| SUPERCONDUCTOR TECHNOLOGIES INC ITEM 1A RISK FACTORS This Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission contain forward-looking statements that involve risks and uncertainties |
| We have made these statements in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 |
| Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our future profitability, revenues, market growth, demand and pricing trends, competition in our industry, market acceptance, timing of any demand for next generation products, capital requirements and new product introductions |
| Other statements contained in our filings that are not historical facts are also forward-looking statements |
| We have tried, wherever possible, to identify forward-looking statements by 8 _________________________________________________________________ [45]Table of Contents terminology such as “may,” “will,” “could,” “should,” “expects, “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar words |
| Forward-looking statements are not guarantees of future performance and are subject to various risks, uncertainties and assumptions that are difficult to predict |
| Therefore, actual results may differ materially from those expressed in forward-looking statements |
| They can be affected by many factors, including, those listed in this Annual Report on Form 10-K under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements |
| ” This section describes some of the additional uncertainties and factors that may affect our forward-looking statements |
| Forward-looking statements are based on the beliefs, estimates made by, and information presently available to senior management |
| We do not assume any duty to update our forward-looking statements |
| Unless otherwise noted, the terms “we,” “us,” and “our,” refer to the combined and ongoing business operations of Superconductor Technologies Inc |
| and its subsidiaries |
| 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 |
| 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 |
| 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 |
| During 2005, we incurred a net loss of dlra14dtta2 million and negative cash flows from operations of dlra9dtta4 million |
| In addition, our independent registered public accounting firm has included in their report for 2005 an explanatory paragraph expressing doubt about our ability to continue as a going concern due to past losses and negative cash flows |
| They included a similar explanatory paragraph in their audit report for 2002, 2003 and 2004 |
| Our principal sources of liquidity consist of existing cash balances and funds expected to be generated from future operations |
| Based on our current forecasts, we expect our existing cash resources will be sufficient to fund our planned operations for at least the next twelve months |
| We believe the key factors to our liquidity will be our ability to successfully execute on our plans to increase sales levels |
| Our cash requirements will also depend on numerous other variable factors, including the rate of growth of sales, the timing and levels of products purchased, payment terms and credit limits from manufacturers, and the timing and level of accounts receivable collections |
| If actual cash flows deviate significantly from forecasted amounts, we may require additional financing in the next twelve months |
| We cannot ensure you that additional financing (public or private) 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, and we could deplete our reserve of authorized but unissued common stock |
| New investors may demand rights, preferences or privileges senior to those of existing holders of common stock |
| If we cannot raise needed funds, we would also 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 |
| 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 9 _________________________________________________________________ [46]Table of Contents 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: • a slowdown or delay in the deployment, upgrading or improvement of wireless networks by any one customer could significantly reduce demand for our products; • reductions in a single customer’s forecasts and demand could result in excess inventories; • each of our customers have significant purchasing leverage over us to require changes in sales terms including pricing, payment terms and product delivery schedules; and • 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 |
| 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 |
| 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 |
| 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: • the lack of any contractual obligation by our customers to purchase their forecasted demand for our products; • variations in the timing, cancellation, or rescheduling of customer orders and shipments; • high fixed expenses that may disproportionately impact operating expenses, especially during a quarter with a sales shortfall; and • discounts given to certain customers for large volume purchases |
| 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 |
| We have also regularly generated a large percentage of our revenues in the last month of a 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 |
| 10 _________________________________________________________________ [47]Table of Contents Order deferrals and cancellations by our customers, declining average sales prices, changes in the mix of products sold, 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 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 |
| Our expense levels are based in large part on expectations of future revenue |
| These items of expense are relatively fixed in the short-term |
| We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall |
| Consequently, operating results in any given period are likely to be disproportionately harmed if revenue in that period falls below expectations |
| Due to these and other factors, our past results are not 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, and sales are subject to delays beyond our control |
| 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 affect 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 only one or a limited number of outside suppliers due to unique designs as well as certain quality and performance requirements |
| We currently purchase substrates for growth of high-temperature superconductor thin-films from a single supplier because of the quality of their substrates |
| There are additional components that we source from a single vendor due to the present volume |
| Key components of our conventional products are manufactured by sole foreign manufacturer |
| Our reliance on sole or limited source suppliers involves certain risks and uncertainties, most 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 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 11 _________________________________________________________________ [48]Table of Contents 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 |
