UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the fiscal
year ended December 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the transition period
from to
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Commission File Number 0-21074
SUPERCONDUCTOR TECHNOLOGIES
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0158076
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(State or other jurisdiction
of
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(IRS Employer
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incorporation or
organization)
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Identification No.
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)
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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:
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Title of each class
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Name of each exchange on which registered
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Common stock, $0.001 par value
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The NASDAQ Stock Market, LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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or No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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or No
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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
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or No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
or No
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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.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting
company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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or No
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The aggregate market value of the common stock held by
non-affiliates was $48.4 million as of June 27, 2009
(the last business day of our most recently completed second
fiscal quarter). The closing price of the common stock on that
date was $3.76 as reported by the NASDAQ Capital Market. For
purposes of this determination, we excluded the shares of common
stock held by each officer and director and by each person who
was known to us to own 10% or more of the outstanding common
stock as of June 27, 2009. The exclusion of shares owned by
the aforementioned individuals and entities from this
calculation does not constitute an admission by any of such
individuals or entities that he or it was or is an affiliate of
ours.
We had 22,330,051 shares of common stock outstanding as of
the close of business on March 1, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate
information by reference from the definitive proxy statement for
the Registrant’s 2010 Annual Meeting of Stockholders.
SUPERCONDUCTOR
TECHNOLOGIES INC.
FORM 10-K
ANNUAL REPORT
Year Ended December 31, 2009
Unless
otherwise noted, the terms “we,” “us,”
“our” refer to the combined and ongoing business
operations of Superconductor Technologies Inc. and its
subsidiaries
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. We claim the protection of the safe harbor
contained in the Private Securities Litigation Reform Act of
1995 for these forward looking statements. 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.
We caution investors that any forward-looking statements
presented in this Report, or that we may make orally or in
writing from time to time, are based on the beliefs of,
assumptions made by, and information currently available to, us.
Such statements are based on assumptions and the actual outcome
will be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control or ability
to predict. Although we believe that our assumptions are
reasonable, they are not guarantees of future performance and
some will inevitably prove to be incorrect. As a result, our
actual future results can be expected to differ from our
expectations, and those differences may be material.
Accordingly, investors should use caution in relying on past
forward-looking statements, which are based on known results and
trends at the time they are made, to anticipate future results
or trends.
Some of the risks and uncertainties that may cause our actual
results, performance or achievements to differ materially from
those expressed or implied by forward-looking statements include
the following:
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limited cash and a history of losses;
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limited number of potential customers;
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limited number of suppliers for some of our components;
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no significant backlog from quarter to quarter;
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our market is characterized by rapidly advancing
technology;
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fluctuations in product demand from quarter to quarter can be
significant;
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the impact of competitive filter products, technologies and
pricing;
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manufacturing capacity constraints and difficulties; and
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general economic conditions, such as the current worldwide
recession.
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For further discussion of these and other factors see,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Risk
Factors” in this Report.
This Report and all subsequent written and oral
forward-looking statements attributable to us or any person
acting on our behalf are expressly qualified in their entirety
by the cautionary statements contained or referred to in this
section. We do not undertake any obligation to release publicly
any revisions to our forward-looking statements to reflect
events or circumstances after the date of this Report.
1
PART I
General
We are a leading company in high temperature superconductor
(“HTS”) materials and related technologies. HTS
materials have the unique ability to conduct various signals or
energy (e.g., electrical current or radio frequency
(“RF”) signals) with little or no resistance when
cooled to “critical” temperatures. Electric currents
that flow through conventional conductors encounter resistance
that requires power to overcome and generates heat. HTS
materials can substantially improve the performance
characteristics of electrical systems, reducing power loss,
lowering heat generation and decreasing electrical noise.
Circuits designed to remove interference inherent in some RF
signals can also be made from HTS materials. Commercial use of
HTS materials requires a number of cutting edge technologies,
including development of HTS materials, specialized
manufacturing expertise to create uniform thin layers of these
materials, expert designs of circuits optimized for HTS
materials, and technologies to maintain an extremely low
temperature environment for HTS applications (although the
critical temperatures for HTS are “high” compared with
traditional superconductors, they are still extremely cold by
other standards).
Our
Proprietary Technology
We are focused on research and development to maintain our
technological edge. As of December 31, 2009, we had
34 employees in our research and development division; 9 of
our employees have Ph.D.s, and 14 others hold advanced degrees
in physics, materials science, electrical engineering and other
fields. Our development efforts over the last 22 years have
yielded an extensive patent portfolio as well as critical trade
secrets, unpatented technology and proprietary knowledge. We
enter into confidentiality and non-disclosure agreements with
our employees, suppliers and consultants to protect our
proprietary information. As of December 31, 2009, we held
59 U.S. patents in the following categories:
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8 patents for technologies directed toward producing thin-film
materials and structures, which expire between 2010 and 2025. We
have developed a proprietary
state-of-the-art
manufacturing process for producing HTS thin-films of the
highest quality.
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32 patents for cryogenic and non-microwave circuit designs,
which expire between 2010 and 2028. The expertise of our highly
qualified team has allowed us to design and fabricate extremely
small, high-performance circuits including RF signal filters.
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17 patents covering cryogenics, packaging and systems, which
expire between 2013 and 2025. Our proprietary and patented
cryogenic packaging innovation provides us with a significant
competitive advantage in maintaining our HTS materials at their
critical temperatures.
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2 patents covering other superconducting technologies, which
expire between 2013 and 2015.
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As of December 31, 2009, we also had 19 issued foreign
patents, 21 U.S. patent applications pending and 60 foreign
applications patents pending.
We are currently focusing our efforts on applications in areas
such as:
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Wireless Networks.
Our current commercial
products help maximize the performance of wireless
telecommunications networks by improving the quality of uplink
signals from mobile wireless devices. Our products increase
capacity utilization, lower dropped and blocked calls, extend
coverage, and enable higher wireless data throughput —
all while reducing capital and operating costs. We are
leveraging our unique filtering technology to pursue wireless
business on multiple fronts: capturing wireless business with
tier one U.S. wireless carriers for the LTE network build
out, and developing our advanced reconfigurable filtering
technology, which has the potential to drastically reduce the
size and cost of mobile devices.
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Superconducting Power Applications.
We are
adapting our unique HTS materials deposition techniques to
deliver energy efficient, cost-effective and high performance 2G
HTS wire technology for next generation power applications. A
variety of large, high potential, initial target markets have
been identified for our 2G
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HTS wire including: energy (wind turbines, smart grid),
industrial (motors, generators) and healthcare (MRI)
applications. To accelerate development and manufacturing
processes for our 2G HTS wire, we are partnering with HTS
industry leaders, United States National Labs and the
U.S. Department of Energy (“DOE”). In August
2009, we renewed our two year Cooperative Research and
Development Agreement with Los Alamos National Laboratory
(“LANL”). These technological interchanges will help
us meet the technical challenges and performance metrics for
both high performance and cost effective 2G HTS wire.
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Government Products.
As the worldwide leader
in developing tunable HTS filter systems for military
applications, we continue to be a crucial partner in the
U.S. government’s future success. Our high-performance
HTS filter systems have been proven to increase the detection
range, reduce interference, and in some cases, detect signals
that were previously undetectable with conventional technology.
Currently, we actively participate in the development of
technologies for application in military communications, signals
intelligence, and electronic warfare.
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Our development efforts can take a significant number of years
to commercialize, and we must overcome significant technical
barriers and deal with other significant risks, some of which
are set out in our public filings, including in particular the
“Risk Factors” included in Item 1A of this Report.
Our
Business Model
To be successful, we must use our expertise and our technology
to generate revenues in various ways, including government
contracts, commercial operations, joint ventures and licenses:
Government
Contracts
We generate significant revenues from government contracts. For
2009, 2008 and 2007, government related contracts accounted for
32%, 40% and 29%, respectively, of our net revenues. We
typically own the intellectual property developed under these
contracts, and grant the Federal government a royalty-free,
non-exclusive and nontransferable license to use it. As a
result, our government contracts can not only generate a profit
for us, but we can also make additional money through exploiting
of the resulting technology in our commercial operations as well
as government products, or through licenses or joint ventures.
Contracts with the U.S. government contain provisions, and
are subject to laws and regulations, that give the government
rights and remedies not typically found in commercial contracts,
including rights that allow the government to:
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terminate existing contracts for convenience, which affords the
U.S. government the right to terminate the contract in
whole or in part any time it wants for any reason or no reason,
as well as for default;
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reduce or modify contracts or subcontracts, if its requirements
or budgetary constraints change;
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cancel or reduce multi-year contracts and related orders, if
funds for contract performance for any subsequent year become
unavailable;
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adjust reimbursable contract costs and fees on the basis of
audits completed by its agencies through exercise of its
oversight rights; and
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control or prohibit the export of products.
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Compensation in the event of a termination, if any, is limited
to compensation for work completed at the time of termination.
In the event of termination for convenience, we may receive a
certain allowance for profit on the work performed.
Commercial
Applications
We have chosen to manufacture and sell certain commercial
products on our own. To date, our commercial efforts have been
focused on the design, manufacture, and sale of high performance
infrastructure products for
3
wireless voice and data applications. We have three current
product lines, all of which relate to wireless base stations:
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SuperLink
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a highly compact and reliable receiver front-end HTS wireless
filter system to eliminate
out-of-band
interference for wireless base stations, combining filters with
a proprietary cryogenic cooler and a cooled low-noise amplifier.
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AmpLink
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a ground-mounted unit for wireless base stations that includes a
high-performance amplifier and up to six dual duplexers.
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SuperPlex, a high-performance multiplexer that provides
extremely low insertion loss and excellent cross-band isolation
designed to eliminate the need for additional base station
antennas and reduce infrastructure costs.
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We sell most of our current commercial products to a small
number of wireless carriers in the United States, including
Alltel, AT&T, Sprint Nextel,
T-Mobile
and
Verizon Wireless. Verizon Wireless and AT&T each accounted
for more than 10% of our commercial revenues in 2009, 2008 and
2007. We are seeking to expand our customer base by selling
directly to other wireless network operators and manufacturers
of base station equipment, including internationally. Demand for
wireless communications equipment fluctuates dramatically and
unpredictably. The wireless communications infrastructure
equipment market is extremely competitive and is characterized
by rapid technological change, new product development, product
obsolescence, evolving industry standards and price erosion over
the life of a product. We face constant pressures to reduce
prices. Consequently, we expect the average selling prices of
our products will continue decreasing over time. We expect these
trends to continue and may cause significant fluctuations in our
quarterly and annual revenues. Our commercial operations are
subject to a number of significant risks, some of which are set
out in our public filings, including in particular the
“Risk Factors” included in Item 1A of this Report.
Joint
Ventures
From time to time we may pursue joint ventures with other
entities to commercialize our technology. In particular, we have
agreed to license certain technology for our SuperLink
interference elimination solution for the China market to a
joint venture where we own 45 percent of the equity. In
2008, we received orders from the joint venture for our new
TD-SCDMA solution to perform lab and field trial activities in
China. The lab and field trial was successfully completed in
2008 and in 2009 we successfully completed field trials in the
existing China 2G market using our SuperLink solution. In 2009,
we recorded a $521,000 loss for impairment of our investment in
the joint venture. The commencement of manufacturing and the
transfer of our processes to the joint venture will be driven by
product demand from the China market. The joint venture’s
activities remain subject to successful product marketing
efforts in addition to a number of other conditions, including
certain critical approvals from the Chinese and United States
governments. In particular, we have been in discussions with the
United States government concerning the national security
implications of our joint venture and investment from Hunchun
BaoLi Communication Co. Ltd. (“BAOLI”). There
continues to be no assurance that these conditions will be met,
or that all required approvals (if obtained) will be obtained on
a timely basis. Even if these conditions are met and the
approvals received, the results from our joint venture will be
subject to a number of significant risks associated with
international operations and new ventures, some of which are set
forth in our public filings, including in particular the
“Risk Factors” included in Item 1A of this Report.
Licenses
From time to time we grant licenses for our technology to other
companies. Specifically, we have granted licenses to, among
others, (1) Bruker for Nuclear Magnetic Resonance
application, (2) General Dynamics for government
applications and (3) Star Cryoelectronics for
Superconducting Quantum Interference Device applications.
Manufacturing
Our manufacturing process involves the assembly of numerous
individual components and precision tuning by production
technicians. We purchase inventory components and manufacture
inventory based on sales forecasts.
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The parts and materials used by us and our contract
manufacturers consist primarily of printed circuit boards,
specialized subassemblies, fabricated housing, relays and small
electric circuit components, such as integrated circuits,
semiconductors, resistors and capacitors. We currently
manufacture our SuperLink systems at our facilities in
Santa Barbara, California. Principal components of our
AmpLink and SuperPlex products are produced by foreign
manufacturers. Our Santa Barbara facilities currently also
house our AmpLink assembly and distribution center.
A number of components used in our products are available from
only a limited number of outside suppliers due to unique designs
as well as certain quality and performance requirements. There
are components that we source from a single vendor due to our
current production volume. In addition, key components of our
conventional products are manufactured by a sole foreign
manufacturer. We do not have guaranteed supply arrangements with
any of these suppliers, do not maintain an extensive inventory
of parts or components and customarily purchase sole or limited
source parts and components pursuant to purchase orders. Our
reliance on sole or limited source suppliers involves certain
risks and uncertainties, many of which are beyond our control,
and some of which are set out in our public filings, including
in particular the “Risk Factors” included in
Item 1A of this Report.
Marketing
and Sales
Because we have a concentrated customer base, we primarily sell
using a direct sales force in the U.S. We use indirect
channels to market our products to select customers
internationally. We demonstrate our products at trade shows, and
participate in industry conferences. We also use advertising
campaigns, email campaigns, direct mailings, and submission of
technical and application reports to recognized trade journals
to advertise our solutions to potential customers. We also
advertise our products through our website, brochures, data
sheets, application notes, trade journal reports and press
releases. Our sales and marketing efforts are complemented by a
team of sales applications engineers who manage field trials and
initial installations, as well as provide ongoing pre-sales and
post-sales support.
Competition
We face competition in various aspects of our technology and
product development. Our products compete on the basis of
performance, functionality, reliability, pricing, quality, and
compliance with industry standards. Our current and potential
competitors include conventional RF filter manufacturers,
including CommScope, ADC, Powerwave, and RFS and both
established and newly emerging companies developing similar or
competing HTS technologies. We also compete with companies that
design, manufacture and sell antenna-optimizing multiplexers and
companies that seek to enhance base station range and
selectivity by means other than a superconducting filter,
including many original equipment manufacturers such as Ericsson
and Nokia. In addition, we currently supply components and
license technology to several companies that may eventually
decide to manufacture or design their own HTS components, rather
than purchasing or licensing our technology. With respect to our
HTS materials, we compete with American Superconductor,
SuperPower and THEVA, among others. In the government sector, we
compete with universities, national laboratories and both large
and small companies for research and development contracts, and
with larger defense contractors, such as Raytheon and Northrop
Grumman, for government products.
Research
and Development
Our research and development efforts primarily involve
engineering and design related to improving product lines and
developing new products and technologies in the same or similar
fields using our core technologies. We spent a total of
$7.0 million, $7.0 million and $6.1 million on
research and development for 2009, 2008 and 2007, respectively,
of which $4.4 million, $3.4 million and
$3.2 million, respectively, was for company-funded research
and development. Customer-funded research and development, most
of which was attributable to work under contracts with the
U.S. Government, represented 37%, 52% and 48% of total
research and development costs for each of 2009, 2008 and 2007,
respectively.
5
Environmental
Issues
We use certain hazardous materials in our research, development
and manufacturing operations. As a result, we are subject to
stringent federal, state and local regulations governing the
storage, use and disposal of such materials. Current or future
laws and regulations could require substantial expenditures for
preventative or remedial action, reduction of chemical exposure,
waste treatment or disposal. Although we believe that our 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, we have
not incurred substantial expenditures for preventive action with
respect to hazardous materials or for remedial action with
respect to any hazardous materials accident, but the use and
disposal of hazardous materials involves risk that we could
incur substantial expenditures for such preventive or remedial
actions. If such an accident were to occur, we could be held
liable for resulting damages. The liability in the event of an
accident or the costs of such remedial actions could exceed our
resources or otherwise have a material adverse effect on our
financial condition, results of operations or cash flows.
Corporate
Information
Our facilities and executive offices are located at 460 Ward
Drive, Santa Barbara, California 93111, and our telephone
number is
(805) 690-4500.
We were incorporated in Delaware on May 11, 1987.
Additional information about us is available on our website at
www.suptech.com. The information on our web site is not
incorporated herein by reference.
Employees
As of December 31, 2009, we had a total of
105 employees. None of our employees are represented by a
labor union, and we believe that our employee relations are good.
Backlog
Our commercial backlog consists of accepted product purchase
orders with scheduled delivery dates during the next twelve
months. We had commercial backlog of $795,000 at
December 31, 2009, compared to $272,000 at
December 31, 2008.
The following section includes some of the material factors that
may adversely affect our business and operations. This is not an
exhaustive list, and additional factors could adversely affect
our business and financial performance. Moreover, we operate in
a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for us
to predict all such risk factors, nor can we assess the impact
of all such risk factors on our business or the extent to which
any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements. This discussion of risk factors includes many
forward-looking statements. For cautions about relying on such
forward looking statements, please refer to the section entitled
“Forward Looking Statements” at the beginning of this
Report immediately prior to Item 1.
Risks
Related to Our Business
We
have a history of losses and may never become
profitable.
In each of our last five years, we have experienced significant
net losses and negative cash flows from operations. In 2009, we
incurred a net loss of $13.0 million and had negative cash
flows from operations of $7.4 million. In 2008, we incurred
a net loss of $12.7 million and had negative cash flows
from operations of $12.1 million. Our independent
registered public accounting firm has included in its audit
reports an explanatory paragraph expressing doubt about our
ability to continue as a going concern. If we fail to increase
our revenues, we may not achieve and maintain profitability and
may not meet our expectations or the expectations of financial
analysts who report on our stock.
6
The
current worldwide recession may adversely affect our business,
operating results and financial condition.
The United States economy has recently experienced, and
continues to experience, a financial downturn, with some
financial and economic analysts predicting that the world
economy may be entering into a prolonged economic downturn
characterized by high unemployment, limited availability of
credit, increased rates of default and bankruptcy and decreased
consumer and business spending. These developments could
negatively affect our business, operating results and financial
condition in a number of ways. For example, current or potential
customers may delay or decrease spending with us or may not pay
us, or may delay paying us for previously purchased products. In
addition, this downturn has had, and may continue to have, an
unprecedented negative impact on the global credit markets.
Credit has tightened significantly in the last several months,
resulting in financing terms that are less attractive to
borrowers, and in many cases, the unavailability of certain
types of debt financing. If this crisis continues or worsens,
and if we are required to obtain financing in the near term to
meet our working capital or other business needs, we may not be
able obtain that financing. Further, even if we are able to
obtain the financing we need, it may be on terms that are not
favorable to us, with increased financing costs and restrictive
covenants.
We may
need to raise additional capital, and if we are unable to raise
capital our ability to implement our current business plan and
ultimately our viability as a company could be adversely
affected.
At December 31, 2009 we had $10.4 million in cash. Our
cash resources, together with our line of credit, may not be
sufficient to fund our business for at least the next twelve
months. We believe the key factors to our future liquidity will
be our ability to successfully use our expertise and our
technology to generate revenues in various ways, including
commercial operations, government contracts, joint ventures and
licenses. Because of the uncertainty of these factors, we may
need to raise funds to meet our working capital needs.
We cannot assure you that additional financing will be available
on acceptable terms or at all. If we issue additional equity
securities to raise funds, the ownership percentage of our
existing stockholders would be reduced. New investors may demand
rights, preferences or privileges senior to those of existing
holders of common stock. If we cannot raise any needed funds, we
might be forced to make further substantial reductions in our
operating expenses, which could adversely affect our ability to
implement our current business plan and ultimately our viability
as a company.
We
rely on a small number of customers for the majority of our
commercial revenues, and the loss of any one of these customers,
or a significant loss, reduction or rescheduling of orders from
any of these customers, could have a material adverse effect on
our business, results of operations and financial
condition.
We sell most of our products to a small number of wireless
carriers. We derived 92% of our commercial product revenues from
Verizon Wireless and AT&T in both 2009 and 2008. We derived
75% of our commercial product revenues from Verizon Wireless and
AT&T in 2007. Our future success depends upon the wireless
carriers continuing to purchase our products, and fluctuations
in demand from such customers could negatively impact our
results. Unanticipated demand fluctuations can have a negative
impact on our revenues and business and an adverse effect on our
results of operations and financial condition.
In addition, our dependence on a small number of major customers
exposes us to numerous other risks, including:
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a slowdown or delay in the deployment, upgrading or improvement
of wireless networks by any one customer could significantly
reduce demand for our products;
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reductions in a single customer’s forecasts and demand
could result in excess inventories;
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each of our customers has significant purchasing leverage over
us to require changes in sales terms including pricing, payment
terms and product delivery schedules; and
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concentration of accounts receivable credit risk, which could
have a material adverse effect on our liquidity and financial
condition if one of our major customers declared bankruptcy or
delayed payment of their receivables.
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Many of our customers also provide minimal lead-time prior to
the release of their purchase orders and have non-binding
commitments to purchase from us. If we fail to forecast our
customer’s demands accurately, we could experience delays
in manufacturing, which could result in customer
dissatisfaction. Additionally, these factors further impact our
ability to forecast future revenue.
We
face competition with respect to various aspects of our
technology and product development.
Our current products compete on the basis of performance,
functionality, reliability, pricing, quality, and compliance
with industry standards. Our current and potential competitors
include conventional RF filter manufacturers, CommScope, ADC,
Powerwave, and RFS and both established and newly emerging
companies developing similar or competing HTS technologies. We
also compete with companies that design, manufacture and sell
antenna-optimizing multiplexers and companies that seek to
enhance base station range and selectivity by means other than a
superconducting filter, including many original equipment
manufacturers such as Ericsson and Nokia. In addition, we
currently supply components and license technology to several
companies that may eventually decide to manufacture or design
their own HTS components, rather than purchasing or licensing
our technology. With respect to our HTS materials, we compete
with American Superconductor, SuperPower and THEVA, among
others. In the government sector, we compete with universities,
national laboratories and both large and small companies for
research and development contracts, and with larger defense
contractors, such as Raytheon and Northrop Grumman, for
government products. If we are unable to compete successfully
against our current or future competitors, then our business and
results of operations will be adversely affected.
The wireless communication industry is highly
concentrated, which limits the number of potential customers,
and further industry consolidation could result in the loss of
key customers.
The wireless communication industry is highly concentrated in
nature and may become more concentrated due to anticipated
industry consolidation. As a result, we believe that the number
of potential customers for our products may be limited. We also
face significant risks in the event any of our key customers is
acquired by a company that has not adopted our technology or not
adopted it to the same extent. In that event, we could face a
significant decline in our sales to the acquired customer.
We
experience significant fluctuations in sales and operating
results from quarter to quarter.
Our quarterly results fluctuate due to a number of factors,
including:
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the lack of any contractual obligation by our customers to
purchase their forecasted demand for our products;
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variations in the timing, cancellation, or rescheduling of
customer orders and shipments; and
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high fixed expenses that may disproportionately impact operating
expenses, especially during a quarter with a sales shortfall.
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The nature of our business requires that we promptly ship
products after we receive orders. This means that we typically
do not have a significant backlog of unfilled orders at the
start of each quarter. Our major customers generally have no
contractual obligation to purchase forecasted amounts and may
cancel orders, change delivery schedules or change the mix of
products ordered with minimal notice and minimal penalty. As a
result of these factors, we may not be able to accurately
predict our quarterly sales. Any shortfall in sales relative to
our quarterly expectations or any delay of customer orders would
adversely affect our revenues and results of operations.
