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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21074
SUPERCONDUCTOR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0158076
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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) 690-4500
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
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 was approximately $59.4 million based on the closing price of
$5.1875 per share of common stock as reported on The NASDAQ Stock Market(R) on
March 23, 2001. 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 23, 2001 was 17,889,613.
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, 2001.
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SUPERCONDUCTOR TECHNOLOGIES INC.
FORM 10-K ANNUAL REPORT
Fiscal Year Ended December 31, 2000
PART I PAGE
----
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..............................12
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.............................................20
Item 8. Financial Statements and Supplementary Data............................................................20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................20
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................................20
Item 11. Executive Compensation.................................................................................20
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................20
Item 13. Certain Relationships and Related Transactions.........................................................20
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K......................................20
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PART I
ITEM 1. BUSINESS.
FORWARD-LOOKING STATEMENTS
The discussion in this section of our annual report contains
forward-looking statements that involve risks and uncertainties. Forward-looking
statements are not guarantees of future performance and are subject to various
risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual results may differ materially from those expressed in forward-looking
statements. Please read the discussion under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Forward Looking Statements" for a description of our forward-looking statements
and some of the factors that might affect those statements. Forward-looking
statements are based on information presently available to senior management,
and we do not assume any duty to update our forward-looking statements.
OVERVIEW
We develop, manufacture and market high performance products to service
providers, systems integrators and original equipment manufacturers in the
wireless telecommunications industry. At present our primary product line is the
SuperFilter(R) System which is used in wireless base stations to filter and
amplify the signals received at the antenna from subscribers' handsets. It is
designed to meet the growing demands of the wireless communication market for
improved coverage, greater capacity, and reduced interference. It accomplishes
these needs through the combination of specialized filters utilizing high
temperature superconducting technology with a proprietary cryogenic cooler and a
cooled low noise amplifier in a highly compact system. The SuperFilter(R) System
offers significant advantages over conventional filter systems. As a result,
service providers benefit from lower capital and operating costs and higher
minutes of use, the latter a result of subscribers experiencing better call
quality, fewer dropped calls and higher speed and quality data transmissions.
The demand for wireless communication is growing, and as the number of
users and the demand for additional services increases, commercial providers
must adapt to keep pace with the expanding market. Mobile wireless communication
systems use radio frequency, or RF, signals to establish communication between
subscribers using wireless handsets and base stations. A wireless network is
composed of a number of small geographic zones or "cells," and each cell
contains one or more base stations. A typical base station has an antenna tower
for transmitting and receiving data by RF signals and a small ground structure
that houses the equipment for processing the RF signals and communicating with
the service provider's mobile telephone switching offices via conventional or
the high-speed communication lines. The base stations receive (the uplink) and
transmit (the downlink) data from multiple wireless handsets. In order to
receive uplink signals from handsets, each base station requires a wireless
filter system to eliminate, or filter out, varying degrees of interfering
signals from man-made sources and naturally occurring background noise. The
SuperFilter(R) System addresses this problem. Wireless service provider's can
use SuperFilter Systems(R) in connection with the installation of additional
base stations in a network, as well as the installation of an entirely new
network. They can also improve the performance of existing base stations and
networks by retrofitting the base stations with SuperFilter Systems(R). Allied
Business Intelligence estimated that there were approximately 700,000 base
stations in the world at the end of 1999 and expects that number to grow to
approximately 1.6 million base stations by the end of 2004.
From the time of our formation in 1987 through the present, we have derived
significant revenue from research and development contracts with the U.S.
government through which we developed much of the technology used in our
commercial products. In 1997, we introduced our commercial TWO-Pak
SuperFilter(R) System for application in the B band of the North American
cellular market. And, in 1998, we completed our transition from a research and
development company to a leading commercial manufacturer and marketer of
superconductor products to the wireless communication market by successfully
delivering our TWO-Pak SuperFilter(R) System for application in the A band
segment of the market. In 1999, we introduced our SIX-Pak SuperFilter(R) for
both A band and B band in order to enhance coverage in urban areas, and we
introduced the SuperFilter(R)II System with premium filtering performance. In
2000, we followed up with the introduction of our new platform and for the next
generations of systems, the third generation (3G), and our family of products
for personal communications services (PCS). The SuperFilter(R) Systems all
operate with base stations that use digital air interface technology such as
code division multiple access (CDMA), time division multiple access (TDMA) or
global system for mobile communication (GSM). These systems can also be operated
with the new 3G technology as well as existing analog technology.
Our augmented SuperFilter(R) System product line as well as increased sales
activities resulted in multiple product orders in 1998, 1999 and 2000. We have
conducted field trials of our products with more than forty wireless service
providers, including all of the top five cellular carriers in the U.S. In 1999,
we concluded a multiple year supply agreement with U.S. Cellular Corporation,
one of the top five service providers, and in 2000, we signed a significant
supply agreement
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with Alltel Communications Corporation, also one of the top five carriers.
These and other customer successes resulted in the deployment of almost 600
systems in operating networks by the end of 2000. We continue to conduct
numerous demonstrations and field trials in the U.S. and have begun similar
demonstrations and field trials in Latin America and Asia. In order to position
ourselves for increased orders and future growth, in 1998 we built a new 18,000
square foot state of the art manufacturing facility in Santa Barbara to support
our SuperFilter(R) System product line. This brings our current production
capacity to more than 300 systems per quarter, and we have plans in place for
substantially increasing our production capacity as demand increases.
The rapid growth in subscriber penetration in wireless markets in Europe,
Asia, and Latin America has generated interest in high temperature
superconducting filter systems for networks in these regions. As a result, we
have reorganized our operations into two divisions, one to focus on increasing
sales in North America and the other to develop international opportunities. We
have appointed a President for STI Wireless Systems, North America. We have
established the position of President of STI Wireless Systems, International,
and have hired a Vice President of International Sales and Marketing to pursue
current opportunities in Asia, Latin America, and Europe.
INDUSTRY BACKGROUND
THE WIRELESS COMMUNICATIONS MARKET
The wireless communications market is expected to experience significant
global growth over the next few years: growth in subscribers, growth in usage,
growth in number of operators providing service, and growth in new applications.
New subscribers. According to Allied Business Intelligence, the worldwide
number of wireless subscribers using mobile wireless networks will increase from
308 million in 1998 to almost 1 billion in 2004, representing an annual compound
growth rate of 21%.
Increased usage (minutes of use). We expect a significant increase in the
average subscriber's minutes of use due to anticipated declines in cell phone
rates and the emergence of new data and internet oriented services such as
e-mail and instant messaging.
Increased number of operators providing services. Increasing demand, lower
network implementation costs, and the availability of additional spectrum have
led to as many as five service competitors in some markets.
New applications. In order to meet consumers' demands for instant access to
information, a broad range of wireless services such as e-mail, faxing and
Internet access is now being offered through many wireless communication
providers. Plans are already in place for adding higher speed, broadband data
capability to wireless networks allowing for true multimedia wireless
communications.
STRAINS ON WIRELESS NETWORKS
As the number of wireless subscribers increases and the wireless data
delivery market proliferates, significant demand will be placed on today's
wireless infrastructure. In order to effectively compete and maximize network
utilization, service providers must be able to cost-effectively increase the
capacity of their wireless networks and improve the signal quality of the radio
frequency (RF) signals between subscribers and base stations.
A wireless network consists of a number of adjoining cells that form a
service provider's geographic coverage area. The communication is switched from
cell to cell as the user moves within the geographic area. Each cell has a base
station, which is a basic building block of a wireless network. Base stations
house the complex electronic equipment required to receive and transmit radio
signals for multiple voice and data transmissions. The user is "linked" to the
closest base station on RF channels, one for the "downlink" from the base
station and another for the "uplink" to the base station. In early systems, this
radio link used an "analog" communication scheme. Today these are called first
generation (1G) systems. In the early 1990's, service providers began to install
systems with "digital" communications schemes. These are known as second
generation (2G) systems. Early implementation is now underway for 3G systems
which will enable high speed data communications for broadband, multimedia
applications. A transition phase, known as 2.5G, will precede full 3G in many
markets. In all communications schemes, the signal quality on the uplink is
improved by placing a filter and a low noise amplifier after the antenna and
before the signal is further processed by
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the receiver. This "filter system" is intended to reject unwanted signals from
adjacent bands (selectivity) and improve the ability of the receiver to detect
low signals (sensitivity).
Most present wireless networks were deployed at a time when subscriber
penetration was low, the signals carried were only voice, only one other
competitive service provider was present, and the typical handset was designed
to transmit up to three watts of RF power. Networks were rural or urban. If
rural, it was thought that little interference was present. If urban, it was
thought that the sensitivity of the uplink signal was relatively unimportant.
That conceptualization of the networks was convenient as conventional filtering
allowed for good selectivity or good sensitivity, but not for both
simultaneously.
With high subscriber density and usage, multiple competing service
providers, and plans for using wireless links for broadband information
transmission, robust RF links are as important as new capacity for satisfying
user needs. In rural and suburban areas, range and coverage ("holes" in the area
covered, typically caused by terrain irregularities) have become issues.
Consumers now use small portable handsets that transmit only 0.6 watt of power,
thereby decreasing the effective range and coverage of existing base stations.
The latest PCS networks operate in the 1900Mhz spectrum as compared with the
850Mhz spectrum for traditional cellular networks. The change in operating
frequencies has diminished range and coverage due to lower signal propagation.
Simultaneously, wireless service providers in both rural and urban areas are
encountering greater interference due to increases in subscriber density and the
number of competing users of the adjacent spectrum. The resulting poor call
quality, dropped calls and call origination failures produces less than optimum
system utilization (and ultimately revenue) and dissatisfied subscribers. In
suburban and urban settings, site acquisition challenges are leading service
providers to share cell towers with other service providers. This solves the
siting issue, but exacerbates the interference issue which is already serious in
these more densely populated areas. Service providers using TDMA, a digital
protocol used by such service providers as AT&T Wireless Services, have been
known to "guard band" their frequency allocation (not use frequencies at each
end of the allocation) to solve the interference issue. This effectively reduces
the capacity of their networks, as those frequencies are not available for
communication. CDMA, a popular digital protocol used by such service providers
as Verizon Wireless, which promises to be an important protocol for delivering
future high speed data transmission for broadband applications, is sensitive to
the power needed for signal transmission. More power, as is required for high
speed data transmission, means fewer subscribers on line in the network,
effectively lowering capacity.
OUR SOLUTION
We believe that our SuperFilter(R) product family of filter systems
currently offers solutions to some of the most serious signal quality and
capacity problems facing the wireless communication industry. By using
superconducting technology, the previously required tradeoff between
interference rejection (selectivity) and ability to "hear" low signals
(sensitivity) is eliminated. With SuperFilter(R) products, service providers can
simultaneously enjoy high selectivity and excellent sensitivity. As a result,
we:
o Extend range and coverage, leading to higher minutes of usage and
fewer dropped calls;
o Improve in building coverage, reducing the need for expensive
repeaters;
o Reduced interference on shared cell sites serving multiple carriers;
o Increase up-link limited CDMA base station capacity;
o Improve BER (bit error rate), allowing for higher data speeds; and
o Reduce handset transmit power, increasing battery life or increasing
data speeds.
