a Current Report on Form 8-K on October 4,
2000 announcing the receipt of a $37.5 million private equity investment.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUPERCONDUCTOR TECHNOLOGIES INC.
Dated: November 13, 2000 /s/ Martin S. McDermut
--------------------------------------
Martin S. McDermut
Vice President, Finance and
Administration and
Chief Financial Officer
(Authorized Signatory and Principal
Financial Officer)
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<PAGE> 15
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2000
COMMISSION FILE NO. 0-21074
SUPERCONDUCTOR TECHNOLOGIES INC.
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Reference
Number Description Document
------- ----------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation (1)
3.2 Certificate of Designations, Preferences and Rights of Series E
Convertible Preferred Stock (2)
3.3 Bylaws, as amended (1)
4.1 Form of Common Stock Certificate (3)
4.2 Certificate of Designations, Preferences and Rights of Series E
Convertible Preferred Stock (2)
4.3 Warrant Issued to United States Cellular Corporation (4)
4.4 Warrant Issued to PNC Bank, National Association in connection
with Credit Agreement (4)
4.5 Warrant Purchase Agreement dated December 1, 1999 with PNC Bank (5)
4.6 Warrant Purchase Agreement dated January 12, 2000 with PNC Bank (5)
4.7 Initial Stock Purchase Warrant dated as of September 29, 2000
between the Company and RGC International Investors, LDC (2)
4.8 Incentive Stock Purchase Warrant dated as of September 29, 2000
by and between the Company and RGC International Investors, LDC (2)
10.1 Securities Purchase Agreement dated as of September 29, 2000
between the Company and RGC International Investors, LDC.
(Exhibits and Schedules Omitted) (2)
10.2 Registration Rights Agreement dated as of September 29, 2000
between the Company and RGC International Investors, LDC (2)
10.3 Amendment No. 1 to the United States Cellular Purchase Agreement (6)
10.4 Amendment No.2 to the Unites States Cellular Purchase Agreement (6)
(Schedule Omitted)
27 Financial Data Schedule --
</TABLE>
Exhibits followed by a number in parenthesis are incorporated by
reference to the similarly numbered Company document cited below:
(1) Registration Statement on Form S-3 filed October 25, 1000 (Reg. No.
333-48540).
(2) Current Report on Form 8-K filed on October 4, 2000.
(3) Registration Statement on Form S-1 (Reg. No. 33-56714).
(4) Quarterly Report on Form 10-Q for the quarter ended July 3, 1999.
(5) Annual Report on Form 10-K for the year ended December 31, 1999.
(6) Included with this filing.