Order deferrals and cancellations by our customers, declining
average sales prices, changes in the mix of products sold,
increases in inventory and finished goods, delays in the
introduction of new products and longer than anticipated sales
cycles for our products have, in the past, adversely affected
our results of operations. Despite these factors, we maintain
significant finished goods,
work-in-progress
and raw materials inventory to meet estimated order forecasts.
If our customers purchase less than the forecasted amounts or
cancel or delay existing purchase orders, there will be higher
levels of inventory that face a greater risk of obsolescence. If
our customers desire to
8
purchase products in excess of the forecasted amounts or in a
different product mix, there may not be enough inventory or
manufacturing capacity to fill their orders.
Due to these and other factors, our past results may not be
reliable indicators of our future performance. Future revenues
and operating results may not meet the expectations of stock
analysts and investors. In either case, the price of our common
stock could be materially adversely affected.
Our
sales cycles are unpredictable, making future performance
uncertain.
The sales cycle for telecommunications products includes
identification of decision makers within the customers’
organizations, development of an understanding of
customer-specific performance and economic issues, convincing
the customer through field trial reports of the benefits of
systems offered, negotiation of purchase orders and deployment.
Customers who purchase our systems must commit a significant
amount of capital and other resources. Our customers must
consider budgetary constraints, comply with internal procedures
for approving large expenditures and complete whatever testing
is necessary for them to integrate new technologies that will
impact their key operations. Customer delays can lengthen the
sales cycles and have a material adverse effect on our business.
We
depend on the capital spending patterns of wireless network
operators, and if capital spending is decreased or delayed, our
business may be harmed.
Because we rely on wireless network operators for product
purchases, any substantial decrease or delay in capital spending
patterns in the wireless communication industry may harm our
business. Demand from customers for our products depends to a
significant degree upon the amount and timing of capital
spending by these customers for constructing, rebuilding or
upgrading their systems. The capital spending patterns of
wireless network operators depend on a variety of factors,
including access to financing, the status of federal, local and
foreign government regulation and deregulation, changing
standards for wireless technology, overall demand for wireless
services, competitive pressures and general economic conditions.
In addition, capital spending patterns in the wireless industry
can be subject to some degree of seasonality, with lower levels
of spending in the first and third calendar quarters, based on
annual budget cycles.
Our
reliance on a limited number of suppliers and the long lead time
of components for our products could impair our ability to
manufacture and deliver our systems on a timely
basis.
A number of components used in our products are available from a
limited number of outside suppliers due to unique designs as
well as certain quality and performance requirements. There are
components that we source from a single vendor due to the
present volume. Key components of our conventional products are
manufactured by a sole foreign manufacturer. Our reliance on
sole or limited source suppliers involves certain risks and
uncertainties, many of which are beyond our control. These
include the possibility of a shortage or the discontinuation of
certain key components. Any reduced availability of these parts
or components when required could impair our ability to
manufacture and deliver our systems on a timely basis and result
in the delay or cancellation of orders, which could harm our
business.
In addition, the purchase of some of our key components involves
long lead times and, in the event of unanticipated increases in
demand for our solutions, we may be unable to obtain these
components in sufficient quantities to meet our customers’
requirements. We do not have guaranteed supply arrangements with
any of these suppliers, do not maintain an extensive inventory
of parts or components and customarily purchase sole or limited
source parts and components pursuant to purchase orders.
Business disruptions, quality issues, production shortfalls or
financial difficulties of a sole or limited source supplier
could materially and adversely affect us by increasing product
costs, or eliminating or delaying the availability of such parts
or components. In such events, our inability to develop
alternative sources of supply quickly and on a cost-effective
basis could impair our ability to manufacture and deliver our
systems on a timely basis and could harm our business.
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Our
reliance on a limited number of suppliers exposes us to quality
control issues.
Our reliance on certain single-source and limited-source
components exposes us to quality control issues if these
suppliers experience a failure in their production process or
otherwise fail to meet our quality requirements. A failure in
single-source or limited-source components or products could
force us to repair or replace a product utilizing replacement
components. If we cannot obtain comparable replacements or
effectively return or redesign our products, we could lose
customer orders or incur additional costs, which could have a
material adverse effect on our gross margins and results of
operations.
We
expect decreases in average selling prices, requiring us to
reduce product costs in order to achieve and maintain
profitability.
The average selling price of our products has decreased over the
years. We anticipate customer pressure on our product pricing
will continue for the foreseeable future. We have plans to
further reduce the manufacturing cost of our products, but there
is no assurance that our future cost reduction efforts will keep
pace with price erosion. We will need to further reduce our
manufacturing costs through engineering improvements and
economies of scale in production and purchasing in order to
achieve adequate gross margins. We may not be able to achieve
the required product cost savings at a rate needed to keep pace
with competitive pricing pressure. Additionally, we may be
forced to discount future orders. If we fail to reach our cost
saving objectives or we are required to offer future discounts,
our business may be harmed.
Our
ability to protect our patents and other proprietary rights is
uncertain, exposing us to possible losses of competitive
advantage.
Our efforts to protect our proprietary rights may not succeed in
preventing infringement by others or ensure that these rights
will provide us with a competitive advantage. Pending patent
applications may not result in issued patents and the validity
of issued patents may be subject to challenge. Third parties may
also be able to design around the patented aspects of the
products. Additionally, certain of the issued patents and patent
applications are owned jointly with third parties. Because any
owner or co-owner of a patent can license its rights under
jointly-owned patents or applications, inventions made by us
jointly with others are not subject to our exclusive control.
Any of these possible events could result in losses of
competitive advantage.
We
depend on specific patents and licenses to technologies, and we
will likely need additional technologies in the future that we
may not be able to obtain.
We utilize technologies under licenses of patents from others
for our products. These patents may be subject to challenge,
which may result in significant litigation expense (which may or
may not be recoverable against future royalty obligations).
Additionally, we continually try to develop new products, and,
in the course of doing so, we may be required to utilize
intellectual property rights owned by others and may seek
licenses to do so. Such licenses may not be obtainable on
commercially reasonable terms, or at all. It is also possible
that we may inadvertently utilize intellectual property rights
held by others, which could result in substantial claims.
Intellectual
property infringement claims against us could materially harm
results of operations.
Our products incorporate a number of technologies, including
high-temperature superconductor technology, technology related
to other materials, and electronics technologies. Our patent
positions, and that of other companies using high-temperature
superconductor technology, is uncertain and there is significant
risk that others, including our competitors or potential
competitors, have obtained or will obtain patents relating to
our products or technologies or products or technologies planned
to be introduced by us.
We believe that patents may be or have been issued, or
applications may be pending, claiming various compositions of
matter used in our products. We may need to secure one or more
licenses of these patents. There can be no assurances that such
licenses could be obtained on commercially reasonable terms, or
at all. We may be required to expend significant resources to
develop alternatives that would not infringe such patents or to
obtain licenses to the related technology. We may not be able to
successfully design around these patents or obtain licenses to
them and may have to defend ourselves at substantial cost
against allegations of infringement of third party
10
patents or other rights to intellectual property. In those
circumstances, we could face significant liabilities and also be
forced to cease the use of key technology.
We
currently rely on specific technologies and may not successfully
adapt to the rapidly changing wireless telecommunications
equipment market.
Wireless telecommunication equipment is characterized by rapidly
advancing technology. Our success depends upon our ability to
keep pace with advancing wireless technology, including
materials, processes and industry standards. For example, we had
to redesign our SuperLink product to convert from thallium
barium calcium copper oxide to yttrium barium copper oxide in
order to reduce the product cost and compete with other
technologies. However, even with the lower cost HTS material,
SuperLink may not ultimately prove commercially competitive
against other current technologies or those that may be
discovered in the future.
We will have to continue to develop and integrate advances to
our core technologies. We will also need to continue to develop
and integrate advances in complementary technologies. We cannot
guarantee that our development efforts will not be rendered
obsolete by research efforts and technological advances made by
others.
Other
parties may have the right to utilize technology important to
our business.
We utilize certain intellectual property rights under
non-exclusive licenses or have granted to others the right to
utilize certain intellectual property rights licensed from a
third party. Because we may not have the exclusive rights to
utilize such intellectual property, other parties may be able to
compete with us, which may harm our business.
Our failure to anticipate and respond to developments in
the wireless telecommunications market could substantially harm
our business
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Our efforts are focused on the wireless telecommunications
market. The dedication of our resources to the wireless
telecommunications market makes us potentially vulnerable to
changes in this market, such as new technologies like WIMAX,
future competition, changes in availability of capital resources
or regulatory changes that could affect the competitive position
and rate of growth of the wireless industry.
We may
not be able to compete effectively against alternative
technologies.
Our products compete with a number of alternative approaches and
technologies that increase the capacity and improve the quality
of wireless networks. Some of these alternatives may be more
cost effective or offer better performance than our products.
Wireless network operators may opt to increase the number of
transmission stations, increase tower heights, install filters
and amplifiers at the top of towers or use advanced antenna
technology in lieu of purchasing our products. We may not
succeed in competing against these alternatives.
We
depend upon government contracts for a substantial amount of
revenue and our business may suffer if significant contracts are
terminated, adversely modified, or we are unable to win new
contracts.
We derive a substantial portion of our revenue from a few large
contracts with the U.S. government. As a result, a
reduction in, or discontinuance of, the government’s
commitment to current or future programs could materially reduce
government contract revenue.
Contracts involving the U.S. government may include various
risks, including:
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termination by the government;
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reduction or modification in the event of changes in the
government’s requirements or budgetary constraints;
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increased or unexpected costs causing losses or reduced profits
under contracts where prices are fixed or unallowable costs
under contracts where the government reimburses for costs and
pays an additional premium;
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risks of potential disclosure of confidential information to
third parties;
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the failure or inability of the main contractor to perform its
contract in circumstances where we are a subcontractor;
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the failure of the government to exercise options for additional
work provided for in the contracts; and
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the government’s right in certain circumstances to freely
use technology developed under these contracts.
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The programs in which we participate may extend for several
years, but are normally funded on an annual basis. The
U.S. government may not continue to fund programs under
which we have entered into contracts. Even if funding is
continued, we may fail to compete successfully to obtain funding
within such programs.
All costs for services under government contracts are subject to
audit, and the acceptance of such costs as allowable and
allocable is subject to federal regulatory guidelines. We record
contract revenues in amounts that we expect to be realized upon
final audit settlement. Any disallowance of costs by the
government could have an adverse effect on our business,
operating results and financial condition. Audits and
adjustments may result in decreased revenues and net income for
those years. Additionally, because of our participation in
government contracts, we are subject to audit from time to time
for our compliance with government regulations by various
agencies. Government agencies may conduct inquiries or
investigations that may cover a broad range of activity.
Responding to any such audits, inquiries or investigations may
involve significant expense and divert management’s
attention. In addition, an adverse finding in any such audit,
inquiry or investigation could involve penalties that may harm
our business.
Because
competition for target employees is intense, we may be subject
to claims of unfair hiring practices, trade secret
misappropriation or other related claims.
Companies in the wireless telecommunications industry whose
employees accept positions with competitors frequently claim
that competitors have engaged in unfair hiring practices, trade
secret misappropriation or other related claims. We may be
subject to such claims in the future as we seek to hire
qualified personnel, and such claims may result in material
litigation. If this should occur, we could incur substantial
costs in defending against these claims, regardless of their
merits.
If we
are unable to forecast our inventory needs accurately, we may be
unable to obtain sufficient manufacturing capacity or may incur
unnecessary costs and produce excess inventory.
We forecast our inventory needs based on anticipated purchase
orders to determine manufacturing requirements. If we
overestimate demand, we may have excess inventory, and our
suppliers may as well, which could increase our costs. If we
underestimate our requirements, our suppliers may have
inadequate inventory, which could interrupt manufacturing and
result in delays in shipments and recognition of revenues. In
addition, lead times for ordering materials and components vary
significantly and depend on factors such as the specific
supplier, contract terms and demand for any component at a given
time. Accordingly, if we inaccurately forecast demand, we may be
unable to obtain adequate manufacturing capacity from our
suppliers to meet customers’ delivery requirements, which
would harm our business.
Our
success depends on the attraction and retention of senior
management and technical personnel with relevant
expertise.
As a competitor in a highly technical market, we depend heavily
upon the efforts of our existing senior management and technical
teams. The loss of the services of one or more members of these
teams could slow product development and commercialization
objectives. Due to the specialized nature of our products, we
also depend upon our ability to attract and retain qualified
technical personnel with substantial industry knowledge and
expertise. Competition for qualified personnel is intense, and
we may not be able to continue to attract and retain qualified
personnel necessary for the development of our business.
We have experienced difficulty recruiting senior management due
to the high cost of living in the Santa Barbara area. We
have a limited pool of qualified executives in
Santa Barbara and may attempt to recruit qualified
candidates from across the country. Some candidates have cited
the high cost of housing in Santa Barbara as a significant
negative factor when considering our employment offers. We have
mitigated this problem to a limited
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extent by allowing some executives to maintain their existing
residences in other parts of the country and effectively
“commute” to our corporate headquarters in
Santa Barbara as needed to perform their duties.
Regardless, we expect the cost of housing in our area will
continue to present a significant obstacle to recruiting senior
executives.
Regulatory
changes negatively affecting wireless communications companies
could substantially harm our business.
The Federal Communications Commission strictly regulates the
operation of wireless base stations in the United States. Other
countries also regulate the operation of base stations within
their territories. Base stations and equipment marketed for use
in base stations must meet specific technical standards. Our
ability to sell our high-temperature superconductor filter
subsystems will depend upon the rate of deployment of other new
wireless digital services, the ability of base station equipment
manufacturers and of base station operators to obtain and retain
the necessary approvals and licenses, and changes in regulations
that may impact the product requirements. Any failure or delay
of base station manufacturers or operators in obtaining
necessary approvals could harm our business.
We may
acquire or make investments in companies or technologies that
could cause loss of value to stockholders and disruption of
business.
We may explore opportunities to acquire companies or
technologies in the future. Other than the acquisition of
Conductus, Inc. in 2002, we have not made any such acquisitions
or investments to date and, therefore, our ability as an
organization to make acquisitions or investments is unproven. An
acquisition entails many risks, any of which could adversely
affect our business, including:
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failure to integrate operations, services and personnel;
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the price paid may exceed the value eventually realized;
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loss of share value to existing stockholders as a result of
issuing equity securities to finance an acquisition;
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potential loss of key employees from either our then current
business or any acquired business;
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entering into markets in which we have little or no prior
experience;
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diversion of financial resources and management’s attention
from other business concerns;
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assumption of unanticipated liabilities related to the acquired
assets; and
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the business or technologies acquired or invested in may have
limited operating histories and may be subjected to many of the
same risks to which we are exposed.
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In addition, future acquisitions may result in potentially
dilutive issuances of equity securities, or the incurrence of
debt, contingent liabilities or amortization expenses or charges
related to goodwill or other intangible assets, any of which
could harm our business. As a result, if we fail to properly
evaluate and execute acquisitions or investments, our business
and prospects may be seriously harmed.
If we
are unable to implement appropriate controls and procedures to
manage our potential growth, we may not be able to successfully
offer our products and implement our business
plan.
Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires an effective
planning and management process. Growth in future operations
would place a significant strain on management systems and
resources. We expect that we would need to improve our financial
and managerial controls, reporting systems and procedures, and
would need to expand, train and manage our work force worldwide.
Furthermore, we expect that we would be required to manage
multiple relationships with various customers and other third
parties.
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Compliance
with environmental regulations could be especially costly due to
the hazardous materials used in the manufacturing
process.
We are subject to a number of federal, state and local
governmental regulations related to the use, storage, discharge
and disposal of toxic, volatile or otherwise hazardous chemicals
used in our business. Any failure to comply with present or
future regulations could result in fines being imposed,
suspension of production or interruption of operations. In
addition, these regulations could restrict our ability to expand
or could require us to acquire costly equipment or incur other
significant expense to comply with environmental regulations or
to clean up prior discharges.
The
reliability of market data included in our public filings is
uncertain.
Since we operate in a rapidly changing market, we have in the
past, and may from time to time in the future, include market
data from industry publications and our own internal estimates
in some of the documents we file with the Securities and
Exchange Commission. The reliability of this data cannot be
assured. Industry publications generally state that the
information contained in these publications has been obtained
from sources believed to be reliable, but that its accuracy and
completeness is not guaranteed. Although we believe that the
market data used in our filings with the Securities and Exchange
Commission is and will be reliable, it has not been
independently verified. Similarly, internal company estimates,
while believed by us to be reliable, have not been verified by
any independent sources.
Our
international operations expose us to certain
risks.
In November 2007, we signed an agreement for a joint venture
with BAOLI to manufacture and market our
SuperLink
®
interference elimination solution for the China market. In
additional to facing many of the risks faced by our domestic
business, if that joint venture or any other international
operation we may have is to be successful, we (together with any
joint venture partner) must recruit the necessary personnel and
develop the facilities needed to manufacture and sell the
products involved, learn about the local market (which may
significantly different from our domestic market), build brand
awareness among potential customers and compete successfully
with local organizations with greater market knowledge and
potentially greater resources than we have. We must also obtain
a number of critical governmental approvals from both the United
States and the local country governments on a timely basis,
including those related to any transfers of our technology. We
must establish sufficient controls on any foreign operations to
ensure that those operations are operated in accordance with our
interests, that our intellectual property is protected and that
our involvement does not inadvertently create potential
competitors. There can be no assurance that these conditions
will be met. Even if they are met, the process of building our
international operations could divert financial resources and
management attention from other business concerns. Finally, our
international operations will also be subject to the general
risks of international operations, such as:
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changes in exchange rates;
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international political and economic conditions;
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changes in government regulation in various countries;
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trade barriers;
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adverse tax consequences; and
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costs associated with expansion into new territories.
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Risks
Related to Our Common Stock
Our
stock price is volatile.
The market price of our common stock has been, and we expect
will continue to be, subject to significant volatility. The
value of our common stock may decline regardless of our
operating performance or prospects. Factors affecting our market
price include:
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our perceived prospects;
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variations in our operating results and whether we have achieved
key business targets;
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changes in, or our failure to meet, earnings estimates;
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changes in securities analysts’ buy/sell recommendations;
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differences between our reported results and those expected by
investors and securities analysts;
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announcements of new contracts by us or our competitors;
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market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors; and
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general economic, political or stock market conditions.
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Recent events have caused stock prices for many companies,
including ours, to fluctuate in ways unrelated or
disproportionate to their operating performance. The general
economic, political and stock market conditions that may affect
the market price of our common stock are beyond our control. The
market price of our common stock at any particular time may not
remain the market price in the future.
We
have a significant number of outstanding warrants and options,
and future sales of these shares could adversely affect the
market price of our common stock.
As of March 10, 2010, we had outstanding warrants and
options exercisable for an aggregate of 1,530,000 shares of
common stock at a weighted average exercise price of $10.08 per
share. We have registered the issuance of all these shares, and
they will be freely tradable by the exercising party upon
issuance. The holders may sell these shares in the public
markets from time to time, without limitations on the timing,
amount or method of sale. As our stock price rises, the holders
may exercise their warrants and options and sell a large number
of shares. This could cause the market price of our common stock
to decline.
Our
corporate governance structure may prevent our acquisition by
another company at a premium over the public trading price of
our shares.
It is possible that the acquisition of a majority of our
outstanding voting stock by another company could result in our
stockholders receiving a premium over the public trading price
for our shares. Provisions of our restated certificate of
incorporation and bylaws and of Delaware corporate law could
delay or make more difficult an acquisition of our company by
merger, tender offer or proxy contest, even if it would create
an immediate benefit to our stockholders. For example, our
restated certificate of incorporation does not permit
stockholders to act by written consent and our bylaws generally
require ninety days advance notice of any matters to be brought
before the stockholders at an annual or special meeting.
In addition, our board of directors has the authority to issue
up to 2,000,000 shares of preferred stock and to determine
the terms, rights and preferences of this preferred stock,
including voting rights of those shares, without any further
vote or action by the stockholders. At March 10, 2010,
1,388,477 shares of preferred stock remained unissued. The
rights of the holders of common stock may be subordinate to, and
adversely affected by, the rights of holders of preferred stock
that may be issued in the future. The issuance of preferred
stock could also make it more difficult for a third party to
acquire a majority of our outstanding voting stock, even at a
premium over our public trading price.
Further, our certificate of incorporation also provides for a
classified board of directors with directors divided into three
classes serving staggered terms. These provisions may have the
effect of delaying or preventing a change in control of us
without action by our stockholders and, therefore, could
adversely affect the price of our stock or the possibility of
sale of shares to an acquiring person.
We do
not anticipate declaring any cash dividends on our common
stock.
We have never declared or paid cash dividends on our common
stock and do not plan to pay any cash dividends in the near
future. Our current policy is to retain all funds and earnings
for use in the operation and expansion of our
15
business. In addition, our debt agreements prohibit the payment
of cash dividends or other distributions on any of our capital
stock except dividends payable in additional shares of capital
stock.
|
|
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We lease all of our properties. All of our operations, including
our manufacturing facility, are located in an industrial complex
in Santa Barbara, California. We occupy approximately
71,000 square feet in this complex under a long-term lease
that expires in 2016. Although we currently have excess
capacity, we believe this facility can be managed in a flexible
and cost effective manner and is adequate to meet current and
reasonably anticipated needs for approximately the next two
years.
|
|
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
From time to time, we are party to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of our
business. Excluding ordinary, routine litigation incidental to
our business, we are not currently a party to any legal
proceedings that we believe would reasonably be expected to have
a material adverse effect on our business, financial condition
or results of operation or cash flow.
PART II
|
|
|
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
for Common Stock
Our common stock is traded on the NASDAQ Capital Market under
the symbol “SCON.” The following table shows the high
and low sales prices for our common stock as reported by NASDAQ
for each calendar quarter in the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2009
|
|
$
|
3.35
|
|
|
$
|
2.08
|
|
|
Quarter ended September 26, 2009
|
|
$
|
3.99
|
|
|
$
|
2.22
|
|
|
Quarter ended June 27, 2009
|
|
$
|
5.45
|
|
|
$
|
0.93
|
|
|
Quarter ended March 28, 2009
|
|
$
|
1.45
|
|
|
$
|
0.82
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2008
|
|
$
|
1.50
|
|
|
$
|
0.68
|
|
|
Quarter ended September 27, 2008
|
|
$
|
2.43
|
|
|
$
|
0.73
|
|
|
Quarter ended June 28, 2008
|
|
$
|
4.83
|
|
|
$
|
2.18
|
|
|
Quarter ended March 29, 2008
|
|
$
|
6.80
|
|
|
$
|
3.22
|
|
Holders
of Record
We had 164 holders of record of our common stock on
March 1, 2010. This number does not include stockholders
for whom shares were held in a “nominee” or
“street” name. We estimate that there are more than
12,000 beneficial owners of our common stock.
16
Dividends
We have never paid cash dividends and intend to employ all
available funds in the development of our business. We have no
plans to pay cash dividends in the near future, and our line of
credit does not allow the payment of dividends.
Our ability to declare or pay dividends on shares of our common
stock is subject to the requirement that we pay an equivalent
dividend on each outstanding share of Series A Preferred
Stock (on an as-converted basis).
Sales of
Unregistered Securities
We did not conduct any offerings of equity securities during the
fourth quarter of 2009 that were not registered under the
Securities Act of 1933.
Repurchases
of Equity Securities
We did not repurchase any shares of our common stock during the
fourth quarter of 2009.