In extended use or field trials, our customers have reported the following
results through the use of the SuperFilter(R) product:
o Call traffic increased by up to 101%;
o Dropped call percentage decreased by up to 40%;
o Calls achievable from previous "dead" spots;
o Increase in average call duration by up to 33%;
o Increased base station range by up to 40%; and
o Handset power reduced by up to 50%.
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OUR STRATEGY
Our objective is to become the leading designer, manufacturer, and marketer
of high-performance, link enhancement solutions for the global wireless
communication market. The primary elements of our strategy to achieve this
objective include the following:
o Enhance and Extend Current Product Offerings. There is an increasing
demand for faster, smaller, and more economical and sophisticated
wireless communication technology. In response to this demand, we
expect to use our technical expertise to expand our core product
functionality (uplink enhancement), including adding products to our
existing SuperFilter(R) product family, such as our new platform for
2.5G and 3G markets. As part of this strategy, we plan to develop
strategic relationships with wireless communication providers and OEMs
to assist us in bringing these product lines to market and gaining
market acceptance.
o Expand Domestic and International Sales Channels. We intend to
continue to expand our sales efforts to domestic wireless
communication providers and OEMs. Additionally, we expect to expand
our international distribution channels.
o Enhance Our Productivity and Lower Our Costs. We intend to continue
developing our manufacturing infrastructure and organization to meet
our expected production requirements. We plan to continue
manufacturing in-house certain key components of our products. We
believe that this will enable us to (1) produce highly reliable,
quality products, (2) protect the proprietary nature of our
technology and processes, (3) properly control our manufacturing
processes and (4) achieve significant cost reductions.
o Maintain Our Focus on Technical Excellence and Innovation. We are
committed to maintaining our leadership role in the wireless
communication market for link enhancement. In order to extend and
protect our technology, we will continue to seek patent protection
and/or licenses of key technology owned by others. We also will
continue to engage in government R&D contracts to fund our commercial
technology and product development.
o Pursue Strategic Partnerships, Alliances and Acquisitions. In addition
to our internal development efforts, we may acquire new products and
technologies that address complementary issues in the wireless
communications market such as "downlink" enhancement and "link
balancing".
OUR WIRELESS PRODUCTS
Our SuperFilter(R) family of filter systems is designed to be installed in
wireless base stations on the uplink path between the antenna and the receiver.
These filter systems are intended to reject interfering signals from adjacent
bands (selectivity) and improve the ability of the receiver to detect low
signals (sensitivity). This ability to simultaneously deliver high selectivity
and high sensitivity results from the use of superconducting technology in our
designs. Each of our SuperFilter(R) systems is a self-contained unit that can be
retrofitted into existing base stations or incorporated into new base stations
regardless of the signaling scheme used or the base station equipment supplied
by the systems manufacturers (OEMs). Each system includes a "pak" of filters and
low noise amplifiers for each antenna to which the system will be connected,
with the filter paks all packaged in a vacuum sealed container called a "dewar",
and cooled by a Stirling cryogenic cooler. These components are assembled into
an enclosure with electronic circuitry which controls the operation of the unit.
Base stations in lightly populated rural areas will operate with two antennas.
In more densely populated suburban and urban areas, service providers will
"sectorize" each cell and thereby require six antennas. As a result, we supply
two pak systems and six pak systems, which differ principally in the number of
filter paks incorporated in the dewar.
In 1997, we introduced our TWO-Pak SuperFilter(R) system for application in
the B band segment of the wireless market. (In the U.S., two cellular bands have
been established in each metropolitan and rural serving area of the market, the
A band and the B band.) In 1998, we introduced our TWO-Pak SuperFilter(R) system
for application in the A band segment of the wireless market. In 1999, we
introduced our first SIX Pak SuperFilter(R) system for both A and B Band, In
early 2000, we introduced enhanced filters for both bands that even further
improve selectivity. Although we already have the smallest platform in the
industry, we also announced the forthcoming introduction of a new half sized
platform that will be available with our first 2.5G and 3G systems.
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We believe that in addition to providing outstanding filtering performance,
our ability to compete is dependent on issues such as size, cost, power
consumption and reliability. We believe that our present SuperFilter(R) systems
are the smallest, least costly, and lowest power consuming superconducting
filter systems on the market and are highly reliable. We expect our new 3G
SuperFilter(R) systems will be less than half the size (only 0.7 cubic feet) of
present systems with even lower cost and lower power consumption.
The small size and low power consumption of our SuperFilter(R) systems is
partially the result of our choice of cooling technology. In order to
incorporate a compact, efficient and reliable cooling system, we developed a
proprietary Stirling 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, and
therefore it requires no scheduled maintenance. This cooler requires
approximately 100 watts of power, about the amount used by a standard electric
light bulb, and much less than other commonly used cryogenic systems.
MARKETING AND SALES
We presently sell solutions to wireless communication service providers in
the Americas and have plans to expand worldwide. Our earliest experience was
with small rural providers who had the most immediate need for the
SuperFilter(R) for range extension and coverage enhancement. We sold our first
systems in the fourth quarter of 1997. We sold 83 more systems in 1998, 123
systems in 1999 and 393 systems in 2000, in spite of a shift in our sales focus
to the large service providers where the sales cycle requiring numerous trials,
is very long. This shift in focus was undertaken to begin a move to the suburban
and urban markets where the majority of base stations are located and where the
need for interference rejection is greatest. In mid 1999, we signed a five-year
supply agreement with U.S. Cellular Corporation, one of the five largest service
providers in the country. More recently, in March, 2000, we signed a supply
agreement with Alltel Corporation, an even larger service provider.
We sell using a direct sales force in the U.S. and internationally. We plan
to supplement our direct sales by building a network of international
distributors. We also demonstrate our products at trade shows, participate in
industry conferences, utilize advertising and direct mailings, and provide
technical and application reports to recognized trade journals. Our product
information in the form of website, brochures, data sheets, application notes,
trade journal reports, product photos and press releases is updated as
necessary. Our sales and marketing efforts are supplemented by a team of
engineers who manage field trials and initial customer installations, educate
customers and work to forecast future application needs and product
opportunities.
BACKLOG
We had a backlog of $746,000 at December 31, 2000, as compared to no
backlog at December 31, 1999. We include in our backlog all the accepted product
purchase orders with respect to which a delivery schedule has been specified for
product shipment within six months. Product orders in our backlog are subject to
changes in delivery schedules or to cancellation at the option of the customer
without significant penalty. We regularly review our backlog of orders to ensure
that our backlog adequately reflects product orders expected to be shipped
within a six-month period. We also had an additional $5.8 million of bookings at
December 31, 2000 under a $7.8 million purchase order from U.S. Cellular with
unscheduled delivery dates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Non-Cash Charges for Warrants
Issued To U.S. Cellular" for a discussion of the accounting for this purchase
order.
OUR TECHNOLOGY
SUPERCONDUCTING TECHNOLOGY
We use superconducting technology to improve both the selectivity
(rejection of adjacent band interference) and the sensitivity (ability to hear
better) of a base station receiver. Superconductors are materials that have the
ability to conduct electrical energy with little or no resistance when cooled to
"critical" temperatures. In contrast, electric currents that flow through normal
conductors encounter resistance that requires power to overcome and generates
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.
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The discovery of superconductors was made in 1911. However, a fundamental
understanding of the phenomenon of superconductivity eluded physicists until J.
Robert Schrieffer (one of the members of our Board of Directors and Chairman of
our 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(Degree)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(Degree)C) were discovered. In early 1987,
yttrium barium copper oxide ("YBCO") was discovered, which has a critical
temperature of 93K (-180(Degree)C). Shortly thereafter, thallium barium calcium
copper oxide ("TBCCO") was discovered, which has a critical temperature of 125K
(-148(Degree)C). These discoveries were important because these high temperature
superconductors allowed for operating temperatures higher than 77K
(-196(Degree)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. Our company was formed following this
discovery for the initial purpose of developing and commercializing high
temperature superconductors.
HOW WE DEVELOP OUR TECHNOLOGY
As part of our strategy to maintain our technological leadership, we have
focused our research and development activities on high temperature
superconducting (HTS) materials, RF circuitry, and cryogenics design and product
application. We have internally developed our key technologies from a standard
set of technology platforms. We utilize a proprietary manufacturing process for
HTS thin-film production, the base material for our 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 our 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. We believe that our filter
systems provide our targeted markets with the smallest and most cost-effective
products and that we are 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. We
primarily utilize TBCCO, which has one of the highest known critical
temperatures, allowing for reduced cooling needs in order to achieve
superconducting properties. We hold 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. As part of our strategy to stimulate the
development and use of TBCCO, we granted DuPont a non-exclusive worldwide
sublicense to develop processes and market TBCCO thin-films. Thin-film
superconductors are the base materials used by us to produce RF components, such
as wireless communications filters. We hold nine patents for technologies
related to thin-film production. We believe that the process technology we have
developed produces state of the art HTS thin-films of the highest quality.
RF CIRCUITRY
We have devoted a significant portion of our engineering resources to
design and model the complex RF circuitry that is basic to our products. Our 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 our Technical Advisory Board. The expertise of this highly qualified team has
allowed us to design and fabricate very precise individual components, such as
RF signal filters. We have implemented computer simulation systems to design our
products and this RF circuitry design has allowed us to produce extremely small,
high-performance circuits. Some of our design and engineering innovations have
been patented; others are the subjects of pending patent applications. We
believe that our RF engineering expertise provides us with a unique competitive
advantage.
CRYOGENIC COOLING TECHNOLOGY
The availability of a low-cost, highly reliable, compact cooling technology
is critical to the successful commercialization of our superconducting products.
Although such technology had been used successfully in military applications in
the past, no such cryogenic cooler was previously commercially available. In
response to this, we developed a low-cost, low-power cooler designed to cool to
77K (-196(Degree)C) with sufficient heat dissipation for our superconducting
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applications. Our cryogenic cooler has a target life of over seven years. Its
development was based in part on patents licensed by us from Sunpower, Inc. We
believe that our internally-developed cryogenics allow us to offer a cooler that
is both compact and reliable enough to meet wireless industry standards and
provide us with a significant competitive advantage.
CRYOGENIC PACKAGING
Cooling to cryogenic temperatures requires proper thermal isolation 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. We have developed several thermal
isolation technologies to satisfy this requirement.
HOW WE USE GOVERNMENT CONTRACTS TO FUND TECHNOLOGY DEVELOPMENT
Our strategy is to pursue government research and development contract
awards which complement our commercial product and technology development. For
example, we are currently working on project to develop rapid tuning of
superconducting filters funded by the Defense Advanced Research Project Agency
(DARPA). This capability would greatly increase the effectiveness of our
systems in blocking interference in both government and commercial applications.