Securities
Authorized for Issuance Under Equity Compensation
Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
Number of
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
Securities to Be
|
|
|
|
|
|
for Future Issuance
|
|
|
|
|
Issued Upon
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
(Excluding
|
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Securities
|
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column(a))
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
1,144,876
|
|
|
$
|
20.16
|
|
|
|
213,380
|
|
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,144,876
|
|
|
$
|
20.16
|
|
|
|
213,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Stock
Performance Graph
The
stock performance graph and related information presented
below shall not be deemed “soliciting material” or
“filed” with the Securities and Exchange Commission or
subject to Regulation 14A or 14C under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”),
or to the liabilities of Section 18 of the Exchange Act,
and shall not be deemed incorporated by reference into any
filing under the Securities Act of 1933, as amended (the
“Securities Act”), or the Exchange Act, except to the
extent that we specifically request that such information be
treated as soliciting material or specifically incorporate it by
reference into such a filing.
The graph and table below compare the cumulative total
stockholders’ return on our common stock since
December 31, 2004 with the Nasdaq Composite Index, and the
Nasdaq Telecommunications Index over the same period (assuming
the investment of $100 in our common stock and in the two other
indices, and reinvestment of all dividends).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-Dec-04
|
|
|
|
31-Dec-05
|
|
|
|
31-Dec-06
|
|
|
|
31-Dec-07
|
|
|
|
31-Dec-08
|
|
|
|
31-Dec-09
|
|
|
Superconductor Technologies
|
|
|
$
|
100.00
|
|
|
|
$
|
30.94
|
|
|
|
$
|
12.73
|
|
|
|
$
|
39.93
|
|
|
|
$
|
7.27
|
|
|
|
$
|
17.55
|
|
|
Nasdaq Composite
|
|
|
|
100.00
|
|
|
|
|
101.37
|
|
|
|
|
111.03
|
|
|
|
|
121.92
|
|
|
|
|
72.49
|
|
|
|
|
104.31
|
|
|
Nasdaq-Telecommunications
|
|
|
|
100.00
|
|
|
|
|
92.79
|
|
|
|
|
118.55
|
|
|
|
|
129.42
|
|
|
|
|
73.79
|
|
|
|
|
109.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
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 our Financial Statements and Notes thereto appearing in
Item 15 of Part IV of this Report and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commercial product revenues
|
|
$
|
7,239
|
|
|
$
|
6,768
|
|
|
$
|
12,787
|
|
|
$
|
17,697
|
|
|
$
|
21,080
|
|
|
Government and other contract revenues
|
|
|
3,577
|
|
|
|
4,525
|
|
|
|
5,115
|
|
|
|
3,361
|
|
|
|
3,107
|
|
|
Sub license royalties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
10,816
|
|
|
|
11,293
|
|
|
|
17,902
|
|
|
|
21,078
|
|
|
|
24,209
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of commercial product revenues
|
|
|
9,102
|
|
|
|
8,911
|
|
|
|
12,944
|
|
|
|
15,922
|
|
|
|
18,989
|
|
|
Cost of government and other contract revenues
|
|
|
2,552
|
|
|
|
3,649
|
|
|
|
2,906
|
|
|
|
2,407
|
|
|
|
2,806
|
|
|
Other research and development
|
|
|
4,399
|
|
|
|
3,394
|
|
|
|
3,172
|
|
|
|
3,488
|
|
|
|
4,214
|
|
|
Selling, general and administrative
|
|
|
6,925
|
|
|
|
8,151
|
|
|
|
8,123
|
|
|
|
9,086
|
|
|
|
11,442
|
|
|
Restructuring expenses and impairment charges
|
|
|
—
|
|
|
|
141
|
|
|
|
—
|
|
|
|
38
|
|
|
|
1,197
|
|
|
Write off of Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,107
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
22,978
|
|
|
|
24,246
|
|
|
|
27,145
|
|
|
|
51,048
|
|
|
|
38,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,162
|
)
|
|
|
(12,953
|
)
|
|
|
(9,243
|
)
|
|
|
(29,970
|
)
|
|
|
(14,439
|
)
|
|
Other income (expense), net
|
|
|
(817
|
)
|
|
|
252
|
|
|
|
117
|
|
|
|
346
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,979
|
)
|
|
$
|
(12,701
|
)
|
|
$
|
(9,126
|
)
|
|
$
|
(29,624
|
)
|
|
$
|
(14,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(2.37
|
)
|
|
$
|
(1.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares Outstanding
|
|
|
19,843
|
|
|
|
16,403
|
|
|
|
12,488
|
|
|
|
12,483
|
|
|
|
11,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,365
|
|
|
$
|
7,569
|
|
|
$
|
3,939
|
|
|
$
|
5,487
|
|
|
$
|
13,018
|
|
|
Working capital
|
|
|
12,557
|
|
|
|
12,253
|
|
|
|
3,293
|
|
|
|
10,158
|
|
|
|
17,218
|
|
|
Total assets
|
|
|
18,126
|
|
|
|
19,358
|
|
|
|
16,625
|
|
|
|
21,904
|
|
|
|
52,045
|
|
|
Long-term debt, including current portion
|
|
|
576
|
|
|
|
521
|
|
|
|
563
|
|
|
|
618
|
|
|
|
33
|
|
|
Total stockholders’ equity
|
|
$
|
16,241
|
|
|
$
|
17,552
|
|
|
$
|
9,190
|
|
|
$
|
17,951
|
|
|
$
|
47,257
|
|
19
|
|
|
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations includes many
forward-looking statements. For cautions about relying on such
forward looking statements, please refer to the section entitled
“Forward Looking Statements” at the beginning of this
Report immediately prior to Item 1.
General
We are a leading company in HTS materials and related
technologies. HTS materials have the unique ability to conduct
various signals or energy (e.g., electrical current or RF
signals) with little or no resistance when cooled to
“critical” temperatures. Electric currents that flow
through conventional conductors encounter resistance that
requires power to overcome and generates heat. HTS materials can
substantially improve the performance characteristics of
electrical systems, reducing power loss, lowering heat
generation and decreasing electrical noise. Circuits designed to
remove interference inherent in some RF signals can also be made
from HTS materials. Commercial use of HTS materials requires a
number of cutting edge technologies, including development of
HTS materials, specialized manufacturing expertise to create
uniform thin layers of these materials, expert designs of
circuits optimized for HTS materials, and technologies to
maintain an extremely low temperature environment for HTS
applications (although the critical temperatures for HTS are
“high” compared with traditional superconductors, they
are still extremely cold by other standards).
Our
Proprietary Technology
We are focused on research and development to maintain our
technological edge. As of December 31, 2009, we had
34 employees in our research and development division; 9 of
our employees have Ph.D.s, and 14 others hold advanced degrees
in physics, materials science, electrical engineering and other
fields. Our development efforts over the last 22 years have
yielded an extensive patent portfolio as well as critical trade
secrets, unpatented technology and proprietary knowledge. We
enter into confidentiality and non-disclosure agreements with
our employees, suppliers and consultants to protect our
proprietary information. As of December 31, 2009, we held
59 U.S. patents in the following categories:
|
|
|
|
|
|
•
|
8 patents for technologies directed toward producing thin-film
materials and structures, which expire between 2010 and 2025. We
have developed a proprietary
state-of-the-art
manufacturing process for producing HTS thin-films of the
highest quality.
|
|
|
|
|
•
|
32 patents for cryogenic and non-microwave circuit designs,
which expire between 2010 and 2028. The expertise of our highly
qualified team has allowed us to design and fabricate extremely
small, high-performance circuits including RF signal filters.
|
|
|
|
|
•
|
17 patents covering cryogenics, packaging and systems, which
expire between 2013 and 2025. Our proprietary and patented
cryogenic packaging innovation provides us with a significant
competitive advantage in maintaining our HTS materials at their
critical temperatures.
|
|
|
|
|
•
|
2 patents covering other superconducting technologies, which
expire between 2013 and 2015.
|
As of December 31, 2009, we also had 19 issued foreign
patents, 21 U.S. patent applications pending and 60 foreign
applications patents pending.
We are currently focusing our efforts on applications in areas
such as:
|
|
|
|
|
|
•
|
Wireless Networks.
Our current commercial
products help maximize the performance of wireless
telecommunications networks by improving the quality of uplink
signals from mobile wireless devices. Our products increase
capacity utilization, lower dropped and blocked calls, extend
coverage, and enable higher wireless data throughput —
all while reducing capital and operating costs. We are
leveraging our unique filtering technology to pursue wireless
business on multiple fronts: capturing wireless business with
tier one U.S. wireless carriers for the LTE network build
out, and developing our advanced reconfigurable filtering
technology, which has the potential to drastically reduce the
size and cost of mobile devices.
|
20
|
|
|
|
|
|
•
|
Superconducting Power Applications.
We are
adapting our unique HTS materials deposition techniques to
deliver energy efficient, cost-effective and high performance 2G
HTS wire technology for next generation power applications. A
variety of large, high potential, initial target markets have
been identified for our 2G HTS wire including: energy (wind
turbines, smart grid), industrial (motors, generators) and
healthcare (MRI) applications. To accelerate development and
manufacturing processes for our 2G HTS wire, we are partnering
with HTS industry leaders, United States National Labs and the
DOE. In August 2009, we renewed our two year Cooperative
Research and Development Agreement with LANL. These
technological interchanges will help us meet the technical
challenges and performance metrics for both high performance and
cost effective 2G HTS wire.
|
|
|
|
|
•
|
Government Products.
As the worldwide leader
in developing tunable HTS filter systems for military
applications, we continue to be a crucial partner in the
U.S. government’s future success. Our high-performance
HTS filter systems have been proven to increase the detection
range, reduce interference, and in some cases, detect signals
that were previously undetectable with conventional technology.
Currently, we actively participate in the development of
technologies for application in military communications, signals
intelligence, and electronic warfare.
|
Our development efforts can take a significant number of years
to commercialize, and we must overcome significant technical
barriers and deal with other significant risks, some of which
are set out in our public filings, including in particular the
“Risk Factors” included in Item 1A of this Report.
Our
Business Model
To be successful, we must use our expertise and our technology
to generate revenues in various ways, including government
contracts, commercial operations, joint ventures and licenses:
Government
Contracts
We generate significant revenues from government contracts. For
2009, 2008 and 2007, government related contracts accounted for
32%, 40% and 29%, respectively, of our net revenues. We
typically own the intellectual property developed under these
contracts, and grant the Federal government a royalty-free,
non-exclusive and nontransferable license to use it. As a
result, our government contracts can not only generate a profit
for us, but we can also make additional money through exploiting
of the resulting technology in our commercial operations as well
as government products, or through licenses or joint ventures.
Contracts with the U.S. government contain provisions, and
are subject to laws and regulations, that give the government
rights and remedies not typically found in commercial contracts,
including rights that allow the government to:
|
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|
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|
|
•
|
terminate existing contracts for convenience, which affords the
U.S. government the right to terminate the contract in
whole or in part any time it wants for any reason or no reason,
as well as for default;
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|
•
|
reduce or modify contracts or subcontracts, if its requirements
or budgetary constraints change;
|
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•
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cancel or reduce multi-year contracts and related orders, if
funds for contract performance for any subsequent year become
unavailable;
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|
|
•
|
adjust reimbursable contract costs and fees on the basis of
audits completed by its agencies through exercise of its
oversight rights; and
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|
|
•
|
control or prohibit the export of products.
|
Compensation in the event of a termination, if any, is limited
to compensation for work completed at the time of termination.
In the event of termination for convenience, we may receive a
certain allowance for profit on the work performed.
Commercial
Applications
We have chosen to manufacture and sell certain commercial
products on our own. To date, our commercial efforts have been
focused on the design, manufacture, and sale of high performance
infrastructure products for
21
wireless voice and data applications. We have three current
product lines, all of which relate to wireless base stations:
|
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|
|
•
|
SuperLink, a highly compact and reliable receiver front-end HTS
wireless filter system to eliminate
out-of-band
interference for wireless base stations, combining filters with
a proprietary cryogenic cooler and a cooled low-noise amplifier.
|
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|
|
|
•
|
AmpLink, a ground-mounted unit for wireless base stations that
includes a high-performance amplifier and up to six dual
duplexers.
|
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|
|
•
|
SuperPlex, a high-performance multiplexer that provides
extremely low insertion loss and excellent cross-band isolation
designed to eliminate the need for additional base station
antennas and reduce infrastructure costs.
|
We sell most of our current commercial products to a small
number of wireless carriers in the United States, including
Alltel, AT&T, Sprint Nextel,
T-Mobile
and
Verizon Wireless. Verizon Wireless and AT&T each accounted
for more than 10% of our commercial revenues in 2009, 2008 and
2007. We are seeking to expand our customer base by selling
directly to other wireless network operators and manufacturers
of base station equipment, including internationally. Demand for
wireless communications equipment fluctuates dramatically and
unpredictably. The wireless communications infrastructure
equipment market is extremely competitive and is characterized
by rapid technological change, new product development, product
obsolescence, evolving industry standards and price erosion over
the life of a product. We face constant pressures to reduce
prices. Consequently, we expect the average selling prices of
our products will continue decreasing over time. We expect these
trends to continue and may cause significant fluctuations in our
quarterly and annual revenues. Our commercial operations are
subject to a number of significant risks, some of which are set
out in our public filings, including in particular the
“Risk Factors” included in Item 1A of this Report.
Joint
Ventures
From time to time we may pursue joint ventures with other
entities to commercialize our technology. In particular, we have
agreed to license certain technology for our SuperLink
interference elimination solution for the China market to a
joint venture where we own 45 percent of the equity. In
2008, we received orders from the joint venture for our new
TD-SCDMA solution to perform lab and field trial activities in
China. The lab and field trial was successfully completed in
2008 and in 2009 we successfully completed field trials in the
existing China 2G market using our SuperLink solution. The
commencement of manufacturing and the transfer of our processes
to the joint venture will be driven by product demand from the
China market. The joint venture’s activities remain subject
to successful product marketing efforts in addition to a number
of other conditions, including certain critical approvals from
the Chinese and United States governments. In particular, we
have been in discussions with the United States government
concerning the national security implications of our joint
venture and investment from BAOLI. There continues to be no
assurance that these conditions will be met, or that all
required approvals (if obtained) will be obtained on a timely
basis. Even if these conditions are met and the approvals
received, the results from our joint venture will be subject to
a number of significant risks associated with international
operations and new ventures, some of which are set forth in our
public filings, including in particular the “Risk
Factors” included in Item 1A of this Report.
Licenses
From time to time we grant licenses for our technology to other
companies. Specifically, we have granted licenses to, among
others, (1) Bruker for Nuclear Magnetic Resonance
application, (2) General Dynamics for government
applications and (3) Star Cryoelectronics for
Superconducting Quantum Interference Device applications.
22
Backlog
Our commercial backlog consists of accepted product purchase
orders with scheduled delivery dates during the next twelve
months. We had commercial backlog of $795,000 at
December 31, 2009, compared to $272,000 at
December 31, 2008.
Results
of Operations
2009
Compared to 2008
Net revenues consist primarily of commercial product revenues
and government contract revenues. Net revenues decreased by
$0.5 million, or 4%, to $10.8 million in 2009 from
$11.3 million in 2008.
Net commercial product revenues increased by $0.4 million,
or 7%, to $7.2 million in 2009 from $6.8 million in
2008. The increase is the result of higher sales volume for our
SuperLink products. Average sales prices for our products were
essentially unchanged in 2009 from 2008. Our two largest
customers accounted for 92% of our net commercial revenues in
2009 and 2008. These customers generally purchase products
through non-binding commitments with minimal lead-times.
Consequently, our commercial product revenues can fluctuate
dramatically from quarter to quarter based on changes in our
customers’ capital spending patterns.
Government contract revenues decreased by $0.9 million, or
21%, to $3.6 million in 2009 from $4.5 million in
2008. This decrease is attributable to the completion of the
first phase of a major contract and a funding gap before the
second phase of that contract was funded in our second quarter
and increased efforts on our research and development activities.
Cost of commercial product revenues includes all direct costs,
manufacturing overhead and provision for excess and obsolete
inventories. The cost of commercial product revenues totaled
$9.1 million for 2009 compared to $8.9 million for
2008, an increase of $0.2 million, or 2%. The higher costs
resulted principally from higher production as a result of
higher sales. Our expense provision for obsolete inventories
totaled $282,000 in 2009 compared to $17,000 in 2008.
Our cost of sales includes both variable and fixed cost
components. The variable component consists primarily of
materials, assembly and test labor, overhead, which includes
equipment and facility depreciation, transportation costs and
warranty costs. The fixed component includes test equipment and
facility depreciation, purchasing and procurement expenses and
quality assurance costs. Given the fixed nature of such costs,
the absorption of our production overhead costs into inventory
decreases, and the amount of production overhead variances
expensed to cost of sales increases, as production volumes
decline since we have fewer units to absorb our overhead costs
against. Conversely, the absorption of our production overhead
costs into inventory increases, and the amount of production
overhead variances expensed to cost of sales decreases, as
production volumes increase since we have more units to absorb
our overhead costs against. As a result, our gross profit
margins generally decrease as revenue and production volumes
decline due to lower sales volume and higher amounts of
production overhead variances expensed to cost of sales; and our
gross profit margins generally increase as our revenue and
production volumes increase due to higher sales volume and lower
amounts of production overhead variances expensed to cost of
sales. Our inventory is valued at the lower of its actual cost
or the current estimated market value of the inventory. We
review inventory quantities on hand and on order and record, on
a quarterly basis, a provision for excess and obsolete inventory
and/or
vendor cancellation charges related to purchase commitments. If
the results of the review determine that a write-down is
necessary, we recognize a loss in the period in which the loss
is identified, whether or not the inventory is retained.
The following is an analysis of our commercial product gross
profit margins for 2009 and 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Dollars in thousands
|
|
|
|
|
Net commercial product sales
|
|
$
|
7,239
|
|
|
|
100.0
|
%
|
|
$
|
6,768
|
|
|
|
100.0
|
%
|
|
Cost of commercial product sales
|
|
|
9,102
|
|
|
|
125.7
|
%
|
|
|
8,911
|
|
|
|
131.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
$
|
(1,863
|
)
|
|
|
25.7
|
%
|
|
$
|
(2,143
|
)
|
|
|
(31.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
We had a negative gross margin of $1.9 million in 2009 from
the sale of our commercial products compared to a negative gross
margin of $2.1 million in 2008. The negative gross margin
in 2009 is primarily because the reduced level of commercial
sales was insufficient to cover our fixed manufacturing overhead
costs. Our gross margins were also adversely impacted by a
$282,000 charge for excess and obsolete inventory in 2009 and a
similar charge of $17,000 in 2008. Gross margins were favorably
impacted by $261,000 in 2009 by the sale of previously
written-off inventory. There was no similar benefit in 2008. We
regularly review inventory quantities on hand and provide an
allowance for excess and obsolete inventory based on numerous
factors, including sales backlog, historical inventory usage,
forecasted product demand and production requirements for the
next twelve months.
Cost of contract research and development totaled
$2.6 million in 2009 compared to $3.6 million in 2008,
a decrease of $1.0 million, or 28%. Because these contracts
are generally priced on a “cost plus” basis, declines
in revenue generally result in declines in associated costs. As
a percentage of government revenue, contract research and
development expenses decreased from 81% in 2008 to 71% in 2009
because of different cost recognition criteria on one of our
2009 cost-plus contracts.
Research and development expenses relate to development of new
wireless commercial products and other products related to our
expertise. We also incur design expenses associated with
reducing the cost and improving the manufacturability of our
existing products. These expenses totaled $4.4 million in
2009 compared to $3.4 million in 2008, an increase of
$1.0 million, or 30%. In 2009, we increased our new
commercial products development effort by $500,000 and in 2008
we capitalized a $521,000 development related to a product for
the China market. We have relatively fixed engineering
resources, and our research and development expenses vary
inversely with the amount of those resources allocated to our
government contract activities.
Selling, general and administrative expenses totaled
$6.9 million in 2009 compared to $8.2 million in 2008,
a decrease of $1.3 million, or 16%. The lower expenses in
2009 resulted primarily from a reduction in employees in the
fourth quarter of 2008, as well as lower expenses for insurance
and consulting.
Other expense included a loss from our joint venture with BAOLI
in China of $638,000. The loss included a $521,000 expense for
impairment and a $117,000 expense for our 45 percent equity
ownership of the joint venture’s 2009 operating loss. The
adjustment of the fair value expense represents the treatment,
as a derivative, of 608,237 warrants that are exercisable for
common stock. We used the Black-Scholes valuation model to
determine their fair value. There were no such charges in 2008.
We incurred no severance charges in 2009. In the fourth quarter
of 2008 we reduced our work force and incurred a $141,000
severance charge.
Interest income decreased to $24,000 in 2009, compared to
$284,000 in 2008, primarily because of dramatically lower
interest rates being paid on our money-market account funds.
Interest expense in 2009 and 2008 amounted to $32,000.
Our loss totaled $13.0 million in 2009, compared to
$12.7 million in 2008.
The net loss available to common stockholders totaled $0.65 per
common share in 2009, compared to $0.77 per common share in 2008.
2008
Compared to 2007
Net revenues decreased by $6.6 million, or 37%, to
$11.3 million in 2008 from $17.9 million in 2007.
Net commercial product revenues decreased by $6.0 million,
or 47%, to $6.8 million in 2008 from $12.8 million in
2007. The decrease is primarily the result of lower sales volume
for our products. Average sales prices for our products were
essentially unchanged in 2008 compared to 2007. Our two largest
customers accounted for 92% of our net commercial revenues in
2008, compared to 75% in 2007. These customers generally
purchase products through non-binding commitments with minimal
lead-times. Consequently, our commercial product revenues can
fluctuate dramatically from quarter to quarter based on changes
in our customers’ capital spending patterns.
24
Government contract revenues decreased by $590,000, or 12%, to
$4.5 million in 2008 from $5.1 million in 2007. This
decrease is primarily attributable to the completion of the
first phase of a major contract and a funding gap before the
second phase of that contract was funded.
The cost of commercial product revenues totaled
$8.9 million for 2008 compared to $12.9 million for
2007, a decrease of $4.0 million, or 31%. The lower costs
resulted principally from lower production as a result of lower
sales. Our expense provision for obsolete inventories totaled
$17,000 in 2008 compared to $160,000 in 2007.
The following is an analysis of our commercial product gross
profit margins for 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Dollars in thousands
|
|
|
|
|
Net commercial product sales
|
|
$
|
6,768
|
|
|
|
100.0
|
%
|
|
$
|
12,787
|
|
|
|
100.0
|
%
|
|
Cost of commercial product sales
|
|
|
8,911
|
|
|
|
131.7
|
%
|
|
|
12,944
|
|
|
|
101.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
(2,143
|
)
|
|
|
(31.7
|
)%
|
|
$
|
(157
|
)
|
|
|
(1.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had a negative gross margin of $2.1 million in 2008 from
the sale of our commercial products compared to a negative gross
margin of $157,000 in 2007. The negative gross margin in 2008 is
primarily because the reduced level of commercial sales was
insufficient to cover our fixed manufacturing overhead costs.
Our gross margins were also adversely impacted by a $17,000
charge for excess and obsolete inventory in 2008 and a similar
charge of $160,000 in 2007. Gross margins were favorably
impacted by $195,000 in 2007 by the sale of previously
written-off inventory. There was no similar benefit in 2008.
Cost of contract research and development totaled
$3.6 million in 2008 compared to $2.9 million in 2007,
an increase of $743,000, or 26%. As a percentage of government
revenue, contract research and development expenses increased
from 57% in 2007 to 81% in 2008 because of different cost
recognition criteria on one of our 2008 cost-plus contracts.
Research and development expenses relate to development of new
wireless commercial products and other products related to our
expertise. We also incur design expenses associated with
reducing the cost and improving the manufacturability of our
existing products. These expenses totaled $3.4 million in
2008 compared to $3.2 million in 2007, an increase of
$222,000, or 7%. The increase is due to increased efforts
associated with new commercial products development.
Selling, general and administrative expenses totaled
$8.2 million in 2008 compared to $8.1 million in 2007,
an increase of $28,000, or less than 1%. Expenses were lower in
2007 primarily from the reversal of a $610,000 reserve in the
first quarter of 2007. In 2008 we had lower insurance premiums
and lower selling expenses that were slightly offset by higher
legal expenses associated with our China joint venture.
In the fourth quarter of 2008 we reduced our work force and
incurred a $141,000 severance charge. There was no similar
charge in 2007.
Interest income increased to $284,000 in 2008, compared to
$156,000 in 2007, primarily because of higher cash balances in
2008.
Interest expense in 2008 amounted to $32,000, compared to
$39,000 in 2007, as a result of lower borrowing levels.
Our loss totaled $12.7 million in 2008, compared to
$9.1 million in 2007.
The net loss available to common stockholders totaled $0.77 per
common share in 2008, compared to $0.73 per common share in 2007.
25
Liquidity
and Capital Resources
Cash
Flow Analysis
As of December 31, 2009, we had working capital of
$12.6 million, including $10.4 million in cash and
cash equivalents, compared to working capital of
$12.3 million at December 31, 2008, which included
$7.6 million in cash and cash equivalents. We currently
invest our excess cash in short-term, investment-grade,
money-market instruments with maturities of three months or
less. Our investments have no exposure to the auction rate
securities market.
Cash and cash equivalents increased by $2.8 million from
$7.6 million at December 31, 2008 to
$10.4 million at December 31, 2009. In 2009, cash was
used principally in operations and to a lesser extent for the
purchase of property and equipment. These uses were offset by
gross cash proceeds of $10.5 million provided by the sales
of common stock.
Cash used in operations totaled $7.4 million in 2009. We
used $9.2 million to fund the cash portion of our net loss.
We also used cash to fund a $600,000 increase in accounts
payable payments, patents and licenses payments, higher accounts
receivables and prepaid and other current asset payments. These
uses were offset by cash generated from the sale of inventory
and lower other assets totaling $2.4 million.
Net cash used in investing activities totaled $226,000 in 2009
from the purchase of fixed assets.
Net cash provided by financing activities in 2009 totaled
$10.5 million, net of $800,000 in expenses, from the sale
of 3,752,005 shares of common stock at $3.00 per share in
June 2009.
Financing
Activities
We have historically financed our operations through a
combination of cash on hand, equipment lease financings,
available borrowings under bank lines of credit and both private
and public equity offerings. We have effective registration
statements on file with the Securities and Exchange Commission
covering the public resale by investors of common stock issued
in our private placements, as well as common stock acquired upon
exercise of warrants.
As described above, financing activities in 2009 totaled
$10.5 million, net of $800,000 in expenses, from the sale
of 3,752,005 shares of common stock at $3.00 per share in
June 2009.
We have an existing line of credit from a bank. The line of
credit expires in July 2010. The loan agreement is structured as
a sale of our accounts receivable and provides for the sale of
up to $3.0 million of eligible accounts receivable, with
advances to us totaling 80% of the receivables sold. Advances
bear interest at the bank’s prime rate (4.0% at
December 31, 2009) plus 2.50% subject to a
minimum monthly charge. Advances are collateralized by a lien on
all of our assets. Under the terms of the agreement, we continue
to service the sold receivables and are subject to recourse
provisions. There was no amount outstanding under this borrowing
facility at December 31, 2009.
Contractual
Obligations and Commercial Commitments
We incur various contractual obligations and commercial
commitments in our normal course of business. They consist of
the following:
Operating Lease Obligations.
Our operating
lease obligations consist of a facility lease in
Santa Barbara, California and several smaller equipment
leases.
Patents and Licenses.
We have entered into
various licensing agreements requiring royalty payments ranging
from 0.13% to 2.5% of specified product sales. Some of these
agreements contain provisions for the payment of guaranteed or
minimum royalty amounts. Typically, the licensor can terminate
our license if we fail to pay minimum annual royalties.
Purchase Commitments.
In the normal course of
business, we incur purchase obligations with vendors and
suppliers for the purchase of inventory, as well as other goods
and services. These obligations are generally
26
evidenced by purchase orders that contain the terms and
conditions associated with the purchase arrangements. We are
committed to accept delivery of such material pursuant to the
purchase orders subject to various contract provisions that
allow us to delay receipt of such orders or cancel orders beyond
certain agreed upon lead times. Cancellations may result in
cancellation costs payable by us.
Quantitative Summary of Contractual Obligations and
Commercial Commitments
At December 31, 2009, we had the following contractual
obligations and commercial commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
2011 and
|
|
|
2013 and
|
|
|
2015 and
|
|
|
Contractual Obligations
|
|
Total
|
|
|
2010
|
|
|
2012
|
|
|
2014
|
|
|
beyond
|
|
|
|
|
Operating leases
|
|
$
|
9,741,000
|
|
|
$
|
1,307,000
|
|
|
$
|
2,707,000
|
|
|
$
|
2,843,000
|
|
|
$
|
2,884,000
|
|
|
Minimum license commitment
|
|
|
1,810,000
|
|
|
|
175,000
|
|
|
|
350,000
|
|
|
|
355,000
|
|
|
|
930,000
|
|
|
Fixed asset and inventory purchase commitments
|
|
|
328,000
|
|
|
|
328,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
11,879,000
|
|
|
$
|
1,810,000
|
|
|
$
|
3,057,000
|
|
|
$
|
3,198,000
|
|
|
$
|
3,814,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
We plan to invest approximately $2.1 million in fixed
assets during 2010.
Future
Liquidity
In 2009, we incurred a net loss of $13.0 million and had
negative cash flows from operations of $7.4 million. In
2008, we incurred a net loss of $12.7 million and had
negative cash flows from operations of $12.1 million. Our
independent registered public accounting firm has included in
their audit reports for 2009 through 2007 an explanatory
paragraph expressing doubt about our ability to continue as a
going concern.
At December 31, 2009 we had $10.4 million in cash and
cash equivalents. Our cash resources, together with our line of
credit, may not be sufficient to fund our business for at least
the next twelve months. We believe the key factors to our future
liquidity will be our ability to successfully use our expertise
and our technology to generate revenues in various ways,
including commercial operations, government contracts, joint
ventures and licenses. Because of the uncertainty of these
factors, we may need to raise funds to meet our working capital
needs.
We cannot assure you that additional financing will be available
on acceptable terms or at all. If we issue additional equity
securities to raise funds, the ownership percentage of our
existing stockholders would be reduced. New investors may demand
rights, preferences or privileges senior to those of existing
holders of common stock. If we cannot raise any needed funds, we
might be forced to make further substantial reductions in our
operating expenses, which could adversely affect our ability to
implement our current business plan and ultimately our viability
as a company.
Net
Operating Loss Carryforward
As of December 31, 2009, we had net operating loss
carryforwards for federal and state income tax purposes of
approximately $298.8 million and $169.9 million
,
respectively, which expire in the years 2010 through 2029.
Of these amounts, $80.9 million and $23.5 million,
respectively, resulted from the acquisition of Conductus.
Included in the net operating loss carryforwards are deductions
related to stock options of approximately $24.1 million and
$13.1 million for federal and California income tax
purposes, respectively. To the extent net operating loss
carryforwards are recognized for accounting purposes, the
resulting benefits related to the stock options will be credited
to stockholders’ equity. In addition, we had research and
development and other tax credits for federal and state income
tax purposes of approximately $3.1 million and
$1.4 million, respectively, which expire in the years 2010
through 2029. Of these amounts, $549,000 and $581,000,
respectively, resulted from the acquisition of Conductus.
Due to the uncertainty surrounding their realization, we have
recorded a full valuation allowance against our net deferred tax
assets. Accordingly, no deferred tax asset has been recorded in
the accompanying balance sheet.
27
Section 382 of the Internal Revenue Code imposes an annual
limitation on the utilization of net operating loss
carryforwards and other tax attributes 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 had changes
in ownership in August 1999, December 2002 and June 2009. In
addition, we acquired the right to Conductus’ net operating
losses, which are also subject to the limitations imposed by
Section 382. Conductus underwent four ownership changes,
which occurred in February 1999, February 2001, December 2002
and June 2009. Therefore, the ability to utilize Conductus’
and our net operating loss carryforwards will be subject annual
limitations upon utilization in future periods. We are currently
studying the impact of these Section 382 limitations on the
future realizability of our various tax attributes.
Recent
Accounting Pronouncements
Recent accounting pronouncements are detailed in Note 2 to
our Consolidated Financial Statements included in this Report.
Market
Risk
We are 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. We do not enter into
derivatives or other financial instruments for trading or
speculation purposes. Our money market investments have no
exposure to the auction rate securities market.
At December 31, 2009, we had approximately
$9.7 million invested in a money market account yielding
approximately 0.1%. Assuming no yield on this money market
account and no liquidation of principal for the year, our total
interest income would decrease by approximately $10,000 per
annum. As we had no amounts outstanding on our bank loan during
2009, changes in its interest rate would not have affected us.
Inflation
We do not foresee any material impact on our operations from
inflation.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We continually
evaluate our estimates, including those related to bad debts,
inventories, recovery of long-lived assets, income taxes,
warranty obligations, contract revenue and contingencies. We
base our estimates on historical experience and on various other
assumptions that we believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Any future
changes to these estimates and assumptions could cause a
material change to our reported amounts of revenues, expenses,
assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of the financial statements. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of
our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required. We write down our inventory for
estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and
market conditions. If actual market conditions are less
favorable than those projected by management, additional
inventory write-downs may be required.
28
Our inventory is valued at the lower of its actual cost or the
current estimated market value of the inventory. We review
inventory quantities on hand and on order and record, on a
quarterly basis, a provision for excess and obsolete inventory
and/or
vendor cancellation charges related to purchase commitments. If
the results of the review determine that a write-down is
necessary, we recognize a loss in the period in which the loss
is identified, whether or not the inventory is retained. Our
inventory reserves establish a new cost basis for inventory and
are not reversed until we sell or dispose of the related
inventory. Such provisions are established based on historical
usage, adjusted for known changes in demands for such products,
or the estimated forecast of product demand and production
requirements. Our business is characterized by rapid
technological change, frequent new product development and rapid
product obsolescence that could result in an increase in the
amount of obsolete inventory quantities on hand. Demand for our
products can fluctuate significantly. Our estimates of future
product demand may prove to be inaccurate, and we may understate
or overstate the provision required for excess and obsolete
inventory.
Our net sales consist of revenue from sales of products, net of
trade discounts and allowances. We recognize revenue when
evidence of an arrangement exists, contractual obligations have
been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is
reasonably assured. At the time revenue is recognized, we
provide for the estimated cost of product warranties if allowed
for under contractual arrangements and return products. Our
warranty obligation is affected by product failure rates and
service delivery costs incurred in correcting a product failure.
Should such failure rates or costs differ from these estimates,
accrued warranty costs would be adjusted.
We indemnify, without limit or term, our customers against all
claims, suits, demands, damages, liabilities, expenses,
judgments, settlements and penalties arising from actual or
alleged infringement or misappropriation of any intellectual
property relating to our products or other claims arising from
our products. We cannot reasonably develop an estimate of the
maximum potential amount of payments that might be made under
our guarantees because of the uncertainty as to whether a claim
might arise and how much it might total.
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.
Contract revenues are derived primarily from research 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 us 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, we believe
that the audits will not have a significant effect on our
financial position, results of operations or cash flows. The
Defense Contract Audit Agency has audited us through 2003.
We periodically evaluate the realizability of long-lived assets
as events or circumstances indicate a possible inability to
recover the carrying amount. Long-lived assets that will no
longer be used in our business are written off in the period
identified since they will no longer generate any positive cash
flows for us. 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 estimated fair value. Our future cash
flows may vary from estimates.
Stock-based employee compensation cost is recognized using the
fair-value based method for all awards granted on or after the
beginning of 2006. We issue stock option awards and restricted
share awards to employees and to non-employee directors under
our stock-based incentive plans. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option pricing model. Compensation cost related to restricted
share awards is recorded based on the market price of our common
stock on the grant date. We recognize compensation expense over
the expected vesting period on a straight-line basis from the
grant date.
Our valuation allowance against the deferred tax assets is based
on our assessments of historical losses and projected operating
results in future periods. If and when we generate future
taxable income in the U.S. against
29
which these tax assets may be applied, some portion or all of
the valuation allowance would be reversed and an increase in net
income would consequently be reported in future years.
|
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ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
See “
Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Market
Risk
.”
|
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|
|
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 15(a)1 of this
Report.
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|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable.
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|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures; Changes in Internal Control Over
Financial Reporting
We have established disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended). As of
the end of the period covered by this report we carried out an
evaluation under the supervision and with the participation of
our management, including the our Chief Executive Officer and
Controller (“Principal Financial Officer”), of the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to
Rule 13a-15
of the Securities and Exchange Act of 1934, as amended. Based
upon that evaluation, the Chief Executive Officer and Controller
concluded that our disclosure controls and procedures are
effective.
There were no changes in our internal controls over financial
reporting during the fourth quarter of the year ended
December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
We do not expect that our disclosure controls and procedures or
our internal controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, have been detected.
Management’s
Report on Internal Control Over Financial Reporting
The report below shall not be deemed “filed” for
purposes of Section 18 of the Exchange Act or otherwise
subject to the liabilities of that section, and shall not be
deemed incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that we
specifically incorporate it by reference into such a filing.
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting (as
defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Our
management assessed the effectiveness of our internal controls
over financial reporting as of December 31, 2009. In making
its assessment of the effectiveness of our internal controls
over financial reporting, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal
Control-Integrated Framework. Based on these criteria, our
management has concluded that, as of December 31, 2009, our
internal control over financial reporting is effective. This
annual report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was
not subject to attestation by our independent registered public
accounting firm pursuant
30
to temporary rules of the Securities and Exchange Commission
that permit the company to provide only management’s report
in this annual report.
|
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|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item is incorporated by
reference to our Proxy Statement for the 2010 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of our year ended
December 31, 2009.
|
|
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated by
reference to our Proxy Statement for the 2010 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of our year ended
December 31, 2009.
|
|
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this item is incorporated by
reference to our Proxy Statement for the 2010 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of our year ended
December 31, 2009.
|
|
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this item is incorporated by
reference to our Proxy Statement for the 2010 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of our year ended
December 31, 2009.
|
|
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND DISCLOSURES
|
The information required by this item is incorporated by
reference to our Proxy Statement for the 2010 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of our year ended
December 31, 2009.
31
PART IV
|
|
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|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as part of this
Report:
1.
Index to Financial Statements.
Our
financial statements and the Report of Stonefield Josephson,
Inc., Independent Registered Public Accounting Firm are included
in Part IV of this Report on the pages indicated:
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Page
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F-1
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F-2
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F-3
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F-4
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F-5
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F-6
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|
2.
Financial Statement Schedule Covered by the
Foregoing Report of Independent Registered Public Accounting
Firm.
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
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|
Number
|
|
Description of Document
|
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3
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.1
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Restated Certificate of Incorporation of Registrant as amended
through March 1, 2006.(25)
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3
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.2
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Amended and Restated Bylaws of Registrant.(25)
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4
|
.1
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|
Form of Common Stock Certificate.(24)
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4
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.2
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|
Certificate of Designations of Registrant of Series A
Convertible Preferred Stock of Registrant filed
November 13, 2007.(23)
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4
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.3
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Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock of Registrant.(3)
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4
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.4
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|
Warrant to Purchase Stock issued by Registrant to Silicon Valley
Bank and Registration Rights Agreement.(10)
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4
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.5
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Form of Warrant Agreement dated August, 2005.(17)
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10
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.1
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|
1992 Director Option Plan (as amended through January
1997).(1)***
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10
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.2
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Form of 1992 Director Stock Option Agreement.(1)***
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10
|
.3
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|
Amended and Restated 1998 Non-Statutory Stock Option Plan,
including Form of Stock Option Agreement.(4)***
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10
|
.4
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|
1999 Stock Plan.(2)***
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|
|
10
|
.5
|
|
Form of 1999 Stock Plan Stock Option Agreement.(2)***
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|
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10
|
.6
|
|
Form of Change in Control Agreement dated March 28,
2003.(7)***
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|
|
10
|
.7
|
|
Form of Amendment No. 1 to Change in Control Agreement
dated as of May 24, 2005.(18)***
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|
|
10
|
.8
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|
Form of Amendment No. 2 to Change in Control Agreement
dated as of December 31, 2006. (20)***
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|
10
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.9
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|
Accounts Receivable Purchase Agreement by and between Registrant
and Silicon Valley Bank, dated March 28, 2003, effective
date June 23, 2003.(7)
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32
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Number
|
|
Description of Document
|
|
|
|
|
10
|
.10
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Accounts Receivable Purchase Modification Agreement by and
between Registrant and Silicon Valley Bank dated March 17,
2004.(9)
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10
|
.11
|
|
Amendment to Purchase Agreement by and between Registrant and
Silicon Valley Bank dated as of April 28, 2004.(11)
|
|
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10
|
.12
|
|
Accounts Receivable Purchase Modification Agreement by and
between Registrant and Silicon Valley Bank dated March 16,
2005.(15)
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10
|
.13
|
|
Third Amendment to Loan and Security Agreement by and between
Registrant and Silicon Valley Bank dated June 16, 2006.(25)
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10
|
.14
|
|
Fourth Amendment to Loan and Security Agreement by and between
Registrant and Silicon Valley Bank dated June 18, 2007.(25)
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10
|
.15
|
|
Sixth Amendment to Loan and Security Agreement by and between
Registrant and Silicon Valley Bank dated July 31, 2008.(24)
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10
|
.16
|
|
Seventh Amendment to Loan and Security Agreement by and between
Registrant and Silicon Valley Bank dated July 31, 2009.(25)
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10
|
.17
|
|
Patent License Agreement by and between Registrant and Lucent
Technologies GRL LLC.(8)**
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|
|
10
|
.18
|
|
License Agreement between Registrant and Sunpower dated
May 2, 2005.(12)**
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|
|
10
|
.19
|
|
Employment Agreement between Registrant and Jeffrey Quiram dated
as of February 14, 2005.(13)***
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|
|
10
|
.20
|
|
Stock Option Grant and 2003 Equity Incentive Plan Option
Agreement between Registrant and Jeffrey Quiram dated
February 14, 2005. (13)***
|
|
|
10
|
.21
|
|
Amendment to Employment Agreement between Registrant and Jeffrey
Quiram dated as of December 31, 2006.(20)***
|
|
|
10
|
.22
|
|
2003 Equity Incentive Plan As Amended May 25, 2005. (16)***
|
|
|
10
|
.23
|
|
Form of Notice of Grant of Stock Options and Option Agreement
for 2003 Equity Incentive Plan.(13)***
|
|
|
10
|
.24
|
|
Management Incentive Plan (July 24, 2006).(19)***
|
|
|
10
|
.25
|
|
Employment Agreement between Registrant and Terry White dated as
of April 11, 2005.(14)***
|
|
|
10
|
.26
|
|
Amendment to Employment Agreement between Registrant and Terry
White dated as of December 31, 2006.(20)***
|
|
|
10
|
.27
|
|
Form of Director and Officer Indemnification Agreement.(18)***
|
|
|
10
|
.28
|
|
Lease Agreement between the Registrant and 1200 Enterprises LLC
dated as of June 1, 2001.(6)
|
|
|
10
|
.29
|
|
Second Amendment to Lease Agreement between the Registrant and
1200 Enterprises LLC dated January 19, 2009.(25)
|
|
|
10
|
.30
|
|
Agreement between Registrant and Hunchun BaoLi Communication
Co., Ltd. (“BAOLI”) dated August 17, 2007.(21)
|
|
|
10
|
.31
|
|
First Amendment to Agreement between Registrant and BAOLI dated
November 1, 2007(22)
|
|
|
10
|
.32
|
|
Second Amendment to Agreement between Registrant and BAOLI dated
January 7, 2008.(22)
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|
|
10
|
.33
|
|
Framework Agreement between Registrant and BAOLI dated
November 8, 2007.(22)
|
|
|
10
|
.34
|
|
Sino-Foreign Equity Joint Venture Contract between
Superconductor Investments (Mauritius) Limited and BAOLI dated
December 8, 2007 (Exhibit A to Framework Agreement
with BAOLI).(22)
|
|
|
10
|
.35
|
|
Form of Technology and Trademark License Agreement between
Superconductor Investments (Mauritius) Limited, Registrant and
BAOLI (Exhibit B to Framework Agreement).(22)
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14
|
|
|
Code of Business Conduct and Ethics.(18)
|
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|
21
|
|
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List of Subsidiaries.(25)
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|
23
|
.1
|
|
Consent of Stonefield Josephson Inc, Independent Registered
Public Accounting Firm.(25)
|
|
|
31
|
.1
|
|
Statement of CEO Pursuant to 302 of the Sarbanes-Oxley Act of
2002.(25)
|
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|
31
|
.2
|
|
Statement of CFO Pursuant to 302 of the Sarbanes-Oxley Act of
2002.(25)
|
|
|
32
|
.1
|
|
Statement of CEO Pursuant to 906 of the Sarbanes-Oxley Act of
2002.(25)
|
|
|
32
|
.2
|
|
Statement of CFO Pursuant to 906 of the Sarbanes-Oxley Act of
2002.(25)
|
33
|
|
|
|
|
(1)
|
|
Incorporated by reference from Registrant’s Registration
Statement on
Form S-8
filed April 15, 1998 (File
No. 333-50137).
|
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(2)
|
|
Incorporated by reference from Registrant’s Registration
Statement on
Form S-8
filed November 4, 1999 (File
No. 333-90293).
|
|
|
|
(3)
|
|
Incorporated by reference from Registrant’s Current Report
on
Form 8-K
filed October 4, 2000.
|
|
|
|
(4)
|
|
Incorporated by reference from Registrant’s Registration
Statement on
Form S-8
filed March 6, 2001 (File
No. 333-56606).
|
|
|
|
(5)
|
|
Incorporated by reference from Registrant’s Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2001.
|
|
|
|
(6)
|
|
Incorporated by reference from Registrant’s Quarterly
Report on
Form 10-Q
for the quarter ended March 30, 2002.
|
|
|
|
(7)
|
|
Incorporated by reference from Registrant’s Quarterly
Report on
Form 10-Q
for the quarter ended March 29, 2003.
|
|
|
|
(8)
|
|
Incorporated by reference from Registrant’s Annual Report
on
Form 10-K
for the year ended December 31, 2003, filed March 11,
2004.
|
|
|
|
(9)
|
|
Incorporated by reference from Registrant’s Quarterly
Report on
Form 10-Q
for the quarter ended April 3, 2004, filed May 12,
2004.
|
|
|
|
(10)
|
|
Incorporated by reference from Registrant’s Registration
Statement on
Form S-3
(File No.
333-117107),
filed July 2, 2004.
|
|
|
|
(11)
|
|
Incorporated by reference from Registrant’s Quarterly
Report on
Form 10-Q
for the quarter ended July 3, 2004, filed August 11,
2004.
|
|
|
|
(12)
|
|
Incorporated by reference from Registrant’s Quarterly
Report on
Form 10-Q
for the quarter ended October 2, 2004, filed
November 10, 2004.
|
|
|
|
(13)
|
|
Incorporated by reference from Registrant’s Annual Report
on
Form 10-K
for the year ended December 31, 2004.
|
|
|
|
(14)
|
|
Incorporated by reference from Registrant’s Quarterly
Report on
Form 10-Q
for the quarter ended April 2, 2005.
|
|
|
|
(15)
|
|
Incorporated by reference from Registrants’ Current Report
on
Form 8-K
filed April 4, 2005.
|
|
|
|
(16)
|
|
Incorporated by reference from Registrant’s Current Report
on
Form 8-K
filed May 27, 2005.
|
|
|
|
(17)
|
|
Incorporated by reference from Registrant’s Current Report
on
Form 8-K
filed August 11, 2005.
|
|
|
|
(18)
|
|
Incorporated by reference from Registrant’s Annual Report
on
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
(19)
|
|
Incorporated by reference from Registrant’s Current Report
on
Form 8-K
filed July 28, 2006.
|
|
|
|
(20)
|
|
Incorporated by reference from Registrant’s Annual Report
on
Form 10-K
for the year ended December 31, 2006.
|
|
|
|
(21)
|
|
Incorporated by reference from Registrant’s Quarterly
Report on
Form 10-Q
for the quarter ended September 29, 2007.
|
|
|
|
(22)
|
|
Incorporated by reference from Registrant’s Annual Report
on
Form 10-K
for the year ended December 31, 2007.
|
|
|
|
(23)
|
|
Incorporated by reference from Registrant’s Current Report
on
Form 8-K/A
filed February 25, 2008.
|
|
|
|
(24)
|
|
Incorporated by reference from Registrant’s Annual Report
on
Form 10-K
for the year ended December 31, 2008.
|
|
|
|
(25)
|
|
Filed herewith.
|
|
|
|
**
|
|
Confidential treatment has been previously granted for certain
portions of these exhibits.
|
|
|
|
***
|
|
This exhibit is a management contract or compensatory plan or
arrangement.
|
(b)
Exhibits
. See Item 15(a) above.