Since our inception in 1987, 83% of our 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 these revenues were paid under
contracts with the U.S. Department of Defense. We have extensively
marketed to various government agencies to identify opportunities and actively
solicit partners for product development proposals. Since 1988, we have
successfully obtained a number of classified and non-classified government
contracts for superconductor research, including one of the largest
non-classified HTS awards from DARPA through the Office of Naval Research.
In addition to actively soliciting government contracts, we have participated in
the Small Business Innovative Research, or SBIR, program. We have been awarded
32 Phase I SBIR contracts, each of which typically generates from $70,000 to
$100,000 of revenues. We have 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, and we converted one of these contracts into a Phase
III program valued at $2.2 million. Since our formation, government contracts
have provided us over $61 million of revenue.
OUR MANUFACTURING CAPABILITIES
We currently manufacture all of our SuperFilter products at our facilities
in Santa Barbara, California. In 1998, we opened a new 18,000 square foot state
of the art manufacturing facility in Santa Barbara. If the demand for our
products grows, we will need to increase our internal manufacturing capacity and
our materials purchase, internal testing and quality assurance functions. We
have plans in place to expand our manufacturing capacity as demand increases and
may subcontract some of our assembly processes.
Some of our manufacturing processes, including thin-film production, are
performed in "clean rooms." Other manufacturing stages, including system
assembly, are conducted in a standard manufacturing environment. We have
demonstrated a proprietary manufacturing process for thin-film TBCCO materials
that we believe is scaleable for high volume production. We have established a
production operation, which we use to produce TBCCO thin films on wafers for
wireless electronics applications. We currently purchase wafers for growth of
our HTS thin films from a single supplier. Our radio frequency circuitry
is designed, modeled and tested by internal engineering resources. We have
in-house capabilities to pattern the superconducting material and all other
aspects of radio frequency component production, including packaging the
filters. We also have in-house capabilities to manufacture our cryogenic coolers
at a pace consistent with current quantity requirements.
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INTELLECTUAL PROPERTY
We regard elements of our manufacturing processes, product design and
fabrication equipment as proprietary and seek to protect our rights in them
through a combination of patent, trademark, trade secret and copyright law and
internal procedures and non-disclosure agreements. We also seek licenses from
third parties for HTS materials and processes used by us, which have been
patented by other parties. We believe that our success will depend, in part, on
the protection of our proprietary information, patents and the licensing of key
technologies from third parties.
We have focused our development efforts on TBCCO. We have an exclusive
worldwide license (including the right to sublicense) under several U.S. patents
which 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 our common
stock. We are obligated to pay royalties of 4% on sales of TBCCO-based products,
subject to a $100,000 annual minimum, and royalties of 35% of sublicense
revenues received by us. In the event that we fail to pay minimum annual
royalties, this license automatically becomes non-exclusive. These royalty
obligations cease in 2009.
In January 1993, as part of our strategy to stimulate the development and
use of TBCCO, we granted DuPont a non-exclusive worldwide sublicense to develop
processes and market TBCCO thin-films. DuPont pays us royalties on sales of
TBCCO thin-films or devices containing TBCCO thin-films. In the event that we
grant another sublicense to a third party on more favorable terms, we will be
obligated to extend those terms to DuPont. The term of this sub-license is the
same as the terms of our license from the University of Arkansas, except that
the sublicense is terminable by DuPont upon 30 days' notice to us of DuPont's
desire to terminate. DuPont and their customers are current or potential
competitors of ours, and we can give no assurance that these sublicenses will
not materially and adversely affect our financial condition.
As of December 31, 2000, we held 29 U.S. patents. Twelve of these patents
are for technologies directed toward producing thin-film materials, including
our proprietary thin-film process for TBCCO production, expiring in 2008 to
2016. In addition, we currently hold nine U.S. patents for circuit designs
expiring in 2010 to 2017 and eight U.S. patents covering cryogenics and
packaging expiring in 2012 to 2018. As of December 31, 2000, we had nine U.S.
patents pending, including five covering our designs and four related to
cryogenics and packaging.
As of December 31, 2000, we held 23 foreign patents. Eleven of these
patents are for technologies directed toward producing thin-film materials,
including our proprietary thin-film process for TBCCO production, expiring in
2008 to 2016. In addition, we currently hold four foreign patents for circuit
designs expiring in 2010 to 2017 and eight foreign patents covering cryogenics
and packaging expiring in 2012 to 2018. As of December 31, 2000, we had sixteen
foreign patents pending, including eight covering our designs and five related
to cryogenics and packaging.
We have trade secrets and unpatented technology and proprietary knowledge
about the sale, promotion, operation, development and manufacturing of our
products. We have confidentiality agreements with our employees and consultants
to protect these rights.
We own a federally registered trademark to the name SuperFilter(R). We own
other registered and unregistered trademarks, and have certain trademark rights
in foreign jurisdictions. We intend to aggressively protect our trademarks.
COMPETITION
The wireless communication market is intensely competitive. We face
competition in various aspects of our technology and product development and in
each of our targeted markets. Our current and potential competitors include
conventional RF filter manufacturers and both established and newly-emerging
companies developing similar or competing superconducting technologies. We
compete primarily with Conductus, Inc. and Illinois Superconductor Corporation
with respect to our superconducting filter systems. We also compete with
alternative means of enhancing base stations' range and selectivity other than
by a superconducting filter. The primary competition from alternative means
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.
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In addition, we currently supply components and license technology to large
companies and industry leaders that may decide to manufacture or design their
own superconducting components instead of purchasing or licensing our
technology. We compete with DuPont and Amtel, a Japanese consortium, among
others, with respect to our HTS materials. In the government sector, we compete
with universities, national laboratories and both large and small companies for
research and development contracts. We expect increased competition both from
existing competitors and a number of companies that may enter the wireless
communications market.
EMPLOYEES
We employed a total of 178 persons as of December 31, 2000: 103 in
manufacturing, 39 in research and development, 20 in sales and marketing and 16
in administration. Nine of our employees have Ph.D.s, and fifteen others hold
advanced degrees in physics, materials science, electrical engineering and
related fields. Our employees are not represented by a labor union, and we
believe that our employee relations are good.
We are highly dependent upon the efforts of our senior management. Due to
the specialized technical nature of our business, we are also highly dependent
upon our 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 our senior management or technical teams could hinder our ability to
achieve our product development and commercialization objectives. There is
intense competition for qualified personnel in our market areas and we can give
no assurance that we will be able to continue to attract and retain qualified
personnel necessary for the development of our business.
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.
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 2002. The Company also leases
regional sales offices in Illinois, Texas and Washington on 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 2002. The Company believes that suitable
space will be available at a reasonable cost in Santa Barbara or other nearby
areas.
ITEM 3. LEGAL PROCEEDINGS
We are not presently involved in any litigation or arbitration proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of the Company's stockholders
during the quarter ended December 31, 2000.
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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(R) 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(R).
HIGH LOW
---- ---
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
Quarter ended July 1, 2000 .......................... $ 42.25 $ 11.06
Quarter ended September 30, 2000 .................... $ 40.00 $ 16.88
Quarter ended December 31, 2000 ..................... $ 19.50 $ 2.66
2001
Quarter ended March 31, 2001 (through March 28, 2001) $ 10.44 $ 3.00
HOLDERS OF RECORD
As of March 26, 2001, we had approximately 160 holders of record of our
common stock. We estimate that there are more than 16,000 round lot beneficial
owners of our common stock.
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.
SALES OF UNREGISTERED SECURITIES
During the fourth quarter of 2000, we did not issue any equity securities
that were not registered under the Securities Act of 1933.
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.
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YEAR ENDED DECEMBER 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net Revenues:
Net commercial product revenues ................ $ 250 $ 175 $ 1,954 $ 2,053 $ 5,303
Government contract revenues ................... 7,104 8,104 6,029 5,059 4,643
Sub license royalties .......................... 38 38 -- 10 10
-------- -------- -------- -------- --------
Total net revenues .......................... 7,392 8,317 7,983 7,122 9,956
Costs and expenses:
Cost of commercial product revenues ......... -- -- 5,873 6,848 15,710
Contract research and development .............. 5,721 6,218 4,693 3,427 4,235
Other research and development .............. 2,260 1,809 1,161 1,747 2,633
Selling, general and administrative ......... 2,967 4,076 5,435 5,664 8,225
Non-recurring charges ....................... -- -- -- -- 132
-------- -------- -------- -------- --------
Total costs and expenses ................. 10,948 12,103 17,162 17,686 30,935
-------- -------- -------- -------- --------
Loss from operations ........................... (3,556) (3,786) (9,179) (10,564) (20,979)
Other income (expense), net .................... 85 245 17 (311) 323
-------- -------- -------- -------- --------
Net loss ....................................... (3,471) (3,541) (9,162) (10,875) (20,656)
Less deemed and cumulative preferred stock
dividends ................................... -- -- (271) (1,364) (2,203)
-------- -------- -------- -------- --------
Net loss available to common stockholders ...... (3,471) (3,541) (9,433) (12,239) (22,859)
before cumulative effect of accounting change
Cumulative effect of accounting change on ...... -- -- -- -- (10,612)
-------- -------- -------- -------- --------
preferred stock beneficial conversion feature
Net loss available to common stockholders ...... ($ 3,471) ($ 3,541) ($ 9,433) ($12,239) ($33,471)
======== ======== ======== ======== ========
Basic and diluted net loss per share:
Net loss per common share before cumulative
effect of accounting change ................. ($ 0.57) ($ 0.46) ($ 1.22) ($ 1.58) ($ 1.42)
Cumulative effect of accounting change ......... -- -- -- -- (0.67)
-------- -------- -------- -------- --------
Net loss per common share ...................... ($ 0.57) ($ 0.46) ($ 1.22) ($ 1.58) ($ 2.09)
======== ======== ======== ======== ========
Weighted average number of shares
Outstanding ................................. 6,117 7,701 7,725 7,744 16,050
DECEMBER 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents..................... $6,871 $3,537 $310 $66 $31,824
Working capital............................... 7,178 3,500 1,349 (13) 36,186
Total assets.................................. 13,344 10,087 12,509 11,085 46,761
Long-term debt, including current portion..... 77 13 1,112 961 751
Redeemable preferred stock.................... -- -- 8,982 17,125 --
Total stockholders' equity (deficit).......... 11,290 8,166 (1,197) (11,656) 38,409
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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GENERAL
We develop, manufacture and market high performance products to service
providers, systems integrators and original equipment manufacturers in the
wireless telecommunications industry. Our primary product line is the
SuperFilter(R) System. The SuperFilter(R) System is used in wireless base
stations to filter and amplify the signals received at the antenna from
subscribers' handsets. It is designed to meet the growing demands of the
wireless communication market for improved coverage, greater capacity, and
reduced interference. It accomplishes these needs through the combination of
specialized filters utilizing high temperature superconducting technology with a
proprietary cryogenic cooler and a cooled low noise amplifier in a highly
compact system. The SuperFilter(R) System offers significant advantages over
conventional filter systems. As a result, service providers benefit from lower
capital and operating costs and higher minutes of use, the latter a result of
subscribers experiencing better call quality, fewer dropped calls and higher
speed data transmissions.
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(R) in 1997
and shipped more than 390 units in 2000. As the Company continues to focus on
its commercial products, commercial revenues are expected to increase as a
percentage of revenues. The Company has incurred cumulative losses of $68
million from inception to December 31, 2000.
Our backlog consists of accepted product purchase orders scheduled for
delivery within six months. We had a backlog of $746,000 at December 31, 2000,
as compared to no backlog at December 31, 1999. We also had an additional $5.8
million of bookings at December 31, 2000 under a $7.8 million purchase order
from U.S. Cellular with unscheduled delivery dates. See subsection below
entitled "Non-Cash Charges for Warrants Issued to U.S. Cellular" for a
discussion of the accounting for this purchase order.
RESULTS OF OPERATIONS
2000 AS COMPARED WITH 1999
Net revenues increased by $2.9 million, or 40%, from $7.1 million in 1999
to $10.0 million in 2000. The increase is due to higher commercial product
revenues, partially offset by lower government contract revenues.
Net commercial product revenues consist of gross commercial product sales
proceeds less discounts and an allocation of proceeds to a warrant issued to one
customer in 1999 under a long-term supply agreement. For a discussion of the
allocation to warrants, please read the discussion under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Non-Cash Charges for Warrants Issued To U.S. Cellular." The
following table summarizes the calculation of net commercial product revenues
for 1999 and 2000:
Dollars in thousands YEAR ENDED DECEMBER 31,
----------------------
1999 2000
---- ----
Gross commercial product sales proceeds .......................... $ 2,177 $ 7,647
Less allocation of proceeds to warrants issued to U.S. Cellular (124) (2,295)
Less sales discounts .......................................... -- (49)
------- -------
Net commercial product revenues .................................. $ 2,053 $ 5,303
======= =======
Net commercial product revenues increased by $3.2 million, or 159%, from
$2.1 million in 1999 to $5.3 million in 2000. This increase is the result of
increased sales of our SuperFilter products and a shift in the product mix
toward higher-priced SIX-Pak units. The increase in gross commercial product
sales proceeds was partially offset by $2.3 million in 2000 and $124,000 in 1999
to reflect an allocation of proceeds to warrants issued to U.S. Cellular in
connection with those sales. The warrant charges increased because of growing
product shipments to U.S. Cellular and a dramatic increase in our stock price
during 2000.
Government contract revenues decreased by $416,000, or 8%, from $5.1
million in 1999 to $4.6 million in 2000. We expect government contract revenues
to decline as we focus more of our research and development resources on our
commercial business. We plan to focus our future government contract work on
projects that have applications to our commercial product business.
Cost of commercial product revenues includes all direct costs,
manufacturing overhead and related start-up costs. The
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cost of commercial product revenues was $15.7 million for 2000, including an
accrued non cash loss of $4.2 million relating to the purchase order received
from U.S. Cellular and other non-cash warrant charges relating to U.S. Cellular
of $482,000. Please read the subsection below entitled "Non-Cash Charges for
Warrants Issued To U.S. Cellular." Excluding the non-cash charges relating to
the supply agreement with U.S. Cellular, cost of commercial revenues increased
$4.1 million, or over 60%, from $6.9 million for 1999. This increase 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.
We generate negative gross margins on our SuperFilter products at current
sales levels primarily due to fixed manufacturing overhead costs. Based on
current prices, expected product mix and costs, we estimate that we will achieve
positive gross margins when product sales reach approximately 200 systems per
quarter. We expect to reach this level sometime in the second half of 2001.
Contract research and development expenses increased by $808,000, or 24%,
from $3.4 million in 1999 to $4.2 million in 2000. Contract research and
development expenses as a percentage of related revenues totaled 91% for 2000,
as compared with 68% last year. The percentage increase is due to higher
expenses associated with a completed contract, the effect of spreading fixed
expenses over a lower revenue base and the increased use of subcontractors.
Other research and development expenses increased by $886,000, or 51%, from
$1.7 million in 1999 to $2.6 million in 2000. This increase is due to increased
spending on product line expansion, further development of the SuperFilter
product line and product cost reduction efforts.
Selling, general and administrative expenses increased by $2.6 million, or
45%, from $5.7 million in fiscal 1999 to $8.2 million in fiscal 2000. This
increase results 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.
Non-recurring charges of $132,000 consist of the write off of deferred
offering expenses in the second quarter of 2000.
Interest income increase to $806,000 in 2000, as compared to $21,000 in the
prior year, due to higher levels of cash available for investment.
Interest expense increased by $151,000, or 45%, from $332,000 in 1999 to
$483,000 in 2000 and resulted from new financing agreements in 1999 and 2000.
The Company had a net loss of $20.7 million for the year ended December 31,
2000, as compared to $10.9 million for the prior year. Excluding the effect of
the allocation of sales proceeds to warrants and loss accrual relating to the
long-term sales contract with U.S. Cellular, the Company would have had a net
loss of $13.6 million in 2000 as compared to $10.8 million in the prior year.
The net loss available to common shareholders of $33.5 million, or $2.09
per share, for fiscal 2000 included $10.6 million for the non-cash cumulative
effect of an accounting change and $2.2 million of non-cash deemed dividends on
preferred stock. The net loss available to common shareholders of $12.2 million,
or $1.58 per share, for fiscal 1999 included $1.4 million for non-cash dividends
and other deemed distributions to preferred stockholders. Excluding the effect
of these non-cash items and those in the preceding paragraph, the loss per share
for 2000 totaled $0.85 per share as compared to $1.39 per share last year.
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 net commercial product revenues.
The following table summarizes the calculation of net commercial product
revenues for fiscal 1998 and 1999:
EAR ENDED DECEMBER 31,
Dollars in thousands ---------------------
1998 1999
------- -------
Gross commercial product sales proceeds .......................... $ 1,954 $ 2,177
Less allocation of proceeds to warrants issued to U.S. Cellular -- (124)
------- -------
Net commercial product revenues .................................. $ 1,954 $ 2,053
======= =======
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Net commercial product revenues increased by $99,000, or 5%, from $2.0
million in 1998 to $2.1 million in 1999. This increase is the result of higher
sales of our SuperFilter products and a shift to higher priced units, partially
offset by decreasing average selling prices due to competitive pricing
pressures. Gross commercial product sales proceeds were reduced by $124,000 in
1999 to reflect an allocation of the proceeds from sales to U.S. Cellular to the
warrants vesting in connection with those sales. For a discussion of the
allocation of proceeds to the warrant, please read the discussion under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations --Non-Cash Charges for Warrants Issued To U.S. Cellular."
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.
The cost of commercial product revenues increased by $975,000, or 17%, from
$5.9 million for 1998 to $6.8 million in 1999. The increase reflects 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 1998 to $1.7 million in 1999. This increase is due to increased
spending on product line expansion, further development of the SuperFilter
product line and product cost reduction efforts.
Selling, general and administrative expenses increased by $229,000, or 4%,
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 $270,000, or over 100%, from $62,000 in 1998
to $332,000 in 1999. This increase occurred as the Company entered into new
working capital financing agreements and increased borrowings for working
capital needs in 1999.
The Company had a net loss of $10.9 million for the year ended December 31,
1999, as compared to $9.2 million for the prior year. The net loss available to
common shareholders of $12.2 million, or $1.58 per share, for 1999 included $1.4
million for non-cash deemed dividends on preferred stock. The net loss available
to common shareholders totaled $9.4 million, or $1.22 per share, for 1998 and
included $271,000 for non-cash dividends.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by approximately $31.8 million from
$66,000 on December 31, 1999 to $31.8 million on December 31, 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.
Cash used in operations totaled $14.5 million in 2000. We used $11.8
million to fund the cash portion of our net losses. We also used cash to fund a
$2.1 million increase in accounts receivable and a $1.0 million increase in
inventory. Cash used in operations in 1999 totaled $9.7 million and was used
primarily to fund operating losses of $9.2 million net of non-cash adjustments.
Net cash used in investing activities totaled $2.2 million in fiscal 2000
and related to the purchase of manufacturing equipment. Net cash provided by
investing activities totaled $285,000 in fiscal 1999 and resulted from the
purchase of equipment offset by the proceeds of $900,000 from the sale and
leaseback of certain production equipment.
Net cash provided by financing activities totaled $48.4 million in fiscal
2000. Cash received from private sales of common stock and preferred stock, as
well as from the exercise of outstanding warrants and stock options, totaled
$50.1
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million and was partially offset by the net reduction in borrowings of $1.7
million. In the same period of 1999, cash provided by financing operations
totaled $9.2 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 raised net proceeds of $35.1 million from the
private 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.
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 an aggregate maximum of 3,554,656 shares of common stock.
The preferred stock carries a 7% conversion 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.
During fiscal 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.
We also have a revolving line of credit available that matures on December
20, 2001. The line of credit cannot exceed the lesser of (i) $2.5 million or
(ii) 80% of eligible accounts receivable. The line of credit bears interest at
prime rate (9.5% at December 31, 2000) plus 1%, requires that certain financial
and business covenants be maintained and is collateralized by substantially all
of the Company's assets.
We are prohibited from paying any dividends on, or repurchasing any shares
of, common stock under the terms of our Series E Preferred Stock.
At December 31, 2000, we had cash commitments for the purchase of fixed
assets totaling $933,000. To meet the anticipated continued increase in demand
for our products, we expect to invest $3.6 to $4.6 million for equipment in
2001. In addition, increased sales will require that higher inventory and
accounts receivable balances be maintained. We expect our existing cash
resources, together with our line of credit, will be sufficient to meet our cash
needs into 2002.
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 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. For accounting purposes, we are allocating proceeds from sales
under this agreement between commercial product revenues and the estimated value
of the warrants vesting in connection with those sales. The estimated fair value
of the warrants in excess of the related sales, when applicable, is recorded in
cost of commercial product revenues. U.S. Cellular vested in the right to
purchase 48,980 shares of common stock for product purchases in 1999 and 53,460
shares of
17
18
common stock for product purchases in 2000. As a result, we allocated $124,000
of sales proceeds to vesting warrants in 1999 and $1,660,000 of sales proceeds
to vesting warrants in 2000. We also allocated $482,000 to cost of commercial
product revenues in the second quarter of 2000 for the estimated value of
vesting warrants in excess of related sales to U.S. Cellular.
In September 2000, the Company received a $7.8 million noncancelable
purchase order from U.S. Cellular for SuperFilter(R) 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 U.S.
Cellular. The vested warrants are immediately exercisable, not subject to
forfeiture, and U.S. Cellular has no other obligations to the Company.