34
Report of
Independent Registered Public Accounting Firm
To: The Board of Directors and Stockholders of Superconductor
Technologies, Inc.
Santa Barbara, California
We have audited the accompanying consolidated balance sheets of
Superconductor Technologies, Inc. as of December 31, 2009
and 2008, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2009. Our audits
also included the consolidated financial statement schedule
listed in the Index at Item 15(a)(2) as of and for the
three years ended December 31, 2009. The Company’s
management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also 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, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Superconductor Technologies, Inc. as of
December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Further, the accompanying schedule is, in our opinion,
fairly stated in all material respects in relation to basic
financial statements as a whole.
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the
company as a going concern. As discussed in Note 2, the
Company has incurred significant net losses since its inception
and has an accumulated deficit of $225,665,000 and expects to
incur substantial additional losses and costs. The foregoing
matters raise substantial doubt about the Company’s ability
to continue as a going concern. Management’s plans in
regard to these matters are described in Note 2 of the
accompanying financial statements. These financial statements do
not include any adjustments that might result from the outcome
of these uncertainties.
/s/
Stonefield
Josephson, Inc.
Los Angeles, California
March 16, 2010
F-1
SUPERCONDUCTOR
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
ASSETS
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,365,000
|
|
|
$
|
7,569,000
|
|
|
Accounts receivable, net
|
|
|
462,000
|
|
|
|
355,000
|
|
|
Inventory, net
|
|
|
2,644,000
|
|
|
|
5,278,000
|
|
|
Prepaid expenses and other current assets
|
|
|
445,000
|
|
|
|
416,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
13,916,000
|
|
|
|
13,618,000
|
|
|
Property and equipment, net of accumulated depreciation of
$21,076,000 and $19,943,000, respectively
|
|
|
1,832,000
|
|
|
|
2,739,000
|
|
|
Patents, licenses and purchased technology, net of accumulated
amortization of $2,384,000 and $2,055,000, respectively
|
|
|
2,163,000
|
|
|
|
2,252,000
|
|
|
Investment in joint venture
|
|
|
—
|
|
|
|
521,000
|
|
|
Other assets
|
|
|
215,000
|
|
|
|
228,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
18,126,000
|
|
|
$
|
19,358,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
467,000
|
|
|
$
|
707,000
|
|
|
Accrued expenses
|
|
|
671,000
|
|
|
|
578,000
|
|
|
Fair value of warrant derivative
|
|
|
171,000
|
|
|
|
—
|
|
|
Current portion of capitalized lease obligations
|
|
|
50,000
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,359,000
|
|
|
|
1,365,000
|
|
|
Other long term liabilities
|
|
|
526,000
|
|
|
|
441,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,885,000
|
|
|
|
1,806,000
|
|
|
Commitments and contingencies (Notes 7 and 8)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 2,000,000 shares
authorized, 611,523 issued and outstanding
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Common stock, $.001 par value, 250,000,000 shares
authorized, 22,512,033 and 17,869,030 shares issued and
outstanding, respectively
|
|
|
23,000
|
|
|
|
18,000
|
|
|
Capital in excess of par value
|
|
|
241,882,000
|
|
|
|
230,219,000
|
|
|
Accumulated deficit
|
|
|
(225,665,000
|
)
|
|
|
(212,686,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
16,241,000
|
|
|
|
17,552,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
18,126,000
|
|
|
$
|
19,358,000
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-2
SUPERCONDUCTOR
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commercial product revenues
|
|
$
|
7,239,000
|
|
|
$
|
6,768,000
|
|
|
$
|
12,787,000
|
|
|
Government and other contract revenues
|
|
|
3,577,000
|
|
|
|
4,525,000
|
|
|
|
5,115,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
10,816,000
|
|
|
|
11,293,000
|
|
|
|
17,902,000
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of commercial product revenues
|
|
|
9,102,000
|
|
|
|
8,911,000
|
|
|
|
12,944,000
|
|
|
Cost of government and other contract revenues
|
|
|
2,552,000
|
|
|
|
3,649,000
|
|
|
|
2,906,000
|
|
|
Research and development
|
|
|
4,399,000
|
|
|
|
3,394,000
|
|
|
|
3,172,000
|
|
|
Selling, general and administrative
|
|
|
6,925,000
|
|
|
|
8,151,000
|
|
|
|
8,123,000
|
|
|
Restructuring expenses and impairment charges
|
|
|
—
|
|
|
|
141,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
22,978,000
|
|
|
|
24,246,000
|
|
|
|
27,145,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,162,000
|
)
|
|
|
(12,953,000
|
)
|
|
|
(9,243,000
|
)
|
|
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of asset for, and noncontrolling interest in, joint
venture
|
|
|
(638,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Adjustments to fair value of derivatives
|
|
|
(171,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Interest income
|
|
|
24,000
|
|
|
|
284,000
|
|
|
|
156,000
|
|
|
Interest expense
|
|
|
(32,000
|
)
|
|
|
(32,000
|
)
|
|
|
(39,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,979,000
|
)
|
|
$
|
(12,701,000
|
)
|
|
$
|
(9,126,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.65
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares
outstanding
|
|
|
19,842,687
|
|
|
|
16,402,509
|
|
|
|
12,487,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-3
SUPERCONDUCTOR
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
Receivable
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
From
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
Stockholder
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
Balance at December 31, 2006
|
|
|
—
|
|
|
$
|
—
|
|
|
|
12,483,367
|
|
|
$
|
12,000
|
|
|
$
|
208,825,000
|
|
|
$
|
(27,000
|
)
|
|
$
|
(190,859,000
|
)
|
|
$
|
17,951,000
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
3,350
|
|
|
|
|
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
26,000
|
|
|
Issuance of common stock (net of costs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,000
|
)
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
24,697
|
|
|
|
|
|
|
|
339,000
|
|
|
|
|
|
|
|
|
|
|
|
339,000
|
|
|
Reserve for impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,000
|
|
|
|
|
|
|
|
27,000
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,126,000
|
)
|
|
|
(9,126,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
12,511,414
|
|
|
|
12,000
|
|
|
|
209,163,000
|
|
|
|
—
|
|
|
|
(199,985,000
|
)
|
|
|
9,190,000
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock (net of costs)
|
|
|
|
|
|
|
|
|
|
|
5,101,361
|
|
|
|
5,000
|
|
|
|
10,563,000
|
|
|
|
|
|
|
|
|
|
|
|
10,568,000
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
256,255
|
|
|
|
1,000
|
|
|
|
593,000
|
|
|
|
|
|
|
|
|
|
|
|
594,000
|
|
|
Issuance of Series A Preferred
|
|
|
611,523
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
9,900,000
|
|
|
|
|
|
|
|
|
|
|
|
9,901,000
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,701,000
|
)
|
|
|
(12,701,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
611,523
|
|
|
|
1,000
|
|
|
|
17,869,030
|
|
|
|
18,000
|
|
|
|
230,219,000
|
|
|
|
—
|
|
|
|
(212,686,000
|
)
|
|
|
17,552,000
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock (net of costs)
|
|
|
|
|
|
|
|
|
|
|
3,752,005
|
|
|
|
4,000
|
|
|
|
10,452,000
|
|
|
|
|
|
|
|
|
|
|
|
10,456,000
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
890,998
|
|
|
|
1,000
|
|
|
|
1,211,000
|
|
|
|
|
|
|
|
|
|
|
|
1,212,000
|
|
|
Issuance of Series A Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,979,000
|
)
|
|
|
(12,979,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
611,523
|
|
|
$
|
1,000
|
|
|
|
22,512,033
|
|
|
$
|
23,000
|
|
|
$
|
241,882,000
|
|
|
$
|
—
|
|
|
$
|
(225,665,000
|
)
|
|
$
|
16,241,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
SUPERCONDUCTOR
TECHNOLOGIES INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,979,000
|
)
|
|
$
|
(12,701,000
|
)
|
|
$
|
(9,126,000
|
)
|
|
Adjustments to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,462,000
|
|
|
|
1,735,000
|
|
|
|
2,333,000
|
|
|
Stock-based compensation expense
|
|
|
1,212,000
|
|
|
|
587,000
|
|
|
|
339,000
|
|
|
Provision for excess and obsolete inventories
|
|
|
282,000
|
|
|
|
17,000
|
|
|
|
160,000
|
|
|
Noncontrolling interest in joint venture
|
|
|
117,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Fair value of derivatives
|
|
|
171,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Asset impairment for joint venture
|
|
|
521,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Reserve for impairment of note and interest receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
(583,000
|
)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(107,000
|
)
|
|
|
2,057,000
|
|
|
|
(877,000
|
)
|
|
Inventories
|
|
|
2,352,000
|
|
|
|
(1,880,000
|
)
|
|
|
2,403,000
|
|
|
Prepaid expenses and other current assets
|
|
|
(147,000
|
)
|
|
|
(26,000
|
)
|
|
|
574,000
|
|
|
Patents and licenses
|
|
|
(240,000
|
)
|
|
|
(315,000
|
)
|
|
|
(169,000
|
)
|
|
Other assets
|
|
|
14,000
|
|
|
|
9,000
|
|
|
|
16,000
|
|
|
Accounts payable and accrued expenses
|
|
|
(92,000
|
)
|
|
|
(1,603,000
|
)
|
|
|
(465,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,434,000
|
)
|
|
|
(12,120,000
|
)
|
|
|
(5,395,000
|
)
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of property and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
26,000
|
|
|
Purchase of property and equipment
|
|
|
(226,000
|
)
|
|
|
(179,000
|
)
|
|
|
(191,000
|
)
|
|
Investment in joint venture
|
|
|
—
|
|
|
|
(521,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(226,000
|
)
|
|
|
(700,000
|
)
|
|
|
(165,000
|
)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from shares to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
4,000,000
|
|
|
Payments on long-term obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,000
|
)
|
|
Net proceeds from sale of common stock and exercise of warrants
and options
|
|
|
10,456,000
|
|
|
|
16,450,000
|
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
10,456,000
|
|
|
|
16,450,000
|
|
|
|
4,012,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,796,000
|
|
|
|
3,630,000
|
|
|
|
(1,548,000
|
)
|
|
Cash and cash equivalents at beginning of year
|
|
|
7,569,000
|
|
|
|
3,939,000
|
|
|
|
5,487,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
10,365,000
|
|
|
$
|
7,569,000
|
|
|
$
|
3,939,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
SUPERCONDUCTOR
TECHNOLOGIES INC.
Superconductor Technologies Inc. (together with our
subsidiaries, “we” or “us”) was incorporated
in Delaware on May 11, 1987. We maintain our headquarters
in Santa Barbara, California. We develop and produce high
temperature superconducting (HTS) materials and associated
technologies. We have generated more than 100 patents as well as
proprietary trade secrets and manufacturing expertise, providing
interference elimination and network enhancement solutions to
the commercial wireless industry. In addition, we are now
leveraging our key enabling technologies, including radio
frequency filtering, HTS materials and cryogenics, to pursue
emerging opportunities in the electrical grid and in equipment
platforms that utilize electrical circuits.
From 1987 to 1997, we were engaged primarily in research and
development and generated revenues primarily from government
research contracts. Since then, we have provided solutions for
wireless infrastructure in the telecommunications industry. Our
commercial product offerings are divided into the following
three areas: SuperLink (high-temperature superconducting
filters), AmpLink (high performance, ground-mounted amplifiers)
and SuperPlex (high performance multiplexers).
Our research and development contracts are used as a source of
funds for our commercial technology development. We continue 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 us. For 2009, 2008 and 2007, government related
contracts accounted for 32%, 40% and 29%, respectively, of our
net revenues.
|
|
|
|
Note 2 —
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
In 2009, we incurred a net loss of $13.0 million and had
negative cash flows from operations of $7.4 million. In
2008, we incurred a net loss of $12.7 million and had
negative cash flows from operations of $12.1 million.
At December 31, 2009 we had $10.4 million in cash and
cash equivalents. Our cash resources, together with our line of
credit, may not be sufficient to fund our business through 2010.
We believe the key factors to our future liquidity will be our
ability to successfully use our expertise and our technology to
generate revenues in various ways, including commercial
operations, government contracts, joint ventures and licenses.
These factors leave substantial doubt about our ability to
continue as a going concern. Because of the uncertainty of these
factors, we may need to raise funds to meet our working capital
needs.
We cannot assure you that additional financing will be available
on acceptable terms or at all. If we issue additional equity
securities to raise funds, the ownership percentage of our
existing stockholders would be reduced. New investors may demand
rights, preferences or privileges senior to those of existing
holders of common stock. If we cannot raise any needed funds, we
might be forced to make further substantial reductions in our
operating expenses, which could adversely affect our ability to
implement our current business plan and ultimately our viability
as a company.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Superconductor Technologies Inc. and its wholly owned
subsidiaries. All significant intercompany transactions have
been eliminated from the consolidated financial statements.
Cash
and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments
with original maturities of three months or less. Cash and cash
equivalents are maintained with quality financial institutions
and from time to time exceed FDIC limits. Historically, we have
not experienced any losses due to such concentration of credit
risk.
F-6
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accounts
Receivable
We sell predominantly to entities in the wireless communications
industry and to entities of the United States government. We
grant uncollateralized credit to our customers. We perform usual
and customary credit evaluations of our customers before
granting credit. Trade accounts receivable are recorded at the
invoiced amount and do not bear interest. The allowance for
doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We determine
the allowance based on historical write-off experience. Past due
balances are reviewed for collectibility. Accounts balances are
charged off against the allowance when we deem it is probable
the receivable will not be recovered. We do not have any
off-balance-sheet credit exposure related to our customers.
Revenue
Recognition
Commercial revenues are principally derived from the sale of our
SuperLink, AmpLink and SuperPlex family of products and are
recognized once all of the following conditions have been met:
a) an authorized purchase order has been received in
writing, b) the customer’s credit worthiness has been
established, c) shipment of the product 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 us for work performed on contracts with agencies
of the U.S. Government are subject to adjustment upon audit
by the Defense Contract Audit Agency. Contract audits through
2003 are closed. Based on historical experience and review of
current projects in process, we believe that the audits will not
have a significant effect on our financial position, results of
operations or cash flows.
Shipping
and Handling Fees and Costs
Shipping and handling fees billed to customers are included in
net commercial product revenues. Shipping and handling fees
associated with freight are generally included in cost of
commercial product revenues.
Warranties
We offer warranties generally ranging from one to five years,
depending on the product and negotiated terms of purchase
agreements with our customers. Such warranties require us to
repair or replace defective product returned to us during such
warranty period at no cost to the customer. Our estimate for
warranty related costs is recorded at the time of sale based on
our actual historical product return rates and expected repair
costs. Such costs have been within our expectations.
Guarantees
In connection with the sales and manufacturing of our commercial
products, we indemnify, without limit or term, our customers and
contract manufacturers against all claims, suits, demands,
damages, liabilities, expenses, judgments, settlements and
penalties arising from actual or alleged infringement or
misappropriation of any intellectual property relating to our
products or other claims arising from our products. We cannot
reasonably develop an estimate of the maximum potential amount
of payments that might be made under our guarantee because
F-7
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of the uncertainty as to whether a claim might arise and how
much it might total. Historically, we have not incurred any
expenses related to these guarantees.
Research
and Development Costs
Research and development costs are expensed as incurred and
include salary, facility, depreciation and material expenses.
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 other 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. We review inventory quantities on hand and on
order and record, on a quarterly basis, a provision for excess
and obsolete inventory
and/or
vendor cancellation charges related to purchase commitments. If
the results of the review determine that a write-down is
necessary, we recognize a loss in the period in which the loss
is identified, whether or not the inventory is retained. Our
inventory reserves establish a new cost basis for inventory and
are not reversed until we sell or dispose of the related
inventory. Such provisions are established based on historical
usage, adjusted for known changes in demands for such products,
or the estimated forecast of product demand and production
requirements. Costs associated with idle capacity are expensed
immediately.
Property
and Equipment
Property and equipment are recorded at cost. Equipment is
depreciated using the straight-line method over their estimated
useful lives ranging from three to five years. Leasehold
improvements and assets financed under capital leases are
amortized over the shorter of their useful lives or the lease
term. Furniture and fixtures are depreciated over seven years.
Expenditures for additions and major improvements are
capitalized. Expenditures for minor tooling, 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 in selling, general and administrative
expenses. There were no disposals in 2009. In 2008, we disposed
of older, fully depreciated equipment with an acquisition cost
of $598,000. There was no gain or loss on those dispositions.
Patents,
Licenses and Purchased Technology
Patents and licenses are recorded at cost and are amortized
using the straight-line method over the shorter of their
estimated useful lives or approximately seventeen years.
Purchased technology acquired through the acquisition of
Conductus, Inc. in 2002 was recorded at its estimated fair value
and is amortized using the straight-line method over seven 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. Long-lived assets that will no
longer be used in the business are written off in the period
identified since they will no longer generate any positive cash
flows for us. Periodically, long lived assets that will continue
to be used by us will need to be evaluated for recoverability.
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 estimated fair value. We tested our long lived
assets for recoverability during 2009 and determined there was
no impairment.
F-8
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Restructuring
Expenses
Liability for costs associated with an exit or disposal activity
are recognized when the liability is incurred.
Loss
Contingencies
In the normal course of our business we are subject to claims
and litigation, including allegations of patent infringement.
Liabilities relating to these claims are recorded when it is
determined that a loss is probable and the amount of the loss
can be reasonably estimated. The costs of our defense in such
matters are expensed as incurred. Insurance proceeds recoverable
are recorded when deemed probable.
Income
Taxes
We recognize deferred tax liabilities and assets based on the
differences between the financial statement carrying amounts and
the tax bases of assets and liabilities, using enacted tax rates
in effect in the years the differences are expected to reverse.
Deferred income tax benefit (expense) results from the change in
net deferred tax assets or deferred tax liabilities. A valuation
allowance is recorded when it is more likely than not that some
or all deferred tax assets will not be realized. The guidance
further clarifies the accounting for uncertainty in income taxes
and sets a consistent framework to determine the appropriate
level of tax reserve to maintain for uncertain tax positions.
This interpretation uses a two-step approach wherein a tax
benefit is recognized if a position is more-likely-than-not to
be sustained. The amount of the benefit is then measured to be
the highest tax benefit that is greater than 50% likely to be
realized and sets out disclosure requirements to enhance
transparency of our tax reserves. Guidance is also provided on
the accounting for related interest and penalties, financial
statement and disclosure. We are currently not under examination
by any taxing authority nor have we been notified of an
impending examination. The oldest tax year that remains open to
possible evaluation and interpretation of our tax position is
1995. As of December 31, 2009, we had net operating loss
carryforwards for federal and state income tax purposes of
approximately $298.8 million and $169.9 million,
respectively. Due to the uncertainty surrounding their
realization, we recorded a full valuation allowance against our
net deferred tax assets. Accordingly, no deferred tax asset has
been recorded in the accompanying balance sheets.
Marketing
Costs
All costs related to marketing and advertising our products are
expensed as incurred or at the time the advertising takes place.
Advertising costs were not material in each of the three years
in the period ended December 31, 2009.
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 convertible preferred stock. Potential
common shares are not included in the calculation of diluted
loss per share because their effect is anti-dilutive.
Stock-based
Compensation Expense
We have in effect several equity incentive plans under which
stock options and awards have been granted to employees and
non-employee members of the Board of Directors. We are required
to estimate the fair value of share-based awards on the date of
grant. The value of the award is principally recognized as
expense ratably over the requisite service periods. We have
estimated the fair value of stock options as of the date of
grant using the Black-Scholes option pricing model. The
Black-Scholes model considers, among other factors, the expected
life of the
F-9
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
award and the expected volatility of our stock price. We
evaluate the assumptions used to value stock options on a
quarterly basis. The fair values generated by the Black-Scholes
model may not be indicative of the actual fair values of our
equity awards, as it does not consider other factors important
to those awards to employees, such as continued employment and
periodic vesting.
The following table presents details of total stock-based
compensation expense that is included in each functional line
item on our consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Cost of revenue
|
|
$
|
32,000
|
|
|
$
|
22,000
|
|
|
$
|
14,000
|
|
|
Research and development
|
|
|
287,000
|
|
|
|
122,000
|
|
|
|
56,000
|
|
|
Selling, general and administrative
|
|
|
893,000
|
|
|
|
443,000
|
|
|
|
269,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,212,000
|
|
|
$
|
587,000
|
|
|
$
|
339,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact to the Consolidated Statement of Operations for 2009,
2008 and 2007 on basic and diluted earnings per share was $0.06,
$0.04 and $0.03, respectively. No stock compensation cost was
capitalized during the periods.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires us 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, fixed assets,
intangibles, goodwill, estimated provisions for warranty costs,
accruals for restructuring and lease abandonment costs, contract
revenues, income taxes and disclosures related to the
litigation. 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. We
estimate that the carrying amount of debt approximates fair
value based on our current incremental borrowing rates for
similar types of borrowing arrangements.
Comprehensive
Income
We have no items of other comprehensive income in any period and
consequently have not included a Statement of Comprehensive
Income.
Segment
Information
We operate in a single business segment, the research,
development, manufacture and marketing of high performance
products used in cellular base stations to maximize the
performance of wireless telecommunications networks by improving
the quality of uplink signals from mobile wireless devices. We
currently derive net commercial product revenues primarily from
the sales of our SuperLink, AmpLink and SuperPlex products. We
currently sell most of our products directly to wireless network
operators in the United States. Net revenues derived principally
from government research and development contracts are presented
separately on the condensed consolidated statement of operations
for all periods presented.
F-10
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Certain
Risks and Uncertainties
Our long-term prospects are dependent upon the continued and
increased market acceptance for our products.
We currently sell most of our products directly to wireless
network operators in the United States and our product sales
have historically been concentrated in a small number of
customers. In 2009, we had two customers that represented 51%
and 11% of total net revenues and 38% of accounts receivable. In
2008, these two customers represented 44% and 13% of total net
revenues and 7% of accounts receivable. The loss of or reduction
in sales, or the inability to collect outstanding accounts
receivable, from any of these customers could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
We currently rely on a limited number of suppliers for key
components of our products. The loss of any of these suppliers
could have material adverse effect on our business, financial
condition, results of operations and cash flows.
In connection with the sales of our commercial products, we
indemnify, without limit or term, our customers against all
claims, suits, demands, damages, liabilities, expenses,
judgments, settlements and penalties arising from actual or
alleged infringement or misappropriation of any intellectual
property relating to our products or other claims arising from
our products. We cannot reasonably develop an estimate of the
maximum potential amount of payments that might be made under
our guarantee because of the uncertainty as to whether a claim
might arise and how much it might total.