We estimated the fair value of the warrants vesting upon receipt of this
order at $5,635,000 using the Black-Scholes option-pricing model and recorded
this amount as a deferred warrant charge in the statement of stockholders'
equity. As SuperFilter systems are shipped under this purchase order, the
related sales proceeds will be allocated between stockholders equity and
commercial product revenue using the percentage relationship which existed
between the fair value of the warrants as recorded in September 2000 and the
amount of the non-cancelable purchase order. In 2000, we allocated sales
proceeds of $1,118,000 for shipments under this purchase to the deferred warrant
charge and recorded sales proceeds of $1,765,000 as commercial product revenues.
After the allocation of sales proceeds to the related warrants, the
estimated cost of providing products under the purchase order exceeds related
revenue by $5.3 million. We included the resulting loss in the results of
operations for the year ended December 31, 2000. In addition, through December
31, 2000, we amortized $1,059,000 of this reserve against the cost of product
delivered under this purchase order.
The following table summarizes the allocation of sales proceeds to warrants
issued under the U.S. Cellular agreement and the contract loss reserve for the
years indicated:
Dollars in thousands YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
---- ---- ----
Warrants issued to U. S. Cellular allocated from gross commercial
product sales proceeds through September 14, 2000 ...................... $ -- $ 124 $ 1,177
Warrants issued to U.S. Cellular allocated from gross commercial
product sales proceeds subsequent to September 14, 2000 ................ -- -- 1,118
--------- --------- -------
Total ................................................................... $ -- $ 124 $ 2,295
========= ========= =======
Warrants issued to U.S. Cellular included in cost of commercial
product revenue ......................................................... -- -- $ 482
========= ========= =======
Non-cash loss included in cost of commercial product revenues in
September 2000 .......................................................... -- -- $ 5,300
Amortization of non-cash loss against cost of commercial product
revenues delivered to U.S. Cellular ..................................... -- -- ($1,059)
========= ========= =======
Non-cash loss remaining at December 31, 2000 to be amortized against cost of
commercial product revenues based on future products
deliverable to U.S Cellular ................................................ $ -- $ -- $ 4,241
========= ========= =======
As of December 31, 2000, U.S. Cellular had 585,560 unvested warrants that
can be earned from future product orders through August 27, 2004.
NET OPERATING LOSS CARRYFORWARD
At December 31, 2000, the Company had a federal net operating loss
carryforward of approximately $78.4 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 have not evaluated 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
18
19
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.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities"; SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. It also requires that gains or losses
resulting from changes in the values of those derivatives be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Adoption of SFAS No. 133 is required for the fiscal year beginning
January 1, 2001. Management believes the adoption of SFAS No. 133 will not have
a material impact on the Company's financial position or results of operations.
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, 2000, the Company had no amounts outstanding under a variable rate
revolving line of credit. The variable rate obligations are based on the
lenders' prime rate plus 1%. Assuming $2.5 million borrowings against the
revolving line of credit, an increase of one-half of a percentage point in the
lenders' prime rate on January 1, 2001, and no principal payments for the
remainder of the year, the Company's total interest expenses would increase by
less than $13,000 for 2001 as compared to 2000.
At December 31, 2000, the Company had $31.5 million invested in a money
market account yielding approximately 6%. Assuming a 1% decrease in the yield on
this money market account and no liquidation of principal for the year, the
Company's total interest income would decrease $315,000 per annum.
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,
future commercial revenues, market growth, capital requirements, new product
introductions, expansion plans and the adequacy of our funding. Other statements
contained in this report that are not historical facts are also forward-looking
statements. We have tried, wherever possible, to identify forward-looking
statements by terminology such as "may," "will," "could," "should," "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and other
comparable terminology.
Forward-looking statements are not guarantees of future performance and are
subject to various risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results may differ materially from those expressed in
forward-looking statements. They can be affected by many factors, including, but
not limited to the following:
o fluctuations in product demand,
o the impact of competitive filter products, technologies and pricing,
o manufacturing capacity constraints and difficulties,
o market acceptance risks, and
o general economic conditions.
Please read Exhibit 99 to this report entitled "Disclosure Regarding
Forward-Looking Statements" for a description of additional uncertainties and
factors that may affect our forward-looking statements. Forward-looking
statements are based on information presently available to senior management,
and we do not assume any duty to update our forward-looking statements.
INFLATION
The Company does not foresee any material impact on its operations from
inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
19
20
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, 2000.
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, 2000.
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, 2000.
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, 2000.
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:
PAGE
----
Report of Independent Accountants............................................................ F-1
Balance Sheet as of December 31, 1999 and 2000................................................F-2
Statement of Operations for the years ended December 31, 1998, 1999 and 2000..................F-3
Statement of Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000........F-4
Statement of Cash Flows for the years ended December 31, 1998, 1999 and 2000..................F-5
Notes to Financial Statements.................................................................F-6
20
21
2. Financial Statement Schedule Covered by the Foregoing Report of
Independent Public Accounts Statement.
Schedule II - Valuation and Qualifying
Accounts..............................................F-20
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.
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.1 Amended and 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(14)
4.25 Warrant Purchase Agreement dated December 1, 1999 with PNC
Bank(14)
4.26 Warrant Purchase Agreement dated January 12, 2000 with PNC
Bank(14)
4.27 Warrant Purchase Agreement dated February 9, 2000 with
Wilmington Securities Inc.(14)
4.28 Certificate of Designations, Preferences and Rights of Series E
Convertible Stock(16)
4.29 Securities Purchase Agreement dated as of September 29, 2000
between the Company and RGC International Investors, LDC.
(Exhibits and Schedules Omitted) (16)
4.30 Registration Rights Agreement dated as of September 29, 2000
between the Company and RGC International Investors, LDC. (16)
4.31 Initial Stock Purchase Warrant dated as of September 29, 2000
between the Company and RGC International 4.31 Investors, LDC.
(16)
4.32 Incentive Stock Purchase Warrant dated as of September 29, 2000
between the Company and RGC International Investors, LDC. (16)
4.33 Incentive Stock Purchase Warrant dated as of September 29, 2000
by and between the Company and RGC International Investors, LDC.
(16)
10.1 Technology Agreement between the Registrant and Lockheed
Corporation dated January 8, 1988(2) *
10.2 Technical Information Exchange Agreement between the Registrant
and Philips dated September 1989(2)
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(2)
21
22
10.4 Form of Consulting Agreement(2)
10.5 Form of Employee Proprietary Information Agreement(2)
10.6 1992 Director Option Plan(2)
10.7 Form of Indemnification Agreement(2)
10.8 License Agreement between the Registrant and the University of
Arkansas dated April 9, 1992, as amended(2)
10.9 Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated May 17, 1991, as amended(2)
10.10 1992 Stock Option Plan(2)
10.11 Proprietary Information & Patents Inventions Agreement among the
Registrant, E-Systems, Inc. and various other parties; Purchase
Order dated October 10, 1991(2)
10.12 Joint Venture Company (JDC) Agreement between the Registrant and
Sunpower Incorporated dated April 2, 1992(2) *
10.13 Government Contract issued to Registrant by the Defense Advanced
Research Projects Agency through the Office of Naval Research
dated September 4, 1991(2)
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(2)
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 Cotten 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(14)
10.29 Term Note dated January 12, 2000 with PNC Bank(14)
10.30 Second Amendment to Credit Agreement dated January 12, 2000
between Registrant and PNC Bank (14)
10.31 Financing commitment from Wilmington Securities Inc. dated March
29, 2000(14)
10.32 Amendment No. 1 to the United States Cellular Purchase
Agreement. (17)
10.33 Amendment No. 2 to the United States Cellular Purchase
Agreement. (17)
10.34 Third Amendment to Credit Agreement dated March 29, 2000 between
Registrant and PNC Bank
10.35 Fourth Amendment to Credit Agreement dated December 21, 2000
between Registrant and PNC Bank
10.36 1998 Stock Option Plan(18)
23 Consent of Independent Accountants
24 Power of Attorney (included on signature page hereto)
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.
(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 the 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.
22
23
(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)
(14) Incorporated by reference from the Registrant's Annual Report on Form 10-K
filed for the year ended December 31, 1999.
(15) Incorporated by reference from the Registrant's Annual Report on Form 10-Q,
filed for the quarter ended April 1, 2000.
(16) Incorporated by reference from the Registrant's Current Report on Form 8-K,
filed October 4, 2000.
(17) Incorporated by reference from the Registrant's Annual Quarterly Report on
Form 10-Q filed for the quarter ended September 20, 2000.
(18) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-56606).
* Confidential treatment has been previously granted for certain
portions of these exhibits.
(b) REPORTS ON FORM 8-K. On October, 4, 2000, the Company filed a report
on Form 8-K which described its September 29, 2000 $37.5 million
private equity investment which resulted in the issuance of a newly
created Series E Convertible Preferred Stock.
(c) EXHIBITS. See Item 14(a) above.
23
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Superconductor Technologies Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) in this Annual Report on Form 10-K present fairly, in all material
respects, the financial position of Superconductor Technologies Inc. at December
31, 1999 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion the financial statement schedule listed in the index
appearing under Item 14(a)(2) in this Annual Report on Form 10-K presents
fairly, in all material respects, the information set forth therein when read in
conjuction with the related financial statements. 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 of America, which 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 our opinion.
As discussed in Note 3 to the financial statements, the Company changed its
method of calculating the beneficial conversion feature associated with the
issuance of convertible preferred stock.
/s/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 19, 2001
F-1
25
SUPERCONDUCTOR TECHNOLOGIES, INC.
BALANCE SHEET
ASSETS
DECEMBER 31, DECEMBER 31,
1999 2000
-------------- -------------
Current Assets:
Cash and cash equivalents $ 66,000 $ 31,824,000
Accounts receivable 1,590,000 3,689,000
Inventory 2,745,000 3,775,000
Prepaid expenses and other current assets 452,000 500,000
------------- -------------
TOTAL CURRENT ASSETS 4,853,000 39,788,000
Property and equipment, net of accumulated depreciation of
$8,054,000 and $9,353,000 respectively 4,097,000 4,991,000
Patents and licenses, net of accumulated amortization of
$1,521,000 and $1,761,000 respectively 1,927,000 1,877,000
Other assets 208,000 105,000
------------- -------------
TOTAL ASSETS $ 11,085,000 $ 46,761,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 1,953,000 $ --
Accounts payable 1,796,000 1,996,000
Accrued expenses 906,000 1,364,000
Current portion of long-term debt and capitalized lease obligations 211,000 242,000
------------- -------------
TOTAL CURRENT LIABILITIES 4,866,000 3,602,000
Long-term debt and capitalized lease obligations 750,000 509,000
Accrual for Contract Loss -- Note 8 -- 4,241,000
------------- -------------
TOTAL LIABILITIES 5,616,000 8,352,000
REDEEMABLE CONVERTIBLE PREFERRED STOCK 17,125,000 --
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
COMMITMENTS AND CONTINGENCIES-NOTE 10
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 $38,169,000 -- --
Common stock, $.001 par value, 30,000,000 and 75,000,000 shares
authorized, 7,739,218 and 17,823,164 shares issued and outstanding 8,000 18,000
Capital in excess of par value 35,426,000 110,654,000
Deferred warrant charges -- (4,517,000)
Accumulated deficit (47,090,000) (67,746,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (11,656,000) 38,409,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,085,000 $ 46,761,000
============= =============
See accompanying notes to the financial statements
F-2
26
SUPERCONDUCTOR TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------
1998 1999 2000
------------ ------------ ------------
NET REVENUES:
Net commercial product revenues-Note 8 $ 1,954,000 $ 2,053,000 $ 5,303,000
Government contract revenues 6,029,000 5,059,000 4,643,000
Sub license royalties -- 10,000 10,000
------------ ------------ ------------
TOTAL NET REVENUES 7,983,000 7,122,000 9,956,000
COSTS AND EXPENSES:
Cost of commercial product revenues-Note 8 5,873,000 6,848,000 15,710,000
Contract research and development 4,693,000 3,427,000 4,235,000
Other research and development 1,161,000 1,747,000 2,633,000
Selling, general and administrative 5,435,000 5,664,000 8,225,000
Non-recurring charge -- -- 132,000
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 17,162,000 17,686,000 30,935,000
LOSS FROM OPERATIONS (9,179,000) (10,564,000) (20,979,000)
Interest income 79,000 21,000 806,000
Interest expense (62,000) (332,000) (483,000)
------------ ------------ ------------
NET LOSS (9,162,000) (10,875,000) (20,656,000)
LESS:
Redeemable preferred stock dividends (271,000) (908,000) --
Deemed distribution attributable to the inducement to
convert preferred stock and beneficial conversion feature -- (456,000) (2,203,000)
------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (9,433,000) (12,239,000) (22,859,000)
Cumulative effect of accounting change on preferred
stock beneficial conversion feature -- -- (10,612,000)
------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS FOR
COMPUTATION OF LOSS PER COMMON SHARE ($ 9,433,000) ($12,239,000) ($33,471,000)
============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Net loss per common share before cumulative
effect of accounting change ($ 1.22) ($ 1.58) ($ 1.42)
Cumulative effect of accounting change -- -- (0.67)
------------ ------------ ------------
NET LOSS PER COMMON SHARE ($ 1.22) ($ 1.58) ($ 2.09)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,724,829 7,744,008 16,050,423
============ ============ ============
See accompanying notes to the financial statements
F-3
27
SUPERCONDUCTOR TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED
COMMON STOCK STOCK
------------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ----------- --------
BALANCE AT DECEMBER 31, 1997 7,699,581 $ 8,000 -- $--
Exercise of stock options 23,010
Cumulative dividends on
redeemable preferred stock
Net loss
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 7,722,591 8,000 -- --
Cumulative dividends on
redeemable preferred stock
Issuance of warrants
Exercise of stock options 16,627
Net loss
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 7,739,218 8,000 -- --
Conversion of mandatory redeemable
convertible preferred stock 5,633,901 6,000
Issuance of common stock for
conversion of note payable 153,846
Issuance of common stock for cash 2,319,855 2,000
Exercise of warrants 1,152,174 1,000
Exercise of stock options 824,170 1,000
Issuance of warrants and stock options
Amortization of deferred warrant charges
Issuance of Series E Convertible
Preferred Stock and warrants 37,500
Net loss
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 17,823,164 $ 18,000 37,500 $--
================================================================================================================
CAPITAL IN DEFERRED
EXCESS OF WARRANT ACCUMULATED
PAR VALUE CHARGES DEFICIT TOTAL
-------------- --------------- --------------- -------------
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 (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 (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 AT DECEMBER 31, 1999 35,426,000 (47,090,000) (11,656,000)
Conversion of mandatory redeemable
convertible preferred stock 17,119,000 17,125,000
Issuance of common stock for
conversion of note payable 500,000 500,000
Issuance of common stock for cash 7,381,000 7,383,000
Exercise of warrants 3,968,000 3,969,000
Exercise of stock options 3,562,000 3,563,000
Issuance of warrants and stock options 7,543,000 (5,635,000) 1,908,000
Amortization of deferred warrant charges 1,118,000 1,118,000
Issuance of Series E Convertible
Preferred Stock and warrants 35,155,000 35,155,000
Net loss (20,656,000) (20,656,000)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 110,654,000 ($ 4,517,000) ($ 67,746,000) $ 38,409,000
=========================================================================================================================
See accompanying notes to the financial statements.
F-4
28
SUPERCONDUCTOR TECHNOLOGIES, INC.
STATEMENT OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------
1998 1999 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 9,162,000) ($10,875,000) ($20,656,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 941,000 1,306,000 1,794,000
Accrued loss on sales contract -- -- 4,241,000
Warrants and options charges -- 335,000 2,798,000
Changes in assets and liabilities:
Accounts receivable (891,000) 349,000 (2,099,000)
Inventory (2,042,000) (329,000) (1,030,000)
Prepaid expenses and other current assets (27,000) (155,000) (159,000)
Patents and licenses (145,000) (94,000) (165,000)
Other assets (113,000) 3,000 90,000
Accounts payable and accrued expenses 1,135,000 (277,000) 691,000
------------ ------------ ------------
Net cash used in operating activities (10,304,000) (9,737,000) (14,495,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 2,099,000 -- --
Purchase of property and equipment (3,372,000) (615,000) (2,193,000)
Proceeds from sale of property and equipment -- 900,000
------------ ------------ ------------
Net cash (used in) provided by investing activities (1,273,000) 285,000 (2,193,000)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from borrowings 1,786,000 3,200,000 1,500,000
Payments on short term borrowings -- -- (2,953,000)
Payments on long-term obligations (118,000) (190,000) (211,000)
Net proceeds from sale of preferred and common stock 8,781,000 6,198,000 50,110,000
------------ ------------ ------------
Net cash provided by financing activities 10,449,000 9,208,000 48,446,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,128,000) (244,000) 31,758,000
Cash and cash equivalents at beginning of year 1,438,000 310,000 66,000
------------ ------------ ------------
Cash and each equivalents at end of year $ 310,000 $ 66,000 $ 31,824,000
============ ============ ============
See accompanying notes to the financial statements.
F-5
29
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 communications industry.
The Company's principal product, the SuperFilter(R), 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(R) in 1997 and shipped more than 390
units in 2000.
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, 1998, 1999, and 2000, government related
contract accounts for 76%, 71%, and 47% respectively, of the Company's net
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 entities in the wireless communications
industry and to entities of the United States government. The Company grants
uncollateralized credit to its customers. The Company performs ongoing credit
evaluations of its customers before granting uncollateralized credit.
Revenue Recognition
Commercial revenues are principally derived from the sale of the Company's
SuperFilter(R) products and are recognized once all of the following conditions
have been met: a) an authorized purchase order has been received in writing, b)
customer`s credit worthiness has been established, c) shipment of the product
has occurred, d) title has transferred, and e) if stipulated by the contract,
customer acceptance has occurred and all significant vendor obligations, if any,
have been satisfied.
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 the audits will not have a
significant effect on the financial position, results of operations or cash
flows of the Company.
F-6
30
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, with costs primarily
determined using standard costs, which approximate actual costs utilizing the
first-in, first-out method. Provision for potentially obsolete or slow moving
inventory is made based on management's analysis of inventory levels and sales
forecasts.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment 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 the shorter of their estimated useful lives or
seventeen years.
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 and diluted 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
after deducting accumulated dividends on cumulative preferred stock, deemed
dividends and accretion of redemption value on redeemable preferred stock for
the period and beneficial conversion features on issuance of preferred stock.
Common stock equivalents are not included in the calculation of diluted loss per
share because their effect is antidilutive.
Stock-based Compensation
As permitted under Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-
F-7
31
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 provision of SFAS 123 and Emerging Issues Task Force 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 debt approximates fair value based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Comprehensive Income
The Company has no items of other comprehensive income in any period and
consequently does not 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 operations 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.
Reclassifications
Certain reclassifications have been made to the 1998 and 1999 financial
statements to conform to the 2000 presentation.
Certain Risks and Uncertainties
During the three year period ended December 31, 2000, the Company sold
almost 600 SuperFilter(R) 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 the product.
Our two largest commercial customers accounted for 21%, 69% and 49% of our
net commercial revenues for fiscal 1998, 1999 and 2000 respectively and 38% and
63% of accounts receivable as of December 31, 1999 and 2000, respectively.
F-8
32
We currently purchase substrates for growth of high-temperature
superconductor films from one supplier because of the quality of its substrates.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities"; SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. It also requires that gains or losses
resulting from changes in the values of those derivatives be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Adoption of SFAS No. 133 is required for the fiscal year beginning
January 1, 2001. Management believes the adoption of SFAS No. 133 will not have
a material impact on the Company's financial position or results of operations.
NOTE 3 - CUMULATIVE ACCOUNTING CHANGE
On November 6, 2000, the Emerging Issues Task Force ("EITF") issued EITF
00-27, "Application of EITF Issue No.98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
to Certain Convertible Instruments". EITF 0-27 requires that any beneficial
conversion feature associated with a convertible instrument be calculated using
the intrinsic value of a conversion option after first allocating the proceeds
received to the convertible instrument and any other detachable instruments
included in the exchange (such as detachable warrants). As a result of adopting
EITF 00-27, the Company has included in the computation of basic and diluted
loss per share for fiscal 2000 a non-recurring cumulative effect of an
accounting change on a preferred stock beneficial conversion feature of
$10,612,000 related to the issuance of its Series E Preferred Stock in September
2000 and to the issuance of its Series D Preferred Stock in June 1999.
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 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 Company is obligated to pay royalties of 4% on sales of TBCCO-based
products, subject to a $100,000 annual minimum 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. These royalty obligations terminate upon expiration of the right
to claim damages for infringement of all the patents covered.
NOTE 5 - SHORT TERM BORROWINGS AND NOTES PAYABLE
The Company has a revolving line of credit maturing on December 20, 2001.
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 31, 1999 and 9.5% at December 31,
2000) plus 1%. Outstanding borrowings under this line of credit at December 31,
1999 and 2000 were $1,453,000 and none, respectively. The Company is required to
maintain certain minimum tangible net worth, debt, cash flow 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. In connection with the credit agreement in 1999, the Company
issued warrants for the purchase of 62,500 shares of common stock at a price of
$3 per share. In December 1999, five year warrants to purchase 33,333 shares of
common stock at $3 per share were issued in connection with an amendment to the
credit agreement. In January 2000, the credit facility was amended to include a
$1.5 million term note. The term note bore 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 the majority preferred
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 per share was issued in connection with this borrowing.
F-9
33
The weighted average interest rate on short-term borrowings at December 31,
1999 was 8.4%.
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 were amortized over the term of the related debt.
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, 1998, 1999 and 2000.