For more risks of our business, see Item 1A, “Risk
Factors” in our Annual Report on
Form 10-K
and other filings with the Securities and Exchange Commission.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“Codification”) was issued. The Codification is the
source of authoritative GAAP recognized by the FASB to be
applied by nongovernmental entities. The Codification is
effective for financials statements issued for interim and
annual periods ending after September 15, 2009. The
implementation of this standard did not have a material impact
on our consolidated financial position or results of operations.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for the consolidation of variable
interest entities. The guidance affects the overall
consolidation analysis and requires enhanced disclosures on
involvement with variable interest entities. The guidance was
effective for fiscal years beginning after November 15,
2009. Implementation did not have a material impact on our
consolidated financial position or results of operations.
In September 2009, the FASB issued additional guidance on
measuring the fair value of liabilities effective for the first
reporting period (including interim periods) beginning after
issuance. We do not expect that implementation of this guidance
will have a material impact on our consolidated financial
position or results of operations.
In September 2009, the FASB issued additional guidance on
measuring fair value of certain alternative investments
effective for the first reporting period (including interim
periods) ending after December 15, 2009. Implementation has
not had a material impact on our consolidated financial position
or results of operations.
In October 2009, the FASB issued amendments to the accounting
and disclosure for revenue recognition. These amendments,
effective for fiscal years beginning on or after June 15,
2010 (early adoption is permitted), modify the criteria for
recognizing revenue in multiple element arrangements and the
scope of what constitutes a non-software deliverable. We are
currently assessing the impact on our consolidated financial
position or results of operations.
In January 2010, the FASB issued guidance that requires
reporting entities to make new disclosures about recurring or
nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair
value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in
F-11
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the reconciliation of Level 3 fair value measurements. The
guidance is effective for annual reporting periods beginning
after December 15, 2009, except for Level 3
reconciliation disclosures that are effective for annual periods
beginning after December 15, 2010. We do not expect the
adoption of this guidance to have a material impact on our
consolidated financial position or results of operations.
|
|
|
|
Note 3 —
|
Short
Term Borrowings
|
We have a line of credit with a bank. There was no amount
outstanding under this borrowing facility at December 31,
2009. The line of credit expires July 2010 and is structured as
a sale of accounts receivable. The agreement provides for the
sale of up to $3.0 million of eligible accounts receivable,
with advances to us totaling 80% of the receivables sold. Any
advances would bear interest at the bank’s prime rate (4.0%
at December 31, 2009) plus 2.50% subject to a
minimum monthly charge. Advances (if any) under the agreement
are collateralized by all of our assets. Under the terms of the
agreement, we continue to service the sold receivables and are
subject to recourse provisions.
The agreement contains representations and warranties,
affirmative and negative covenants and events of default
customary for financings of this type. The failure to comply
with these provisions, or the occurrence of any one of the
events of default, would prevent any further borrowings and
would generally require the repayment of any outstanding
borrowings. Such representations, warranties and events of
default include (a) non-payment of debt and interest
hereunder, (b) non-compliance with terms of the agreement
covenants, (c) insolvency or bankruptcy, (d) material
adverse change, (e) merger or consolidation where our
stockholders do not hold a majority of the voting rights of the
surviving entity, (f) transactions outside the normal
course of business, or (g) payment of dividends.
We incurred a net loss in each year of operation since inception
resulting in no current or deferred tax expense for 2009, 2008
and 2007.
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 2009, 2008 and 2007 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Tax benefit computed at Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
Increase (decrease) in taxes due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(39.8
|
)
|
|
|
(39.8
|
)
|
|
|
(39.8
|
)
|
|
State taxes, net of federal benefit
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.8
|
|
|
Impairment of Goodwill (not deductible for tax)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets (liabilities)
at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Loss carryforwards
|
|
$
|
112,187,000
|
|
|
$
|
108,940,000
|
|
|
Capitalized research and development
|
|
|
1,102,000
|
|
|
|
1,468,000
|
|
|
Depreciation
|
|
|
2,582,000
|
|
|
|
2,541,000
|
|
|
Tax credits
|
|
|
3,984,000
|
|
|
|
3,916,000
|
|
|
Inventory
|
|
|
330,000
|
|
|
|
343,000
|
|
|
Acquired intellectual property
|
|
|
(90,000
|
)
|
|
|
(90,000
|
)
|
|
Other
|
|
|
514,000
|
|
|
|
540,000
|
|
|
Less: valuation allowance
|
|
|
(120,609,000
|
)
|
|
|
(117,658,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
F-12
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The valuation allowance increased by $2,951,000 in 2009,
$2,376,000 in 2008, and $3,129,000 in 2007.
As of December 31, 2009, we had net operating loss
carryforwards for federal and state income tax purposes of
approximately $298.8 million and $169.9 million
,
respectively, which expire in the years 2010 through 2029.
Of these amounts $80.9 million and $23.5 million,
respectively, resulted from the acquisition of Conductus.
Included in the net operating loss carryforwards are deductions
related to stock options of approximately $24.1 million and
$13.1 million for federal and California income tax
purposes, respectively. To the extent net operating loss
carryforwards are recognized for accounting purposes the
resulting benefits related to the stock options will be credited
to stockholders’ equity. In addition, we had research and
development and other tax credits for federal and state income
tax purposes of approximately $3.1 million and
$1.4 million, respectively, which expire in the years 2010
through 2029. Of these amounts $549,000 and $581,000,
respectively resulted from the acquisition of Conductus.
Due to the uncertainty surrounding their realization, we have
recorded a full valuation allowance against our net 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 and other tax attributes 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 had changes
in ownership in August 1999, December 2002, and June 2009. In
addition, we acquired the right to Conductus’ net operating
losses, which are also subject to the limitations imposed by
Section 382. Conductus underwent four ownership changes,
which occurred in February 1999, February 2001, December 2002
and June 2009. Therefore, the ability to utilize Conductus’
and our net operating loss carryforwards will be subject to
annual limitation upon utilization in future periods. We are
currently studying the impact of these Section 382
limitations on the future realizability of our various tax
attributes.
|
|
|
|
Note 5 —
|
Stockholders’
Equity
|
Preferred
Stock
Pursuant to our 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. In February 2008, we issued to
Hunchun BaoLi Communication Co. Ltd. (“BAOLI”) and two
related purchasers a total of (a) 3,101,361 shares of
our common stock and (b) 611,523 shares of our
Series A Preferred Stock (convertible into
6,115,230 shares of our common stock) in exchange for net
proceeds of $14.9 million in cash after offering costs of
$89,000, of which $4.0 million was received in 2007.
Subject to the terms and conditions of our Series A
Preferred Stock and to customary adjustments to the conversion
rate, each share of our Series A Preferred Stock is
convertible into ten shares of our common stock so long as the
number of shares of our common stock beneficially owned by BAOLI
and affiliates following such conversion does not exceed 9.9% of
our outstanding common stock. Except for a preference on
liquidation of $.01 per share, each share of Series A
Preferred Stock is the economic equivalent of the ten shares of
common stock into which it is convertible. There is no
beneficial conversion feature related to the conversion of the
preferred shares, as the value of the common shares into which
the preferred shares convert does not exceed the recorded amount
of the preferred at date of issuance. Except as required by law,
the Series A Preferred Stock does not have any voting
rights.
Common
Stock
In a registered direct offering completed in June 2009 we raised
proceeds of $10.5 million, net of offering costs of
$800,000, from the sale of 3,752,005 shares of common stock
at $3.00 per share based on a negotiated discount to market.
F-13
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In a registered direct offering completed in May 2008 we raised
net proceeds of $5.6 million, net of offering costs of
$442,000, from the sale of 2,000,000 shares of common stock
at $3.00 per share based on a negotiated discount to market. For
both the 2008 and 2009 offerings, we determined the offering
price based principally on negotiations between us, the
placement agent and the selected institutional investors and on
our consideration of the closing prices (including high, low and
average prices) and trading volumes of our common stock on the
Nasdaq Capital Market primarily during the 30 trading days
proceeding the date we determined the offering price.
As noted above, in February 2008, we issued to BAOLI and two
related purchasers a total of (a) 3,101,361 shares of
our common stock and (b) 611,523 shares of our
Series A Preferred Stock (convertible into
6,115,230 shares of our common stock) in exchange for net
proceeds of $14.9 million in cash net of offering costs of
$89,000.
Other than the $4.0 million cash deposit on the BAOLI stock
sale described above, we raised no money from the sale of our
common stock in 2007.
Equity
Awards
At December 31, 2009, we have four equity award option
plans, the nonstatutory 1992 Directors Stock Option Plan,
1998 and 1999 Stock Option Plans and the 2003 Equity Incentive
Plan (collectively, the “Stock Option Plans”) although
we can only grant new options under the 2003 Equity Incentive
Plan. Under the 2003 Equity Incentive Plan, stock awards may be
made to our directors, key employees, consultants, and
non-employee directors and may consist of stock options, stock
appreciation rights, restricted stock awards, performance
awards, and performance share awards. Stock options must be
granted at prices no less than the market value on the date of
grant.
At December 31, 2009, 213,380 shares of common stock
were available for future grants under the 2003 Equity Incentive
Plan.
There were no stock option exercises in 2009 or 2008 and
3,350 shares were issued upon option exercises in 2007.
We did not grant stock options in 2009. For 2008 and 2007, the
weighted average fair value of options has been estimated at the
date of the grant using the Black-Scholes option-pricing model.
The following are the significant weighted average assumptions
used for estimating the fair value under our stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
Per share fair value at grant date
|
|
$
|
3.57
|
|
|
$
|
2.15
|
|
|
Risk free interest rate
|
|
|
2.47
|
%
|
|
|
4.34
|
%
|
|
Expected volatility
|
|
|
109
|
%
|
|
|
98
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected life in years
|
|
|
4.0
|
|
|
|
4.0
|
|
The expected life was based on the contractual term of the
options and the expected employee exercise behavior. Typically,
options to our employees have a 3 or 4 year vesting term
and a 10 year contractual term. Options vest at 33% or 25%,
respectively, after one year and thereafter vest ratably on a
monthly basis. Options to Board Members have a 10 year
contractual term and vest 50% after one year and 50% after two
years. The risk-free interest rate is based on the
U.S. Treasury zero-coupon issues with a remaining term
equal to the expected option life assumed at the grant date. The
future volatility is based on our 4 year historical
volatility. We used an expected
F-14
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
dividend yield of 0% because we have never paid a dividend and
do not anticipate paying dividends. We assumed a 10% aggregate
forfeiture rate based on historical stock option cancellation
rates over the last 4 years.
At December 31, 2009, 213,380 shares of common stock
were available for future grants and options covering
1,144,876 shares were outstanding but not yet exercised.
Option activity during the three years ended December 31,
2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
1,154,941
|
|
|
$
|
38.33
|
|
|
Granted
|
|
|
45,670
|
|
|
|
2.96
|
|
|
Canceled
|
|
|
(455,403
|
)
|
|
|
41.68
|
|
|
Exercised
|
|
|
(3,350
|
)
|
|
|
7.42
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
741,858
|
|
|
|
34.24
|
|
|
Granted
|
|
|
576,590
|
|
|
|
4.83
|
|
|
Canceled
|
|
|
(84,423
|
)
|
|
|
9.60
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,234,025
|
|
|
|
22.18
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Canceled
|
|
|
(89,149
|
)
|
|
|
48.20
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,144,876
|
|
|
$
|
20.16
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning currently
outstanding and exercisable stock options at December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
Number
|
|
|
Contractual
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
|
|
$1.43 — $4.90
|
|
|
205,600
|
|
|
|
7.58
|
|
|
$
|
3.67
|
|
|
|
132,249
|
|
|
$
|
3.65
|
|
|
5.12 — 5.80
|
|
|
412,912
|
|
|
|
8.13
|
|
|
|
5.12
|
|
|
|
312,090
|
|
|
|
5.12
|
|
|
6.70 — 7.02
|
|
|
232,500
|
|
|
|
5.39
|
|
|
|
6.90
|
|
|
|
232,500
|
|
|
|
6.90
|
|
|
8.00 — 39.38
|
|
|
158,978
|
|
|
|
1.88
|
|
|
|
19.28
|
|
|
|
158,978
|
|
|
|
19.28
|
|
|
40.00 — 493.75
|
|
|
134,886
|
|
|
|
.89
|
|
|
|
115.22
|
|
|
|
134,886
|
|
|
|
115.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,144,876
|
|
|
|
5.75
|
|
|
$
|
20.16
|
|
|
|
970,703
|
|
|
$
|
22.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our outstanding options expire on various dates through July
2018. The weighted-average contractual term of outstanding
options is 5.75 years and the weighted-average contractual
term of currently exercisable stock options is slightly less
than 5.75 years. At December 31, 2009, outstanding
options covering 15,700 shares, with an intrinsic value of
$28,000, had an exercise price less than the current market
value and 11,838 of these shares, with an intrinsic value of
$21,000 were exercisable. The number of options exercisable and
weighted average exercise price at December 31, 2008 and
2007 totaled 674,061 and $36.67 and 663,174 and $37.87,
respectively.
In May 2009, we issued awards covering 55,000 shares of
restricted stock, vesting 50% after one year of service and 50%
after two years of service. The per share weighted average
grant-date fair value was $3.24. In January 2009, we issued
awards covering 835,998 shares of restricted stock, vesting
50% after one year of service and 50% after two years of
service. The per share weighted average grant-date fair value
was $1.00. In
F-15
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
September 2008, we issued awards covering
20,000 shares of restricted stock, all vesting after two
years of service, with a per share weighted average grant-date
fair value of $1.62. A 10% aggregate forfeiture rate was assumed
for all awards.
In July 2006, we issued restricted stock awards totaling
331,000 shares with a cliff vest after two years of service
and a per share weighted average grant-date fair value of $1.50.
A 10% forfeiture rate was assumed. In July 2008, 302,000 of
these shares fully vested in one single installment and have
been expensed over the prior periods as compensation expense. We
issued 256,255 of these shares and withheld 45,745 shares
for statutory minimum tax withholding requirements.
The impact of all equity awards on the condensed consolidated
statements of operations for 2009 was an expense of
$1.2 million and $0.06 on basic and diluted earnings per
share. The 2008 and 2007 impact on net income was an expense of
$587,000 and $339,000, respectively, and $0.04 and $0.03 on
basic and diluted earnings per share, respectively. No stock
compensation cost was capitalized during the periods. The total
compensation cost related to non-vested option awards not yet
recognized was $1.1 million and the weighted-average period
over which the cost is expected to be recognized is
1.2 years. The total compensation cost related to
non-vested stock awards not yet recognized was $318,000, and the
weighted-average period over which the cost is expected to be
recognized is 8 months.
Warrants
The following is a summary of outstanding warrants at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
|
|
Currently
|
|
|
Price per
|
|
|
|
|
|
|
|
Total
|
|
|
Exercisable
|
|
|
Share
|
|
|
Expiration Date
|
|
|
|
|
Warrants related to August 2005 financing
|
|
|
608,237
|
|
|
|
608,237
|
|
|
$
|
6.25
|
|
|
|
August 16, 2010
|
***
|
|
Warrants related to April 2004 financing
|
|
|
10,000
|
|
|
|
10,000
|
|
|
$
|
18.50
|
|
|
|
April 28, 2011
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
618,237
|
|
|
|
618,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The terms of these warrants contain net exercise provisions,
under which holders can elect to receive common stock equal to
the difference between the exercise price and the sale price for
common shares on the exercise date or the date immediately
preceding the exercise date instead of paying the exercise price
in cash.
|
|
|
|
**
|
|
These warrants contain special anti-dilution adjustment
provisions relating to the price of other issuances. Under the
issuances in 2009, the exercise price of these warrants was
adjusted to $6.25.
|
We determined that the 608,237 warrants related to issuance of
common stock are subject to fair value accounting as a
derivative. Using the Black-Scholes valuation model, the
significant weighted average assumptions for estimating the fair
value of these warrants at December 31, 2009 were as
follows: expected life of 8 months; risk free interest rate
of 0.2%; expected volatility of 118% and; dividend yield of 0%.
The December 31, 2009 fair value of those warrants was
estimated to be $171,000.
No warrants were exercised during 2009 and 2008. During 2007,
the BAOLI offering caused the exercise price and the number of
shares of certain warrants issued in 2004 to be adjusted to
$8.34 and 110,880, respectively. In November 2007, the holder of
these warrants elected the net exercise provision of this
warrant, and received 24,697 shares of our common stock.
|
|
|
|
Note 6 —
|
Employee
Savings Plan
|
In December 1989, the Board of Directors approved a 401(k)
savings plan (the “401(k) Plan”) for our employees
that became effective in 1990. Eligible employees may elect to
make contributions under the terms of the
F-16
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
401(k) Plan; however, contributions by us are made at the
discretion of management. We contributed $241,000 to the 401(k)
Plan in 2009 and $287,000 in 2008 and made no contributions to
the 401(k) Plan in 2007.
|
|
|
|
Note 7 —
|
Commitments
and Contingencies
|
Operating
Leases
We lease our offices and production facilities under a
non-cancelable operating lease that expires in November 2016.
This lease contains a minimum rent escalation clause that
requires additional rental amounts after the first year. Rent
expense for this lease with minimum annual rent escalation is
recognized on a straight line basis over the minimum lease term.
This lease also requires us to pay utilities, insurance, taxes
and other operating expenses and contains one five-year renewal
option at 95% of the then current market rental value.
For 2009, 2008 and 2007, rent expense was $1,126,000, $1,122,000
and $1,104,000, respectively.
Capital
Leases
We leased certain property and equipment under a capital lease
arrangement that expired in 2007.
Patents
and Licenses
We have entered into various licensing agreements requiring
royalty payments ranging from 0.13% to 2.5% of specified product
sales. Certain of these agreements contain provisions for the
payment of guaranteed or minimum royalty amounts. In the event
that we fail to pay any minimum annual royalties, these licenses
may automatically be terminated. These royalty obligations
terminate in 2010 to 2020. Royalty expenses totaled $161,000 in
2009, $150,000 in 2008 and $172,000 in 2007. Under the terms of
certain royalty agreements, royalty payments made may be subject
to audit. There have been no audits to date and we do not expect
any possible future audit adjustments to be significant.
The minimum lease payments under operating and capital leases
and license obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Years Ended December 31,
|
|
Licenses
|
|
|
Leases
|
|
|
|
|
2010
|
|
$
|
175,000
|
|
|
$
|
1,307,000
|
|
|
2011
|
|
|
175,000
|
|
|
|
1,338,000
|
|
|
2012
|
|
|
175,000
|
|
|
|
1,369,000
|
|
|
2013
|
|
|
175,000
|
|
|
|
1,401,000
|
|
|
2014
|
|
|
180,000
|
|
|
|
1,442,000
|
|
|
Thereafter
|
|
|
930,000
|
|
|
|
2,884,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
$
|
1,810,000
|
|
|
$
|
9,741,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 —
|
Contractual
Guarantees and Indemnities
|
During our normal course of business, we make certain
contractual guarantees and indemnities pursuant to which we may
be required to make future payments under specific
circumstances. We have not recorded any liability for these
contractual guarantees and indemnities in the accompanying
consolidated financial statements.
Warranties
We establish reserves for future product warranty costs that are
expected to be incurred pursuant to specific warranty provisions
with our customers. Our warranty reserves are established at the
time of sale and updated
F-17
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
throughout the warranty period based upon numerous factors
including historical warranty return rates and expenses over
various warranty periods.
Intellectual
Property Indemnities
We indemnify certain customers and our contract manufacturers
against liability arising from third-party claims of
intellectual property rights infringement related to our
products. These indemnities appear in development and supply
agreements with our customers as well as manufacturing service
agreements with our contract manufacturers, are not limited in
amount or duration and generally survive the expiration of the
contract. Given that the amount of any potential liabilities
related to such indemnities cannot be determined until an
infringement claim has been made, we are unable to determine the
maximum amount of losses that we could incur related to such
indemnifications.
Director
and Officer Indemnities and Contractual Guarantees
We have entered into indemnification agreements with our
directors and executive officers, which require us to indemnify
such individuals to the fullest extent permitted by Delaware
law. Our indemnification obligations under such agreements are
not limited in amount or duration. Certain costs incurred in
connection with such indemnifications may be recovered under
certain circumstances under various insurance policies. Given
that the amount of any potential liabilities related to such
indemnities cannot be determined until a lawsuit has been filed
against a director or executive officer, we are unable to
determine the maximum amount of losses that we could incur
relating to such indemnifications. Historically, any amounts
payable pursuant to such director and officer indemnifications
have not had a material negative effect on our business,
financial condition or results of operations.
We have also entered into severance and change in control
agreements with certain of our executives. These agreements
provide for the payment of specific compensation benefits to
such executives upon the termination of their employment with us.
General
Contractual Indemnities/Products Liability
During the normal course of business, we enter into contracts
with customers where we agreed to indemnify the other party for
personal injury or property damage caused by our products. Our
indemnification obligations under such agreements are not
generally limited in amount or duration. Given that the amount
of any potential liabilities related to such indemnities cannot
be determined until a lawsuit has been filed against a director
or executive officer, we are unable to determine the maximum
amount of losses that we could incur relating to such
indemnifications. Historically, any amounts payable pursuant to
such guarantees have not had a material negative effect on our
business, financial condition or results of operations. We
maintain general and product liability insurance as well as
errors and omissions insurance, which may provide a source of
recovery to us in the event of an indemnification claim.
Short
Term Borrowings
We have a line of credit with a bank. The line of credit expires
July 2010 and is structured as a sale of accounts receivable.
The agreement provides for the sale of up to $3.0 million
of eligible accounts receivable, with advances to us totaling
80% of the receivables sold. Advances under the agreement
(
See Note 3)
are collateralized by all our
assets. Under the terms of the agreement, we continue to service
the sold receivables and are subject to recourse provisions.
Under the terms of the agreement, if the bank determines that
there is a material adverse change in our business, they can
exercise all their rights and remedies under the agreement,
including demanding immediate payment of outstanding amounts.
There was no amount outstanding under this facility during 2009.
F-18
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Contractual
Contingency
We had a contract to deliver several custom products to a
government contractor, with respect to which delivery of the
product was delayed because we were unable to manufacture the
products for technical reasons. In December 2008, new terms and
amended specifications were agreed upon and in September 2009 we
delivered and the customer accepted the products.
|
|
|
|
Note 9 —
|
Legal
Proceedings
|
From time to time, we are party to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of our
business. Excluding ordinary, routine litigation incidental to
our business, we are not currently a party to any legal
proceedings that we believe would reasonably be expected to have
a material adverse effect on our business, financial condition
or results of operation or cash flow.
Note 10 —
Earnings Per Share
Basic and diluted earnings (loss) per share is based on the
weighted-average number of common shares outstanding.
Since their impact would be anti-dilutive, our loss per common
share does not include the effect of the assumed exercise or
vesting of any of the following shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Outstanding stock options
|
|
|
1,144,876
|
|
|
|
1,234,025
|
|
|
|
741,858
|
|
|
Outstanding stock awards
|
|
|
910,998
|
|
|
|
20,000
|
|
|
|
331,000
|
|
|
Outstanding warrants
|
|
|
618,237
|
|
|
|
352,466
|
|
|
|
468,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,674,111
|
|
|
|
1,606,491
|
|
|
|
1,541,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 —
Restructuring Expenses and Impairment Charges
There were no restructuring expenses or impairment charges in
2009 or 2007. In December 2008, we initiated an effort to reduce
our cost structure and incurred $141,000 in severance related
expense. Severance expense included in cost of goods sold was
$19,000 and severance expense included in operating expenses was
$122,000.
|
|
|
|
Note 12 —
|
Details
of Certain Financial Statement Components and Supplemental
Disclosures of Cash Flow Information and Non-Cash
Activities
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
$
|
204,000
|
|
|
$
|
110,000
|
|
|
U.S. government accounts receivable-billed
|
|
|
269,000
|
|
|
|
320,000
|
|
|
Less: allowance for doubtful accounts
|
|
|
(11,000
|
)
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
462,000
|
|
|
$
|
355,000
|
|
|
|
|
|
|
|
|
|
|
|
F-19
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
2,010,000
|
|
|
$
|
2,753,000
|
|
|
Work-in-process
|
|
|
543,000
|
|
|
|
1,038,000
|
|
|
Finished goods
|
|
|
919,000
|
|
|
|
2,348,000
|
|
|
Less: inventory reserves
|
|
|
(828,000
|
)
|
|
|
(861,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,644,000
|
|
|
$
|
5,278,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
15,743,000
|
|
|
$
|
15,537,000
|
|
|
Leasehold improvements
|
|
|
6,761,000
|
|
|
|
6,741,000
|
|
|
Furniture and fixtures
|
|
|
404,000
|
|
|
|
404,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,908,000
|
|
|
|
22,682,000
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(21,076,000
|
)
|
|
|
(19,943,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,832,000
|
|
|
$
|
2,739,000
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to $1,134,000, $1,401,000 and
$1,877,000 respectively, in 2009, 2008 and 2007. In 2007 and
2008, we disposed of older, fully depreciated equipment with an
acquisition cost of $1,344,000 and $598,000, respectively. There
were no gains or losses from these dispositions.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Patents and Licenses:
|
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
1,118,000
|
|
|
$
|
940,000
|
|
|
Patents issued
|
|
|
1,141,000
|
|
|
|
1,059,000
|
|
|
Less accumulated amortization
|
|
|
(477,000
|
)
|
|
|
(409,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net patents issued
|
|
|
664,000
|
|
|
|
650,000
|
|
|
Licenses pending
|
|
|
18,000
|
|
|
|
39,000
|
|
|
Licenses
|
|
|
563,000
|
|
|
|
563,000
|
|
|
Less accumulated amortization
|
|
|
(200,000
|
)
|
|
|
(167,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net licenses Issued
|
|
|
363,000
|
|
|
|
396,000
|
|
|
Purchased technology
|
|
|
1,706,000
|
|
|
|
1,706,000
|
|
|
Less accumulated amortization
|
|
|
(1,706,000
|
)
|
|
|
(1,479,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net purchased technology
|
|
|
—
|
|
|
|
227,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,163,000
|
|
|
$
|
2,252,000
|
|
|
|
|
|
|
|
|
|
|
|
F-20
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense related to these items totaled $328,000,
$334,000 and $331,000 respectively in 2009, 2008 and 2007.
Amortization expenses related to these items are expected to
total $105,000 in 2010 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Accrued Expenses and Other Long Term Liabilities:
|
|
|
|
|
|
|
|
|
|
Salaries payable
|
|
$
|
107,000
|
|
|
$
|
12,000
|
|
|
Compensated absences
|
|
|
397,000
|
|
|
|
375,000
|
|
|
Compensation related
|
|
|
39,000
|
|
|
|
12,000
|
|
|
Warranty reserve
|
|
|
255,000
|
|
|
|
261,000
|
|
|
Deferred rent
|
|
|
384,000
|
|
|
|
325,000
|
|
|
Other
|
|
|
236,000
|
|
|
|
114,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,418,000
|
|
|
|
1,099,000
|
|
|
Less current portion
|
|
|
(892,000
|
)
|
|
|
(658,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
526,000
|
|
|
$
|
441,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Warranty Reserve Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
261,000
|
|
|
$
|
380,000
|
|
|
$
|
428,000
|
|
|
Additions
|
|
|
17,000
|
|
|
|
41,000
|
|
|
|
75,000
|
|
|
Deductions
|
|
|
(23,000
|
)
|
|
|
(160,000
|
)
|
|
|
(123,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
255,000
|
|
|
$
|
261,000
|
|
|
$
|
380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Abandonment Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
—
|
|
|
|
—
|
|
|
$
|
8,000
|
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Transfers from unfavorable lease costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Deductions
|
|
|
|
|
|
|
—
|
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Line Exit Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
—
|
|
|
|
—
|
|
|
$
|
319,000
|
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Deductions
|
|
|
—
|
|
|
|
—
|
|
|
|
(319,000
|
)
|
|
Change in estimate relating to previous exit costs accrual
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
—
|
|
|
|
—
|
|
|
$
|
32,000
|
|
|
Additions
|
|
|
—
|
|
|
|
141,000
|
|
|
|
—
|
|
|
Deductions
|
|
|
—
|
|
|
|
—
|
|
|
|
(32,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
141,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
SUPERCONDUCTOR
TECHNOLOGIES INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Cash paid for interest
|
|
$
|
32,000
|
|
|
$
|
32,000
|
|
|
$
|
32,000
|
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues(1)
|
|
$
|
1,677,000
|
|
|
$
|
2,631,000
|
|
|
$
|
4,292,000
|
|
|
$
|
2,216,000
|
|
|
Loss from operations(2)
|
|
|
3,496,000
|
|
|
|
3,286,000
|
|
|
|
2,179,000
|
|
|
|
3,201,000
|
|
|
Net loss
|
|
|
3,542,000
|
|
|
|
4,108,000
|
|
|
|
1,819,000
|
|
|
|
3,510,000
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.16
|
)
|
|
Weighted average number of shares outstanding
|
|
|
17,869,030
|
|
|
|
18,170,470
|
|
|
|
21,621,035
|
|
|
|
21,621,035
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues(1)
|
|
$
|
3,471,000
|
|
|
$
|
2,949,000
|
|
|
$
|
3,595,000
|
|
|
$
|
1,278,000
|
|
|
Loss from operations(2)
|
|
|
2,398,000
|
|
|
|
3,411,000
|
|
|
|
3,294,000
|
|
|
|
3,850,000
|
|
|
Net loss
|
|
|
2,308,000
|
|
|
|
3,349,000
|
|
|
|
3,235,000
|
|
|
|
3,809,000
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.21
|
)
|
|
Weighted average number of shares outstanding
|
|
|
13,636,083
|
|
|
|
16,316,072
|
|
|
|
17,750,761
|
|
|
|
17,869,030
|
|
|
|
|
|
|
(1)
|
|
Our revenues vary from quarter to quarter as our customers
provide minimal lead-time prior to the release of their purchase
orders and have non-binding commitments to purchase from us.
|
|
|
|
(2)
|
|
Includes increased reserve for inventory obsolescence of
$12,000, $90,000, $90,000 and $90,000, respectively, in the 2009
quarters and $0, $15,000, $0 and $2,000, respectively, in the
2008 quarters.
|
F-22
SUPERCONDUCTOR
TECHNOLOGIES INC.
Schedule II —
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
Charged to
|
|
Charged to
|
|
|
|
|
|
|
|
Beginning
|
|
Costs &
|
|
Other
|
|
|
|
Ending
|
|
|
|
Balance
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Balance
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Uncollectible Accounts
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(64,000
|
)
|
|
$
|
11,000
|
|
|
Reserve for Inventory Obsolescence
|
|
|
861,000
|
|
|
|
611,000
|
|
|
|
—
|
|
|
|
(644,000
|
)
|
|
|
828,000
|
|
|
Reserve for Warranty
|
|
|
261,000
|
|
|
|
43,000
|
|
|
|
—
|
|
|
|
(49,000
|
)
|
|
|
255,000
|
|
|
Deferred Tax Asset Valuation Allowance
|
|
|
117,658,000
|
|
|
|
2,951,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120,609,000
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Uncollectible Accounts
|
|
|
75,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
|
Reserve for Inventory Obsolescence
|
|
|
1,015,000
|
|
|
|
17,000
|
|
|
|
—
|
|
|
|
(171,000
|
)
|
|
|
861,000
|
|
|
Reserve for Warranty
|
|
|
380,000
|
|
|
|
41,000
|
|
|
|
—
|
|
|
|
(160,000
|
)
|
|
|
261,000
|
|
|
Deferred Tax Asset Valuation Allowance
|
|
|
115,282,000
|
|
|
|
2,376,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
117,658,000
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Uncollectible Accounts
|
|
|
75,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
|
Impairment for Notes Receivable from Stockholder
|
|
|
1,007,000
|
|
|
|
(583,000
|
)
|
|
|
—
|
|
|
|
(424,000
|
)
|
|
|
—
|
|
|
Reserve for Inventory Obsolescence
|
|
|
1,367,000
|
|
|
|
(195,000
|
)
|
|
|
—
|
|
|
|
(157,000
|
)
|
|
|
1,015,000
|
|
|
Reserve for Warranty
|
|
|
428,000
|
|
|
|
75,000
|
|
|
|
—
|
|
|
|
(123,000
|
)
|
|
|
380,000
|
|
|
Deferred Tax Asset Valuation Allowance
|
|
$
|
112,153,000
|
|
|
$
|
3,129,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
115,282,000
|
|
F-23
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 17th day of March 2010.
SUPERCONDUCTOR TECHNOLOGIES INC.
|
|
|
|
|
|
By:
|
/s/ Jeffrey
A. Quiram
|
Jeffrey A. Quiram
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 William J.
Buchanan, his attorney-in-fact, 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 said
attorney-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/ Jeffrey
A. Quiram
Jeffrey
A. Quiram
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 17, 2010
|
|
|
|
|
|
|
|
/s/ William
J. Buchanan
William
J. Buchanan
|
|
Controller (Principal Accounting Officer) (Principal Financial
Officer)
|
|
March 17, 2010
|
|
|
|
|
|
|
|
/s/ David
W. Vellequette
David
W. Vellequette
|
|
Director
|
|
March 17, 2010
|
|
|
|
|
|
|
|
/s/ Lynn
J. Davis
Lynn
J. Davis
|
|
Director
|
|
March 17, 2010
|
|
|
|
|
|
|
|
/s/ Dennis
J. Horowitz
Dennis
J. Horowitz
|
|
Director
|
|
March 17, 2010
|
|
|
|
|
|
|
|
/s/ Martin
A. Kaplan
Martin
A. Kaplan
|
|
Director
|
|
March 17, 2010
|
|
|
|
|
|
|
|
/s/ John
D. Lockton
John
D. Lockton
|
|
Chairman of the Board
|
|
March 17, 2010
|
F-24
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
SUPERCONDUCTOR TECHNOLOGIES INC
.
a Delaware corporation
TABLE OF CONTENTS
|
|
|
|
|
|
|
ARTICLE 1. CORPORATE OFFICES
|
|
|
2
|
|
|
1.1 REGISTERED OFFICE
|
|
|
2
|
|
|
1.2 OTHER OFFICES
|
|
|
2
|
|
|
ARTICLE 2. MEETINGS OF STOCKHOLDERS
|
|
|
2
|
|
|
2.1 PLACE OF MEETINGS
|
|
|
2
|
|
|
2.2 ANNUAL MEETING
|
|
|
2
|
|
|
2.3 SPECIAL MEETING
|
|
|
2
|
|
|
2.4 NOTICE OF STOCKHOLDERS’ MEETINGS
|
|
|
3
|
|
|
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER
BUSINESS
|
|
|
3
|
|
|
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
|
|
|
3
|
|
|
2.7 QUORUM
|
|
|
3
|
|
|
2.8 ADJOURNED MEETING; NOTICE
|
|
|
4
|
|
|
2.9 VOTING
|
|
|
4
|
|
|
2.10 WAIVER OF NOTICE
|
|
|
4
|
|
|
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
|
|
|
4
|
|
|
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
|
|
|
5
|
|
|
2.13 PROXIES
|
|
|
5
|
|
|
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
|
|
|
5
|
|
|
2.15 CONDUCT OF BUSINESS
|
|
|
5
|
|
|
ARTICLE 3. DIRECTORS
|
|
|
6
|
|
|
3.1 POWERS
|
|
|
6
|
|
|
3.2 NUMBER
|
|
|
6
|
|
|
3.2.1
|
|
|
6
|
|
|
3.2.2
|
|
|
6
|
|
|
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
|
|
|
6
|
|
|
3.4 RESIGNATION AND VACANCIES
|
|
|
6
|
|
|
3.4.1
|
|
|
7
|
|
|
3.4.2
|
|
|
7
|
|
|
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
|
|
|
7
|
|
|
3.6 FIRST MEETINGS
|
|
|
7
|
|
|
3.7 REGULAR MEETINGS
|
|
|
7
|
|
|
3.8 SPECIAL MEETINGS; NOTICE
|
|
|
7
|
|
|
3.9 QUORUM
|
|
|
8
|
|
|
3.10 WAIVER OF NOTICE
|
|
|
8
|
|
|
3.11 ADJOURNED MEETING; NOTICE
|
|
|
8
|
|
|
3.12 CONDUCT OF BUSINESS
|
|
|
8
|
|
|
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
|
|
|
8
|
|
|
3.14 FEES AND COMPENSATION OF DIRECTORS
|
|
|
8
|
|
|
3.15 APPROVAL OF LOANS TO OFFICERS
|
|
|
9
|
|
|
3.16 REMOVAL OF DIRECTORS
|
|
|
9
|
|
|
ARTICLE 4. COMMITTEES
|
|
|
9
|
|
|
4.1 COMMITTEES OF DIRECTORS
|
|
|
9
|
|
|
4.2 COMMITTEE MINUTES
|
|
|
9
|
|
|
4.3 MEETINGS AND ACTION OF COMMITTEES
|
|
|
9
|
|
|
ARTICLE 5. OFFICERS
|
|
|
10
|
|
|
5.1 OFFICERS
|
|
|
10
|
|
|
5.2 ELECTION OF OFFICERS
|
|
|
10
|
|
|
5.3 REMOVAL AND RESIGNATION OF OFFICERS
|
|
|
10
|
|
Amended and Restated Bylaws (050525)
i
|
|
|
|
|
|
|
5.4 CHAIRMAN OF THE BOARD
|
|
|
10
|
|
|
5.5 CHIEF EXECUTIVE OFFICER
|
|
|
10
|
|
|
5.6 PRESIDENT
|
|
|
11
|
|
|
5.7 VICE PRESIDENT
|
|
|
11
|
|
|
5.8 SECRETARY
|
|
|
11
|
|
|
5.9 CHIEF FINANCIAL OFFICER
|
|
|
11
|
|
|
5.10 ASSISTANT SECRETARY
|
|
|
11
|
|
|
5.11 AUTHORITY AND DUTIES OF OFFICERS
|
|
|
12
|
|
|
ARTICLE 6. INDEMNITY
|
|
|
12
|
|
|
6.1 DIRECTORS’ LIABILITY
|
|
|
12
|
|
|
6.2 RIGHT TO INDEMNIFICATION
|
|
|
12
|
|
|
6.3 RIGHT OF CLAIMANT TO BRING SUIT
|
|
|
12
|
|
|
6.4 NON-EXCLUSIVITY OF RIGHTS
|
|
|
13
|
|
|
6.5 INDEMNIFICATION AGREEMENTS
|
|
|
13
|
|
|
6.6 INSURANCE
|
|
|
13
|
|
|
6.7 FUNDING OBLIGATIONS
|
|
|
13
|
|
|
6.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE COPRORATION
|
|
|
13
|
|
|
6.9 AMENDMENT
|
|
|
13
|
|
|
ARTICLE 7. RECORDS AND REPORTS
|
|
|
13
|
|
|
7.1 MAINTENANCE AND INSPECTION OF RECORDS
|
|
|
13
|
|
|
7.2 INSPECTION BY DIRECTORS
|
|
|
14
|
|
|
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
|
|
|
14
|
|
|
ARTICLE 8. GENERAL MATTERS
|
|
|
14
|
|
|
8.1 CHECKS
|
|
|
14
|
|
|
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
|
|
|
14
|
|
|
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
|
|
|
14
|
|
|
8.4 SPECIAL DESIGNATION ON CERTIFICATES
|
|
|
15
|
|
|
8.5 LOST CERTIFICATES
|
|
|
15
|
|
|
8.6 CONSTRUCTION, DEFINITIONS
|
|
|
15
|
|
|
8.7 DIVIDENDS
|
|
|
15
|
|
|
8.8 FISCAL YEAR
|
|
|
16
|
|
|
8.9 SEAL
|
|
|
16
|
|
|
8.10 TRANSFER OF STOCK
|
|
|
16
|
|
|
8.11 STOCK TRANSFER AGREEMENTS
|
|
|
16
|
|
|
8.12 REGISTERED STOCKHOLDERS
|
|
|
16
|
|
|
8.13 RESTRICTIONS ON STOCK OPTIONS
|
|
|
16
|
|
|
ARTICLE 9. AMENDMENTS
|
|
|
16
|
|
|
ARTICLE 10. DISSOLUTION
|
|
|
17
|
|
Amended and Restated Bylaws (050525)
ii
AMENDED AND RESTATED BYLAWS
of
SUPERCONDUCTOR TECHNOLOGIES INC
.
a Delaware corporation
(hereinafter called the “Corporation”)
ARTICLE 1.
CORPORATE OFFICES
1.1
REGISTERED OFFICE
. The registered office of the corporation shall be in the
City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of
the corporation at such location is The Corporation Trust Company.
1.2
OTHER OFFICES
. The board of directors may at any time establish other
offices at anyplace or places where the corporation is qualified to do business.
ARTICLE 2.
MEETINGS OF STOCKHOLDERS
2.1
PLACE OF MEETINGS
. Meetings of stockholders shall be held at any place,
within or outside the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders’ meetings shall be held at the registered office of the
corporation.
2.2
ANNUAL MEETING
. The annual meeting of stockholders shall be held each year on a
date and at a time designated by the board of directors. At the meeting, directors shall be elected
and any other proper business may be transacted.
2.3
SPECIAL MEETING
. A special meeting of the stockholders may be called at any time
by the board of directors, the chairman of the board, the president, the chief executive officer or
one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent
of the votes at that meeting (the “10% Stockholders”); provided that, notwithstanding the above and
any provision contained in these bylaws to the contrary, effective upon such time as (i) shares of
capital stock of the corporation are designated as qualified for trading as National Market System
securities on the National Association of Securities Dealers, Inc. Automated Quotation System (or
any successor national market
system), and (ii) the corporation has at least 800 holders of shares of its capital stock, the
10% Stockholders shall no longer be entitled to call such meeting. If a special meeting is called
by any person or persons other than the board of directors, the request shall be in writing,
specifying the time of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the chairman of the board, the president, chief executive officer or the
secretary of the corporation. No business may be transacted at such special meeting otherwise than
specified
in such notice. The officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5, that a
meeting will be held at the time requested by the person or persons who called the meeting, not
less than 35 nor more than 60 days after the receipt of the request. If the notice is not given
within 20 days after the receipt of the request, the person or persons requesting the meeting may
give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called by action of the
board of directors may be held.
Amended and Restated Bylaws (050525)
2
2.4
NOTICE OF STOCKHOLDERS’ MEETINGS
. All notices of meetings with stockholders
shall be in writing and shall be sent or otherwise given in accordance with Section 2.6 of these
bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder
entitled to vote at such meeting. The notice shall specify the place, date, and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is
called.
2.5
ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
. To be properly
brought before an annual meeting or special meeting, nominations for the election of director or
other business must be (a) specified in the notice of meeting (or any supplement thereto) given by
or at the direction of the board of directors, (b) otherwise properly brought before the meeting by
or at the direction of the board of directors, or (c) otherwise properly brought before the meeting
by a stockholder. For such nominations or other business to be considered properly brought before
the meeting by a stockholder, such stockholder must have given timely notice and in proper form of
his intent to bring such business before such meeting. To be timely, such stockholder’s notice must
be delivered to or mailed and received by the secretary of the corporation not less than 90 days
prior to the meeting; provided, however, that in the event that less than 100 days notice or prior
public disclosure of the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or such public
disclosure was made. To be in proper form, a stockholder’s notice to the secretary shall set forth:
(i) the name and address of the stockholder who intends to make the nominations, propose the
business, and, as the case may be, the name and address of the person or persons to be nominated or
the nature of the business to be proposed; (ii) a representation that the stockholder is a holder
of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends
to appear in person or by proxy at the meeting to nominate the person or persons specified in the
notice or introduce the business specified in the notice; (iii) if applicable, a description of all
arrangements or understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (iv) such other information regarding such nominee or each matter of
business to be proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the
nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as
director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge
the nomination of any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6
MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
. Written notice of any meeting
of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation
that the notice has been given shall, in the absence of fraud, be prima facia evidence of the facts
stated therein.
2.7
QUORUM
. The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at
all meetings of the stock holders for the transaction of business except as otherwise provided by
statute or by the certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of the meeting, or
(ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall
Amended and Restated Bylaws (050525)
3
have power to adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum is present or represented. At such adjourned meeting at which a
quorum is present or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed. When a quorum is present or represented at any meeting, the
vote of the holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting, unless the question is
one upon which, be express provisions of the statutes or of the certificate of incorporation, a
different vote is required, in which case such express provisions shall govern and control the
decision of the question.
2.8
ADJOURNED MEETING; NOTICE
. When a meeting is adjourned to another time or
place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the corporation may transact any business that might have been transacted at the
original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given
to each stockholder of record entitled to vote at the meeting.
2.9
VOTING
. The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Sections 2.12 and 2.14 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware
(relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts
and other voting agreements.
2.10
WAIVER OF NOTICE
. Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a
written waiver thereof, signed by the person entitled to notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be specified in any
written waiver of notice unless so required by the certificate of incorporation or these bylaws.
2.11
STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
. Unless otherwise
provided in the certificate of incorporation, any action required by this chapter to be taken at
any annual or special meeting of stockholders of a corporation, or any action that may be taken at
any annual or special meeting of such stockholders, may be taken without a meeting, without prior
notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those stockholders who have not
consented in writing. If the action which is consented to is such as would have required the filing
of a certificate under any section of the General Corporation Law of Delaware if such action had
been voted on by stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any vote of stockholders,
that written notice and written consent have been given as provided in Section 228 of the General
Corporation Law of Delaware. Notwithstanding the foregoing, effective upon the closing of the
corporation’s initial public offering of securities pursuant to a registration statement file under
the Securities Act of 1933,
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as amended, the stockholders of the corporation may not take action by written consent
without a meeting but must take any such actions at a duly called annual or special meeting.
2.12
RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
. In order that the
corporation may determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in
advance, a record date, which shall not be more than 60 nor less than 10 days before the date of
such meeting, nor more than 60 days prior to any other action. If the board of directors does not
so fix a record date, the fixing of such record date shall be governed by the provisions of Section
213 of the General Corporation Law of Delaware. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the adjourned meeting.
2.13
PROXIES
. Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may authorize another
person or persons to act for him by a written proxy, signed by the stockholder and filed with the
secretary of the corporation, but no such proxy shall be voted or acted upon after 3 years from its
date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the stockholder or the stockholder’s attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.14
LIST OF STOCKHOLDERS ENTITLED TO VOTE
. The officer who has charge of the stock
ledger of a corporation shall prepare and make, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period of at least 10
days prior to the meeting, either at a place within the city where the meeting is to be held, which
place shall be specified in the notice of the meeting, or, if not so specified, at the place where
the meeting is to be held. The stock ledger shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the corporation, or to vote in
person or by proxy at any meeting of stockholders and of the number of shares held by each such
stockholder.
2.15
CONDUCT OF BUSINESS
. Meetings of stockholders shall be presided over by the
chairman of the board, if any, or in his absence by the president, or in his absence by a vice
president, or in the absence of the foregoing persons by a chairman designated by the board of
directors, or in the absence of such designation by a chairman chosen at the meeting. The secretary
shall act as secretary of the meeting, but absence the chairman of the meeting may appoint any
person to act as secretary of the meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting, including such matters as the
regulation of the manner of voting and conduct of business.
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ARTICLE 3.
DIRECTORS
3.1
POWERS
. Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these bylaws relating to action
required to be approved by the stockholders or by the outstanding shares, the business and affairs
of the corporation shall be managed and all corporate powers shall be exercised by or under the
direction of the board of directors.
3.2
NUMBER
.