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, 1998, 1999 and 2000 as follows:
For the Year Ending December 31
1998 1999 2000
-------------------------------
Tax benefit computed at Federal statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes due to:
Change in valuation allowance (41.8) (39.8) (42.8)
State taxes, net of federal benefit 5.8 5.8 8.5
Nondeductible expenses (0.1) -- --
Other 2.1 -- 0.3
-------------------------------
-- -- --
================================
The significant components of deferred tax assets (liabilities) at December
31 are as follows:
1998 1999 2000
-------------------------------------------------
Loss carryforwards $ 9,709,000 $ 13,603,000 $ 28,432,000
Capitalized research and development 2,175,000 2,155,000 3,220,000
Depreciation 1,726,000 1,487,000 1,087,000
Tax credits 1,402,000 985,000 1,187,000
Inventory 56,000 80,000 160,000
Other -- -- 374,000
Less: valuation allowance (15,068,000) (18,310,000) (34,460,000)
-------------------------------------------------
Net deferred tax asset $ -- $ -- $ --
=================================================
The valuation allowance increased by $3,832,000, $3,242,000, and
$16,150,000 in 1998, 1999 and 2000, respectively.
As of December 31, 2000, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $78.4 million and
$30.5 million, respectively, which expire in the years 2000 through 2020. In
addition, the Company has research and development and other tax credits for
federal and state income tax purposes of approximately $761,000 and $351,000
respectively, which expire in the years 2002 through 2020
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.
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 have not completed our evaluation of
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 they could be permitted to offset them against any
future taxable income.
NOTE 7 - STOCKHOLDERS' EQUITY
Preferred Stock
F-10
34
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.
Convertible Preferred Stock
On September 29, 2000, the Company issued in a private placement 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 $35,155,000.
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 an aggregate maximum of 3,554,656 shares of common stock.
The preferred stock carries a 7% conversion premium, payable upon conversion in
cash or common stock subject to certain limitations, at the Company's option.
The beneficial conversion feature related to this conversion premium is being
included in the calculation of net loss available to common shareholders over
the period it is earned by the preferred stockholder.
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 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.
Redeemable Convertible Preferred Stock
During 1998, the Company completed private placements of Series A and
Series A-1 Cumulative Convertible Preferred Stock, to a certain investor. Each
share of Series A and A-1 preferred stock was convertible into two shares of
common stock, carried a cumulative dividend of 6% per annum, had voting rights,
liquidation preferences and was not redeemable by the Company prior to March 26,
2001. In March 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. In August 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. In September 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.
Also in September 1998, the Company completed a private placement of
500,000 shares of Series B Cumulative Convertible Preferred Stock to certain
investors at $8.00 per share. Each share of Series B preferred stock carried a
cumulative dividend rate of 7% per annum, was convertible into two shares of
common stock, had voting rights and liquidation preferences. The proceeds of the
offering, net of offering expenses, totaled approximately $4 million. The Series
B preferred stock was 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.
F-11
35
In February 1999, the Company entered into an agreement to exchange all of
the then outstanding redeemable preferred shares and related warrants for shares
in a new series of preferred stock and modified warrants. The impact of the
exchange 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 stock and
related warrants were exchanged for 12,500 shares of Series A-3 preferred stock
and warrants to purchase 66,669 shares of common stock. 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 stockholders warrants to purchase up to 75,000 shares of common stock
at $7.00.
Each share of the Series A-2, Series A-3 and Series B-1 Convertible
Preferred Stock was convertible into twenty shares of common stock and had
voting rights. The Series A-2 Convertible Preferred Stock carried 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 carried 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 accrual dividends, thereafter. Each share
of the Series B-1 Convertible Preferred Stock carried a cumulative annual
dividend of 7% per share and had a liquidation preference of $80 per share plus
unpaid dividends.
In March 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 carried a cumulative dividend of 7% per annum, had 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.
In June 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, 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, 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 was
convertible into twenty shares of common stock, and carried a cumulative
dividend of 6% per annum, had voting rights and a liquidation preference of $65
per share until December 17, 2003 and $50 per share plus accrued dividends per
share 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 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 a deemed distribution for accounting purposes 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 of the Company's common stock. The deemed dividend was a non-cash,
non-recurring accounting entry for determining net loss available to common
stockholders and the related net loss per share.
F-12
36
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 was as follows:
SHARES OF PREFERRED COMMON STOCK ISSUABLE UPON
------------------- CONVERSION
--------------------------
Series A-2 64,584 1,322,539
Series A-3 12,500 263,852
Series B-1 50,000 1,055,410
Series C 41,667 872,100
Series D 106,000 2,120,000
---------
Total 5,633,901
=========
As described below, all redeemable convertible preferred shares were converted
into common shares in 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 $7,540,000 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 2,458,391 shares of common stock.
As an 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 year ended December 31, 2000, the holders of the outstanding Series B-1 and
D preferred shares elected to convert their holdings into 3,175,409 shares of
common stock.
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. Generally, stock options become exercisable in installments over a
minimum of 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, 2000, options for 677,345 shares of Common Stock
were exercisable.
F-13
37
At December 31, 2000, 672,454 shares of common stock were available for
future grants and 1,889,101 options had been granted but not yet exercised.
Option activity during the three years ended December 31, 2000 was as follows:
Number of Weighted Average
Shares Exercise Price
------------ --------------
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
Granted 984,030 $20.60
Canceled (153,311) $ 7.72
Exercised (824,170) $ 4.32
---------- -----
Outstanding at December 31, 2000 1,889,101 $12.40
=========
The following table summarizes information concerning currently outstanding and
exercisable stock options at December 31, 2000:
Weighted
Average
Remaining Weighted
Range of Number Contractual Weighted Average Average
Exercise Prices Outstanding Life Exercise Price Number Exercisable Exercise Price
--------------- ----------- ---- -------------- ------------------ --------------
$2.3130 - $ 3.6250 421,089 7.22 $ 3.1049 237,033 $3.0889
$3.7500 - $ 5.0000 407,006 7.07 $ 4.2200 257,094 $4.1609
$5.0630 - $11.3750 426,186 7.86 $ 7.8753 183,218 $6.1704
$14.0000 - $30.6880 590,020 9.37 $25.7312 - -
$35.625 - $49.3750 44,800 9.34 $41.4969 - -
--------- -------- --------- -------- ---------
1,889,101 8.05 $12.3987 677,345 $4.3293
========= =======
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the stock-based compensation other than for non-employees. If the Company
had elected to recognize compensation expense for employee awards based upon the
fair value at the grant date consistent with the methodology prescribed by SFAS
123, the Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below:
1998 1999 2000
------------- ------------ -------------
Net Loss:
As reported ($ 9,162,000) ($10,875,000) ($20,656,000)
Pro forma ($ 9,963,000) ($11,689,000) ($23,440,000)
Loss per Share:
As reported ($1.22) ($1.58) ($2.09)
Pro forma ($1.33) ($1.69) ($2.26)
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, 1998, 1999 and 2000, respectively:
dividend yields of zero percent each year; expected volatilities of 50, 75, and
85 percent; risk-free interest rates of
F-14
38
5.31, 5.62, and 6.19%; and expected life of 3.9, 4.0, and 4.0 years. The
weighted average fair value of options granted in 1998, 1999 and 2000 for which
the exercise price equals the market price on the grant date was $2.08, $1.80,
and $13.86 respectively.
Warrants
The following is a summary of outstanding warrants at December 31, 2000:
- --------------------------------------------------------------------------------------------------------
Number of Common Shares
Exercisable Price Per Expiration Date
Total Currently Share
- --------------------------------------------------------------------------------------------------------
Warrants related to issuance of
Series E Preferred 1,044,568 313,370 $21.54 September 29, 2005
Warrants related to borrowings
and sales agreements 62,500 62,500 $ 3.00 June 18, 2004
1,000,000 414,440 $ 4.00 August 27, 2004
33,333 33,333 $ 3.00 December 1, 2004
27,692 27,692 $ 3.25 January 12, 2005
- --------------------------------------------------------------------------------------------------------
NOTE 8 - 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. For accounting purposes proceeds from sales to U.S. Cellular
under this agreement are allocated between commercial product revenue and the
estimated value of the warrants vesting using the Black-Scholes option pricing
model. The estimated fair value of the warrants in excess of the related sales,
when applicable is recorded in cost of commercial product revenues. For product
sales in 1999 and 2000, respectively, U.S. Cellular has vested in the right to
exercise the warrant and purchase a total of 48,980 and 53,460 shares of common
stock, respectively. As a result, sales proceeds allocated to warrants vesting
in 1999 and 2000 were $124,000 and $1,660,000, respectively. In addition, the
estimated value of warrants vesting in excess of certain sales to U.S. Cellular
in the second quarter of 2000 of $482,000 was recorded in cost of commercial
product revenues.
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 U.S. Cellular.
The vested warrants are immediately exercisable, not subject to forfeiture, and
U.S. Cellular has no other obligations to the Company.
The estimated fair value of the warrants vesting upon receipt of this order
was calculated to be $5,635,000 using the Black-Scholes option-pricing model and
has been recorded as a deferred warrant charge in the statement of stockholders'
equity. As SuperFilter systems are shipped under this purchase order, the
related sales proceeds will be allocated between stockholders equity and
commercial product revenue using the percentage relationship which existed
between the fair value of the warrants as recorded in September 2000 and the
amount of the non-cancelable purchase order. The fair value of the warrants was
calculated utilizing a volatility factor of 85%, risk-free interest rate of
6.01%, and an expected life of 3.92 years. During fiscal 2000 sales proceeds of
$1,118,000 for shipments pursuant to this purchase order were allocated to the
deferred warrant charge and proceeds of $1,765,000 were recorded as commercial
product revenues.
After the allocation of sales proceeds to the related warrants, the
estimated cost of providing products under the purchase order exceeds related
revenue by $5.3 million. The resulting loss has been reflected in the results of
operations for the year ended December 31, 2000. In addition through December
31, 2000, $1,059,000 of this reserve was amortized against the cost of product
delivered under this purchase order.
F-15
39
As of December 31, 2000 U.S. Cellular has 585,560 unvested warrants that
can be earned from future product orders through August 27, 2004.
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 $900,000 cash. The loss of $44,000 realized on the
sale transactions 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. The estimated fair value of the warrants was
calculated using the Black-Scholes option-pricing model and is being amortized
over the term of the lease.
For the years ended December 31, 1998, 1999, and 2000, rent expense was
$499,000, $749,000, and $851,000 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%.
F-16
40
The minimum lease payments under operating and capital lease obligations
are as follows: [needs updated]
Year ending December 31, Operating Leases Capital Leases
----------------------- ---------------- --------------
2001 $ 767,000 $ 337,000
2002 733,000 337,000
2003 518,000 241,000
2004 452,000 -
2005 452,000 -
Thereafter 1,983,000 -
--------- -------
Total payments $4,905,000 915,000
=========
Less: amount representing interest (164,000)
-------
Present value of minimum lease 751,000
Less current portion 242,000
-------
Long term portion $509,000
=======
Other Matters
In the normal course of business, the Company, from time to time, is a
defendant on 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 operation.