3.2.1 The Board of Directors shall consist of six (6) members. Such set number of
directors may be changed from time to time by resolution of the Board of Directors, except as
otherwise provided by law or the Certificate of Incorporation. Any director may resign at any time
upon written notice to the Corporation. Directors need not be stockholders.
3.2.2 Subject to the last two sentences of this subsection, the Board of Directors shall be
divided into three classes, as nearly equal in numbers as the then total number of directors
constituting the entire Board of Directors permits with the term of office of one class expiring
each year. Whenever this subsection comes into effect, directors of the first class shall be
elected to hold office for a term expiring at the next succeeding annual meeting, directors of the
second class shall be elected to hold office for a term expiring at the second succeeding annual
meeting and directors of the third class shall be elected to hold office for a term expiring at the
third succeeding annual meeting. The directors shall be assigned to their respective classes by
resolution of the Board of Directors at the time of the effectiveness of this subsection. At each
subsequent annual meeting of stockholders, the successors to the class of directors whose term
shall then expire shall be elected to hold office for a term expiring at the third succeeding
annual meeting. In the event that the foregoing provisions of this subsection shall conflict with
Section 301.5 of the California General Corporation Law (“CGCL”) at a time when such Section is
legally applicable to this Corporation as a result of Section 2115 of the CGCL (or any successor
provisions thereto), the terms of any directors then in office shall be reduced by the minimum
extent necessary to eliminate such conflict. Thereafter, all directors shall be elected at each
annual meeting of stockholders until the foregoing provisions of this subsection relating to the
classification of directors can be reinstated, at which time the terms of the directors shall
expire as provided in the second through fourth sentences of this subsection.
3.3
ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
.
Except as provided in
Section 3.4 of these bylaws, at each annual meeting of stockholders, directors of the corporation
shall be elected to hold office until the expiration of the term for which they are elected, and
until their successors have been duly elected and qualified; except that if any such election shall
not be so held, such election shall take place at a stockholders’ meeting called and held in
accordance with the Delaware General Corporation Law. Directors need not be stockholders unless so
required by the certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Elections of directors need not be by written ballot.
3.4
RESIGNATION AND VACANCIES
. Any director may resign at any time upon
written notice to the corporation. Stockholders may remove directors with or without cause.
Any vacancy occurring in the board of directors with or without cause may be filed by a majority of
the remaining members of the board of directors, although such majority is less than a quorum, or
by a plurality of the votes cast at a meeting of stockholders, and each director so elected shall
hold office until the expiration of the term of office of the director whom he has replaced. Unless
otherwise provided in the certificate of incorporation or these bylaws:
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3.4.1 Vacancies and newly created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in office, although less
than a quorum, or by a sole remaining director or by the stockholders entitled to vote at any
Annual or Special Meeting held in accordance with Article II, and the directors so chosen shall
hold office until the next election of the class for which such directors have been chosen and
until their successors are duly elected and qualified, or until their earlier resignation or
removal.
3.4.2 Whenever the holders of any class or classes of stock or series thereof are entitled to
elect one or more directors by the provisions of the certificate of incorporation, vacancies and
newly created directorships of such class or classes or series may be filled by a majority of the
directors elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected. if at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then any officer or any stockholder or an
executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with
like responsibility for the person or estate of a stockholder, may apply to the Court of Chancery
for a decree summarily ordering an election as provided in Section 211 of the General Corporation
Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the
directors then in office constitute less than a majority of the whole
board (as constituted
immediately prior to any such increase), then the Court of Chancery may, upon application of any
stockholder or stockholders holding at least 10% of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an election to be held to
fill any such vacancies or newly created directorships, or to replace the directors chosen by the
directors then in office as aforesaid, which election shall be governed by the provisions of
Section 211 of the General Corporation Law of Delaware as far as applicable.
3.5
PLACE OF MEETINGS; MEETINGS BY TELEPHONE
. The board of directors of the
corporation may hold meetings, both regular and special, either within or outside the State of
Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members
of the board of directors, or any committee designated by the board of directors, may participate
in a meeting of the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in the meeting can
hear each other, and such participation in a meeting shall constitute presence in person at the
meeting.
3.6
FIRST MEETINGS
. The first meeting of each newly elected board of directors shall
beheld at such time and place as shall be fixed by the vote of the stockholders at the annual
meeting and no notice of such meeting shall be necessary to the newly elected directors in order
legally to constitute the meeting, provided a quorum shall be present. In the event of the failure
of the stockholders to fix the time or place of such first meeting of the newly elected board of
directors, or in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be specified in a notice
given as hereinafter provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.
3.7
REGULAR MEETINGS
. Regular meetings of the board of directors may be held without
notice at such time and at such place as shall from time to time be determined by the board.
3.8
SPECIAL MEETINGS; NOTICE
. Special meetings of the board of directors for any
purpose or purposes may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors. Notice of the time and place of special
meetings shall be delivered personally or by telephone to each director or sent by first-class
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7
mail or telegram, charges prepaid, addressed to each director at that director’s address as
it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in
the United States mail at least 4 days before the time of the holding of the meeting. If the
notice is delivered personally or by telephone or by telegram, it shall be delivered personally or
by telephone or to the telegraph company at least 48 hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the notice has reason
to believe will promptly communicate it to the director. The notice need not specify the purpose
of the place of the meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9
QUORUM
. At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum shall be the act of the
board of directors, except as may be otherwise specifically provided by statute or by the
certificate of incorporation.
3.10
WAIVER OF NOTICE
. Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a
written waiver thereof, signed by the person entitled to notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required by the certificate
of incorporation or these bylaws.
3.11
ADJOURNED MEETING; NOTICE
. If a quorum is not present at any meeting of the board
of directors, then the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12
CONDUCT OF BUSINESS
. Meetings of the board of directors shall be presided over by
the chairman of the board, if any, or in his absence by the chief executive officer, or in their
absence by a chairman chosen at the meeting. The secretary shall act as secretary of the meeting,
but in his absence the chairman of the meeting may appoint any person to act as secretary of the
meeting. The chairman of any meeting shall determine the order of business and the procedures at
the meeting.
3.13
BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
. Unless otherwise restricted by
the certificate of incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the board of directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in writing and the
writing or writings are filed with the minutes of proceedings of the board or committee.
3.14
FEES AND COMPENSATION OF DIRECTORS
. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the board of directors shall have the authority to
fix the compensation of directors. The directors may be paid their expenses, if any, of attendance
at each meeting of the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors or a stated salary as director. No such
payment shall preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
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3.15
APPROVAL OF LOANS TO OFFICERS
. The corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the corporation or its
subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be
with or without interest and may be unsecured, or secured in such manner as the board of directors
shall approve, including, without limitation, a pledge of shares of stock of the corporation.
Nothing in this section contained shall be deemed to deny, limit or restrict the powers of
guaranty or warranty of the corporation at common law or under any statute.
3.16
REMOVAL OF DIRECTORS
. Unless otherwise restricted by statute, by the certificate
of incorporation or by these bylaws, any director or the entire board of directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled to vote at an
election of directors. If at any time a class or series of shares is entitled to elect one or more
directors, the provisions of this Article 3.16 shall apply to the vote of that class or series and
not to the vote of the outstanding shares as a whole. No reduction of the authorized number of
directors shall have the effect of removing any director prior to the expiration of such
director’s term of office.
ARTICLE 4.
COMMITTEES
4.1
COMMITTEES OF DIRECTORS
. The board of directors may, by resolution passed by
a majority of the whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of directors to act
at the meeting in the place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the board of directors or in the bylaws of the corporation,
shall have and may exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to the following matter: (i) approving or adopting, or recommending
to the stockholders, any action or matter expressly required by the Delaware General Corporation
Law to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw
of the corporation.
4.2
COMMITTEE MINUTES
. Each committee shall keep regular minutes of its meetings
and report the same to the board of directors when required.
4.3
MEETINGS AND ACTION OF COMMITTEES
. Meetings and actions of committees shall be
governed by, and held and taken in accordance with, the provisions of Article III of these bylaws,
Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section
3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section
3.11 (adjournment and notice of adjournment), Section 3.12
(conduct of business) and 3.13 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings of committees may
also be called by resolution of the board of directors and that notice of special meetings of
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committees shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE 5.
OFFICERS
5.1
OFFICERS
. The officers of the corporation shall be a chief executive
officer, one or more vice presidents, a secretary and a chief financial officer. The corporation
may also have, at the discretion of the board of directors, a chairman of the board, a president,
a chief operating officer, one or more executive, senior or assistant vice presidents, assistant
secretaries and any such other officers as may be appointed in accordance with the provisions of
Section 5.2 of these bylaws. Any number of offices may be held by the same person.
5.2
ELECTION OF OFFICERS
. Except as otherwise provided in this Section 5.2, the
officers of the corporation shall be chosen by the board of directors, subject to the rights, if
any, of an officer under any contract of employment. The board of directors may appoint, or empower
an officer to appoint, such officers and agents of the business as the corporation may require
(whether or not such officer or agent is described in this Article V), each of whom shall hold
office for such period, have such authority, and perform such duties as are provided in these
bylaws or as the board of directors may from time to time determine. Any vacancy occurring in any
office of the corporation shall be filled by the board of directors or may be filled by the
officer, if any, who appointed such officer.
5.3
REMOVAL AND RESIGNATION OF OFFICERS
. Subject to the rights, if any, of an officer
under any contract of employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or special meeting of the
board or, except in the case of an officer chosen by the board of directors, by any officer upon
whom such power of removal may be conferred by the board of directors or, in the case of an officer
appointed by another officer, by such other officer. Any officer may resign, at any time by giving
written notice to the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise specified in that
notice, the acceptance of the resignation shall not be necessary to make it effective. Any
resignation is without prejudice to the rights, if any, of the corporation under any contract to
which the officer is a party.
5.4
CHAIRMAN OF THE BOARD
. The chairman of the board, if such an officer be elected,
shall, if present, preside at meetings of the board of directors and exercise and perform such
other powers and duties as may from time to time be assigned to him by the board of directors or as
may be prescribed by these bylaws. If there is no chief executive officer, then the chairman of the
board shall also be the chief executive officer of the corporation and shall have the powers and
duties prescribed in Section 5.5 of these bylaws.
5.5
CHIEF EXECUTIVE OFFICER
. The chief executive officer of the corporation shall,
subject to the control of the board of directors, have general supervision, direction and control
of the business and the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board at all meetings of the
board of directors. He or she shall have the general powers and duties of management usually vested
in the chief executive officer of a corporation, including general supervision, direction and
control of the business and supervision of other officers of the
corporation, and shall have such other powers and duties as may be prescribed by the board of
directors or these bylaws. The chief executive officer shall, without limitation, have the
authority to execute bonds, mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed and executed
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and except where the signing and execution thereof shall be expressly delegated by the board
of directors to some other officer or agent of the corporation.
5.6
PRESIDENT
. Subject to such supervisory powers as may be given by these bylaws or
the board of directors to the chairman of the board or the chief executive officer, if there be
such officers, the president shall have general supervision, direction and control of the business
and supervision of other officers of the corporation, and shall have such other powers and duties
as may be prescribed by the board of directors or these bylaws. In the event a chief executive
officer shall not be appointed, the president shall have the duties of such office.
5.7
VICE PRESIDENT
. In the absence or disability of the president, the vice
presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the duties of the chief
executive officer and when so acting shall have all the powers of, and be subject to all the
restrictions upon, the chief executive officer. The vice presidents shall have such other powers
and perform such other duties as from time to time may be prescribed for them respectively by the
board of directors, these bylaws, the chief executive officer or the chairman of the board.
5.8
SECRETARY
. The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of directors may direct, a
book of minutes of all meetings and actions of directors, committees of directors, and
stockholders. The minutes shall show the time and place of each meeting, whether regular or special
(and, if special, how authorized and the notice given), the names of those present at directors’
meetings or committee meetings, the number of shares present or represented at stockholders’
meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the
principal executive office of the corporation or at the office of the corporation’s transfer agent
or registrar, as determined by resolution of the board of directors, a share register, or a
duplicate share register, showing the names of all stockholders and their addresses, the number and
classes of shares held by each, the number and date of certificates evidencing such shares, and the
number and date of cancellation of every certificate surrendered for cancellation. The secretary
shall give, or cause to be given, notice of all meetings of the stockholders and of the board of
directors required to be given by law or by these bylaws. He shall keep the seal of the
corporation, if one be adopted, in safe custody and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by these bylaws.
5.9
CHIEF FINANCIAL OFFICER
. The chief financial officer shall keep and maintain, or
cause to be kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The
books of account shall at all reasonable times be open to inspection by any director. The chief
financial officer shall deposit all money and other valuables in the name and to the credit of the
corporation with such depositaries as may be designated by the board of directors. He shall
disburse the funds of the corporation as may be ordered by the board of directors, shall render to
the chief executive officer and directors, whenever they request it, an account of all of his
transactions as treasurer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of directors or these
bylaws.
5.10
ASSISTANT SECRETARY
. The assistant secretary, or, if there is more than one, the
assistant secretaries in the order determined by the stockholders or board of directors (or if
there be no such determination, then in the order of their election) shall, in the absence of
the secretary or in the event of his or her inability or refusal to act, perform the duties
and
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exercise the powers of the secretary and shall perform such other duties and have such other
powers as the board of directors or the stockholders may from time to time prescribe.
5.11
AUTHORITY AND DUTIES OF OFFICERS
. In addition to the foregoing authority and
duties, all officers of the corporation shall respectively have such authority and perform such
duties in the management of business of the corporation as may be designated from time to time by
the board of directors or the stockholders.
ARTICLE 6.
INDEMNITY
6.1
DIRECTORS’ LIABILITY
. A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director’s duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended. Any repeal or modification of this provision
shall not adversely affect any right or protection of a director of the Corporation existing at
the time of such repeal or modification.
6.2
RIGHT TO INDEMNIFICATION
. Each person who was or is made a party to or is
threatened to be made a party to or is involuntarily involved in any claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of
the fact that he or she is or was a director or officer of the Corporation, or is or was serving
(during his or her tenure as director and/or officer) at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, whether the basis of such Proceeding is an alleged action or inaction in
an official capacity as a director or officer or in any other capacity while serving as a director
or officer, shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law (or other applicable law), as the same exists or
may hereafter be amended (but in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability and loss (including
attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection with such Proceeding.
Such director or officer shall have the right to be paid by the Corporation for expenses incurred
in defending any such Proceeding in advance of its final disposition; provided, however, that, if
the Delaware General Corporation Law (or other applicable law) requires, the payment of such
expenses in advance of the final disposition of any such Proceeding shall be made only upon receipt
by the Corporation of an undertaking by or on behalf of such director or officer to repay all
amounts so advanced if it should be determined ultimately by final judicial decision from which
there is no further right to appeal that he or she is not entitled to be indemnified under this
Article or otherwise.
6.3
RIGHT OF CLAIMANT TO BRING SUIT
. If a claim under Section 6.2 of this Article
is not paid in full by the Corporation within ninety (90) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim, together with interest thereon, and, if
successful in whole or in part, the claimant shall also be entitled to be paid the expense of
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prosecuting such claim, including reasonable attorneys’ fees incurred in connection
therewith. It shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any Proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under the Delaware General
Corporation Law (or other applicable law) for the Corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the
failure of the Corporation (or of its full Board of Directors, its directors who are not parties
to the Proceeding with respect to which indemnification is claimed, its stockholders, or
independent legal counsel) to have made a determination prior to the commencement of such action
that indemnification of the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation Law (or other
applicable law), nor an actual determination by any such person or persons that such claimant has
not met such applicable standard of conduct, shall be a defense to such action or create a
presumption that the claimant has not met the applicable standard of conduct.
6.4
NON-EXCLUSIVITY OF RIGHTS
. The rights conferred by this Article VI shall not be
exclusive of any other right which any director, officer, representative, employee or other agent
may have or hereafter acquire under the Delaware General Corporation Law or any other statute, or
any provision contained in the Corporation’s Certificate of Incorporation or Bylaws, or any
agreement, or pursuant to a vote of stockholders or disinterested directors, or otherwise.
6.5
INDEMNIFICATION AGREEMENTS
. The Corporation may enter into contracts providing
indemnification to the fullest extent permitted by law.
6.6
INSURANCE
. The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation, or is serving at
the request of the Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under the provisions of
applicable law.
6.7
FUNDING OBLIGATIONS
. The Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of credit, surety bonds
and/or other similar arrangements), to ensure the payment of insurance premiums, or other such
amounts as may become necessary to effect indemnification as provided in this Article VI or
elsewhere.
6.8
INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE COPRORATION
. The Corporation may,
to the extent authorized from time to time by the Board of Directors, grant rights to
indemnification, including the right to be paid by the Corporation the expenses incurred in
defending any Proceeding in advance of its final disposition, to any employee or agent of the
Corporation to the fullest extent of the provisions of this Article VI or otherwise with respect to
the indemnification and advancement of expenses of directors and officers of the Corporation.
6.9
AMENDMENT
. Any repeal or modification of this Article VI shall not change the
rights of an officer or director to indemnification with respect to any action or omission
occurring prior to such repeal or modification.
ARTICLE 7.
RECORDS AND REPORTS
7.1
MAINTENANCE AND INSPECTION OF RECORDS
. The corporation shall,
either at its principal executive office or at such lace or places as designated by the board
of
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directors, keep a record of its stockholders listing their names and addresses and the number
and class of shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records. Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose thereof, have the right during
the usual hours for business to inspect for any proper purpose the corporation’s stock ledger, a
list of its stockholders, and its other books and records and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a
stockholder. In every instance where an attorney or other agent is the person who seeks the right
to inspection, the demand under oath shall be accompanied by a power of attorney or such other
writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The
demand under oath shall be directed to the corporation at its registered office in Delaware or at
its principal place of business.
7.2
INSPECTION BY DIRECTORS
. Any directors shall have the right to examine the
corporation’s stock ledger, a list of its stockholders and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery is hereby vested
with the exclusive jurisdiction to determine whether a director is entitled to the inspection
sought. The Court may summarily order the corporation to permit the director to inspect any and all
books and records, the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its discretion, prescribe any limitations or conditions with reference to the
inspection, or award such other and further relief as the Court may deem just and proper.
7.3
REPRESENTATION OF SHARES OF OTHER CORPORATIONS
. The chairman of the board, the
chief executive officer, any vice president, the chief financial officer, the secretary or
assistant secretary of this corporation, or any other person authorized by the board of directors
or the chief executive officer or a vice president, is authorized to vote, represent, and exercise
on behalf of this corporation all rights incident to any and all shares of any other corporation or
corporations standing in the name of this corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to do so by proxy or
power of attorney duly executed by such person having the authority.
ARTICLE 8.
GENERAL MATTERS
8.1
CHECKS
. From time to time, the board of directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other orders for payment
of money, notes or other evidence of indebtedness that are issued in the name of or payable to the
corporation, and only the person so authorized shall sign or endorse those instruments.
8.2
EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
. The board of directors, except
as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents,
to enter into any contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances. Unless so authorized
or ratified by the board of directors or within the agency power of an officer, no officer, agent
or employee shall have any power or authority to bind the corporation by any contract or engagement
or to pledge its credit or to render it liable for any purpose or for any amount.
8.3
STOCK CERTIFICATES; PARTLY PAID SHARES
. The shares of a corporation shall be
represented by certificates, provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of its stock shall be
uncertificated shares. Any such resolution shall not apply to shares represented by a
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certificate until such certificate is surrendered to the corporation. Notwithstanding the
adoption of such a resolution by the board of directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be entitled to have a
certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the
board of directors, or the president or vice-president, and by the treasurer or an assistant
treasurer, or the secretary or an assistant secretary of such corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the certificate may be a
facsimile. Incase any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has caused to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of issue. The
corporation may issue the whole or any part of its shares as partly paid and subject to call for
the remainder of the consideration to be paid therefor. Upon the face or back of each stock
certificate issued to represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated. Upon the
declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon
partly paid shares of the same class, but only upon the basis of the percentage of the
consideration actually paid thereon.
8.4
SPECIAL DESIGNATION ON CERTIFICATES
. If the corporation is authorized to issue
more than one class of stock or more than one series of any class, then the powers, the
designations, the preferences, and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face or back of the
certificate that the corporation shall issue to represent such class or series of stock; provided,
however, that, except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the
certificate that the corporation shall issue to represent such class or series of stock a statement
that the corporation will furnish without charge to such stockholder who so request the powers, the
designations, the preferences, and the relative, participating, optional or other special rights of
each class of stocks or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
8.5
LOST CERTIFICATES
. Except as provided in this Section 8.5, no new certificates for
shares shall be issued to replace a previously issued certificate unless the latter is surrendered
to the corporation and canceled at the same time. The corporation may issue a new certificate of
stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to
have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen
or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to
indemnify it against any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate or uncertificated
shares.
8.6
CONSTRUCTION, DEFINITIONS
. Unless the content requires otherwise, the general
provisions, rules of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this provision, the
singular number includes the plural, the plural number includes the singular, and the term “person”
includes both a corporation and a natural person.
8.7
DIVIDENDS
. The directors of the corporation, subject to any restrictions
contained in the certificate of incorporation, may declare and pay dividends upon the shares of its
capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash,
in property, or in shares of the corporation’s capital stock. The directors of the
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corporation may set apart out of any of the funds of the corporation available for dividends
a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall
include but not be limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8
FISCAL YEAR
. The fiscal year of the corporation shall be fixed by resolution of
the board of directors and may be changed by the board of directors.
8.9
SEAL
. The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be impressed or affixed or
in any other manner reproduced.
8.10
TRANSFER OF STOCK
. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the corporation to issue
a new certificate to the person entitled thereto, cancel the old certificate, and record the
transaction in its books.
8.11
STOCK TRANSFER AGREEMENTS
. The corporation shall have power to enter into and
perform any agreement with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of any one or more
classes owned by such stockholders in any manner not prohibited by the General Corporation Law of
Delaware.
8.12
REGISTERED STOCKHOLDERS
. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and assessments the person
registered on its books as the owner of shares, and shall not be bound to recognize any equitable
or other claim or interest in such share or shares on the part of another person, whether or not it
shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
8.13
RESTRICTIONS ON STOCK OPTIONS
. The Corporation, without the approval of the
owners of a majority of the Common Stock, shall not grant to any officer of the Corporation any
stock options at less than the closing market price on the date of grant or reduce the price of any
options at less than the closing market price on the date of grant or reduce the price of any
options which either were granted as a non-qualified stock option grant to an incoming employee or
vender or were granted to any officer under any of the Corporation’s existing or future stock
options plans, provided, however, that the foregoing shall not preclude the Corporation from
issuing new, lower priced options issued from a stock option plan to persons holding higher priced
options from such plan or any other plan, provided, however, that if such new lower priced options
are granted in exchange for such higher priced options, the shares covered by such higher priced
options shall be canceled or surrendered and not available for re-grant under such stock option
plan.
ARTICLE 9.
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the corporation may, in its certificate
of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact
that such power has been so conferred upon the directors shall not divest the stockholders of the
power, nor limit their power to adopt, or repeal bylaws.
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ARTICLE 10.
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors of the
corporation that the corporation should be dissolved, the board, after the adoption of a
resolution to that effect by a majority of the whole board at any meeting called for that purpose,
shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of
the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting
a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding
stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a
certificate stating that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the names and residences
of the directors and officers shall be executed, acknowledged, and filed and shall become
effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such
certificate’s becoming effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
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CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BYLAWS
THIS IS TO CERTIFY:
That I am the duly elected, qualified and acting Secretary of Superconductor Technologies
Inc., a Delaware corporation, and that the foregoing amended and restated bylaws were adopted as
the Bylaws of said corporation as of the 25th day of May, 2005, by the board of directors of said
corporation.
Dated as of this 25
th
day of May, 2005.
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/s/ Martin S. McDermut
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Martin S. McDermut, Secretary
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