NOTE 11 - EARNINGS PER SHARE
The computation of per share amounts for 1998, 1999, and 2000 is based on
the average number of common shares outstanding for the period. Options and
warrants to purchase 2,241,964, 3,920,964, and 4,062,194 shares of common stock
during 1998, 1999, and 2000 respectively, were not considered in the computation
of diluted earnings per share because their inclusion would have been
antidilutive. Also, the preferred stock convertible into 2,541,666, 5,633,900,
and 2,089,136 shares of common stock at December 31, 1998, 1999, and 2000 was
not considered in the computation of diluted earnings per share because it's
inclusion would also have been antidilutive.
F-17
41
NOTE 12 - DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS AND SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES
Balance sheet data:
DECEMBER 31
1999 2000
------------ ------------
ACCOUNTS RECEIVABLE:
- --------------------
Accounts receivable-trade $ 793,000 $ 2,662,000
U.S. government accounts receivable-billed 317,000 718,000
U.S. government accounts receivable-unbilled 480,000 321,000
Less: allowance for doubtful accounts -- (12,000)
------------ ------------
$ 1,590,000 $ 3,689,000
============ ============
INVENTORIES:
- ------------
Raw materials $ 428,000 $ 1,094,000
Work-in-process 1,688,000 1,960,000
Finished goods 629,000 721,000
------------ ------------
$ 2,745,000 $ 3,775,000
============ ============
PROPERTY AND EQUIPMENT:
- -----------------------
Equipment $ 9,985,000 $ 12,165,000
Leasehold improvements 2,064,000 2,072,000
Furniture and fixtures 102,000 107,000
------------ ------------
12,151,000 14,344,000
Less: accumulated depreciation and amortization (8,054,000) (9,353,000)
------------ ------------
$ 4,097,000 $ 4,991,000
============ ============
ACCRUED EXPENSES
- ----------------
Compensation related $ 669,000 $ 900,000
Warranty reserve 100,000 250,000
Other 137,000 214,000
------------ ------------
$ 906,000 $ 1,364,000
============ ============
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, 1999 and 2000, equipment includes $1,211,000 of assets
financed under capital lease arrangements, net of $281,000 and $600,000 of
accumulated amortization, respectively. Depreciation expense amounted to
$713,000, $1,126,000, and $1,299,000 for the years ended December 31, 1998, 1999
and 2000, respectively.
F-18
42
Supplemental Cash Flow Information:
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 2000
- --------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 62,000 $ 232,000 $230,000
- --------------------------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activities:
- --------------------------------------------------------------------------------------------------------------------------------
Equipment acquired through issuance of capital lease 34,000
- --------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock exchanged for common stock - - 17,125,000
- --------------------------------------------------------------------------------------------------------------------------------
Common stock options issued for past services in lieu of accounts payable - 14,000 72,000
- --------------------------------------------------------------------------------------------------------------------------------
Issuance of warrants in connection with debt and lease agreements - 491,000 131,000
- --------------------------------------------------------------------------------------------------------------------------------
Dividends accrued not paid 271,000 95,000 -
- --------------------------------------------------------------------------------------------------------------------------------
Conversion of notes payable to purchase preferred and common stock - 1,875,000 500,000
- --------------------------------------------------------------------------------------------------------------------------------
Disposal of fully depreciated property and equipment 277,000 -
- --------------------------------------------------------------------------------------------------------------------------------
Equity issuance costs not yet paid - - 40,000
- --------------------------------------------------------------------------------------------------------------------------------
Assets acquired through issuance of stock options - - 26,000
- --------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (UNAUDITED)
- -----------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- -----------------------------------------------------------------------------------------------------
2000
- -----------------------------------------------------------------------------------------------------
Net revenues $1,669,000 $2,249,000 $2,372,000 $3,666,000
- -----------------------------------------------------------------------------------------------------
Loss from operations (3,616,000) (4,014,000) (9,292,000) (4,046,000)
- -----------------------------------------------------------------------------------------------------
Net loss (3,760,000) (4,081,000) (9,318,000) (3,497,000)
- -----------------------------------------------------------------------------------------------------
Basic and diluted
loss per common share
- -----------------------------------------------------------------------------------------------------
Net loss per common ($0.47) ($0.23) ($0.53) ($0.23)
share before
cumulative effect of
accounting change
- -----------------------------------------------------------------------------------------------------
Cumulative effect of - - - (0.60)
accounting change
- -----------------------------------------------------------------------------------------------------
Net loss per common ($0.47) ($0.23) ($0.53) (0.83)
share
- -----------------------------------------------------------------------------------------------------
1999
- -----------------------------------------------------------------------------------------------------
Net revenues 1,491,000 1,478,000 1,970,000 2,183,000
- -----------------------------------------------------------------------------------------------------
Loss from operations (2,565,000) (2,310,000) (2,813,000) (2,877,000)
- -----------------------------------------------------------------------------------------------------
Net loss (2,616,000) (2,412,000) (2,860,000) (2,987,000)
- -----------------------------------------------------------------------------------------------------
Basic and diluted
loss per common share ($0.36) ($0.35) ($0.43) ($0.42)
- -----------------------------------------------------------------------------------------------------
F-19
43
SUPERCONDUCTOR TECHNOLOGIES, INC.
SCHEDULE II- VALUATION AND QUALIFYING
ACCOUNTS
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONS
Charge to Charge to Charge to
Beginning Costs & Other Other Ending
VALUATION AND QUALIFYING ACCOUNTS Balance Expenses Accounts Deductions Balance
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for Uncollectible Accounts $ - $ 12,000 $ - $ - $ 12,000
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for Inventory Obsolescence 201,000 202,000 - - 403,000
- ----------------------------------------------------------------------------------------------------------------------------
Deferred Tax Asset Valuation Allowance 18,310,000 16,150,000 - - 34,460,000
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for Uncollectible 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 3,242,000 - - 18,310,000
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for Uncollectible 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
- ----------------------------------------------------------------------------------------------------------------------------
F-20
44
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 2001.
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:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ M. PETER THOMAS President, Chief Executive Officer and Director (Principal March 30, 2001
- --------------------------- Executive Officer)
M. Peter Thomas
/s/ MARTIN S. MCDERMUT Vice President, Finance and Administration Chief Financial March 30, 2001
- --------------------------- Officer (Principal Financial Officer)
Martin S. McDermut
/s/ WILLIAM J. BUCHANAN Controller (Principal Accounting Officer) March 30, 2001
- ---------------------------
William J. Buchanan
/s/ GLENN E. PENISTEN Director March 30, 2001
- ---------------------------
Glenn E. Penisten
/s/ ROBERT P. CAREN Director March 30, 2001
- ---------------------------
Robert P. Caren
/s/ E. RAY COTTEN Director, Senior Vice President, Business Development March 30, 2001
- --------------------------- and Chief Marketing Officer
E. Ray Cotten
/s/ DENNIS J. HOROWITZ Director March 30, 2001
- ---------------------------
Dennis J. Horowitz
/s/ JOHN D. LOCKTON Chairman of the Board March 30, 2001
- ---------------------------
John D. Lockton
/s/ JOSEPH C. MANZINGER Director March 30, 2001
- ---------------------------
Joseph C. Manzinger
/s/ J. ROBERT SCHRIEFFER Director March 30, 2001
- ---------------------------
J. Robert Schrieffer
/s/ H. VAUGHAN BLAXTER, III Director March 30, 2001
- ---------------------------
H. Vaughan Blaxter, III
45
Securities and Exchange Commission
Washington, D.C. 20549
Exhibits to Form 10-K
For Fiscal Year Ended December 31, 2000
Commission File No. 0-21074
Superconductor Technologies Inc.
46
EXHIBIT INDEX
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Amended and 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(14)
4.25 Warrant Purchase Agreement dated December 1, 1999 with PNC
Bank(14)
4.26 Warrant Purchase Agreement dated January 12, 2000 with PNC
Bank(14)
4.27 Warrant Purchase Agreement dated February 9, 2000 with Wilmington
Securities Inc.(14)
4.28 Certificate of Designations, Preferences and Rights of Series E
Convertible Stock(16)
4.29 Securities Purchase Agreement dated as of September 29, 2000
between the Company and RGC International Investors, LDC.
(Exhibits and Schedules Omitted) (16)
4.30 Registration Rights Agreement dated as of September 29, 2000
between the Company and RGC International Investors, LDC. (16)
4.31 Initial Stock Purchase Warrant dated as of September 29, 2000
between the Company and RGC International Investors, LDC. (16)
4.32 Incentive Stock Purchase Warrant dated as of September 29, 2000
between the Company and RGC International Investors, LDC. (16)
4.33 Incentive Stock Purchase Warrant dated as of September 29, 2000 by
and between the Company and RGC International Investors, LDC. (16)
10.1 Technology Agreement between the Registrant and Lockheed
Corporation dated January 8, 1988(2) *
10.2 Technical Information Exchange Agreement between the Registrant
and Philips dated September 1989(2)
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(2)
10.4 Form of Consulting Agreement(2)
10.5 Form of Employee Proprietary Information Agreement(2)
10.6 1992 Director Option Plan(2)
10.7 Form of Indemnification Agreement(2)
10.8 License Agreement between the Registrant and the University of
Arkansas dated April 9, 1992, as amended(2)
10.9 Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated May 17, 1991, as amended(2)
I
47
10.10 1992 Stock Option Plan(2)
10.11 Proprietary Information & Patents Inventions Agreement among the
Registrant, E-Systems, Inc. and various other parties; Purchase
Order dated October 10, 1991(2)
10.12 Joint Venture Company (JDC) Agreement between the Registrant and
Sunpower Incorporated dated April 2, 1992(2) *
10.13 Government Contract issued to Registrant by the Defense Advanced
Research Projects Agency through the Office of Naval Research
dated September 4, 1991(2)
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(2)
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 Cotten 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(14)
10.29 Term Note dated January 12, 2000 with PNC Bank(14)
10.30 Second Amendment to Credit Agreement dated January 12, 2000
between Registrant and PNC Bank (14)
10.31 Financing commitment from Wilmington Securities Inc. dated March
29, 2000(14)
10.32 Amendment No. 1 to the United States Cellular Purchase Agreement.
(17)
10.33 Amendment No. 2 to the United States Cellular Purchase Agreement.
(17)
10.34 Third Amendment to Credit Agreement dated March 29, 2000 between
Registrant and PNC Bank
10.35 Fourth Amendment to Credit Agreement dated December 21, 2000
between Registrant and PNC Bank
10.36 1998 Stock Option Plan(18)
23 Consent of Independent Accountants
24 Power of Attorney (included on signature page hereto)
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.
(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 the 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)
(14) Incorporated by reference from the Registrant's Annual Report on Form
10-K filed for the year ended December 31, 1999.
(15) Incorporated by reference from the Registrant's Annual Report on Form
10-Q, filed for the quarter ended April 1, 2000.
(16) Incorporated by reference from the Registrant's Current Report on Form
8-K, filed October 4, 2000.
(17) Incorporated by reference from the Registrant's Annual Quarterly Report
on Form 10-Q filed for the quarter ended September 20, 2000.
II
48
(18) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-56606).
* Confidential treatment has been previously granted for certain
portions of these exhibits.
III