| 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 |
| Changes in the mix of our sales channels could cause fluctuations in our gross profit and future operating results |
| We currently sell most of our products directly to wireless network operators in the United States |
| We plan, however, to expand our business by selling directly to manufacturers of base station equipment on an OEM basis |
| If and when changes in the mix of our sales channels occur, our gross profit and operating margins may be adversely affected |
| 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 utilize |
| 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 |
| 12 _________________________________________________________________ [49]Table of Contents 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 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 were engaged in a patent dispute with ISCO International, Inc |
| ” ISCO alleged that some of our HTS products infringed the ISCO patent |
| We prevailed at trial |
| The jury returned a unanimous verdict that our products did not infringe the ISCO patent and that the ISCO patent is invalid and unenforceable |
| The jury’s verdict was upheld on appeal, and we do not expect any further legal action related to this matter |
| We currently rely on specific technologies and may not successfully adjust 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 in technology |
| 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 |
| Our efforts are focused on the wireless telecommunications market, including the 2G, 2dtta5G and 3G markets |
| The concentration of our resources on 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 13 _________________________________________________________________ [50]Table of Contents 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 antennas or use advanced antenna technology in lieu of purchasing our products |
| We may not succeed in competing with these alternatives |
| We depend upon government contracts for a substantial portion of revenue, and our business may suffer if significant contracts are terminated or adversely modified or we are unable to win new contracts |
| We derive a portion of our revenue from a few large contracts with the US 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 US government may include various risks, including: • termination by the government; • reduction or modification in the event of changes in the government’s requirements or budgetary constraints; • 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; • risks of potential disclosure of confidential information to third parties; • the failure or inability of the main contractor to perform its contract in circumstances where either STI is a subcontractor; • the failure of the government to exercise options for additional work provided for in the contracts; and • the government’s right in certain circumstances to freely use technology developed under these contracts |
| The programs in which we participate may extend for several years, but are normally funded on an annual basis |
| The US 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 pursuant to 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 which 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 secrets 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 secrets 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 |
| 14 _________________________________________________________________ [51]Table of Contents If we are unable to forecast our inventory needs accurately, we may be unable to obtain efficient manufacturing capacity or may incur unnecessary costs and produce excess inventory |
| We forecast our inventory needs based on anticipated product orders to determine manufacturing requirements |
| If we overestimate our requirements, 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 each 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 sometimes 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 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 |
| Entering into an acquisition entails many risks, any of which could adversely affect our business, including: • failure to integrate operations, services and personnel; • the price paid may exceed the value eventually realized; • loss of share value to existing stockholders as a result of issuing equity securities to finance an acquisition; • potential loss of key employees from either our then current business or any acquired business; 15 _________________________________________________________________ [52]Table of Contents • entering into markets in which we have little or no prior experience; • diversion of financial resources and management’s attention from other business concerns; • assumption of unanticipated liabilities related to the acquired assets; and • 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 |
| 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 expected 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 |
| Anticipated growth in future operations will continue to place a significant strain on management systems and resources |
| We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force worldwide |
| Furthermore, we expect that we will be required to manage multiple relationships with various customers and other third parties |
| 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 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 SEC filings 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 |
| 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: • our perceived prospects; • variations in our operating results and whether we have achieved key business targets; 16 _________________________________________________________________ [53]Table of Contents • changes in, or our failure to meet, earnings estimates; • changes in securities analysts’ buy/sell recommendations; • differences between our reported results and those expected by investors and securities analysts; • announcements of new contracts by us or our competitors; • market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; and • general economic, political or stock market conditions |
| 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 may not be able to maintain our NASDAQ stock listing, and the loss of our listing would have a material adverse affect on the liquidity and price of our stock |
| Our common stock currently is listed on the NASDAQ Capital Market |
| However, we cannot assure you that our stock will continue to be listed on the NASDAQ Stock Market |
| The NASDAQ Stock Market has rules for maintaining a listing, including a minimum bid price for common stock of dlra1dtta00 per share |
| Our common stock was originally listed on the NASDAQ National Market, but we transferred our listing to the NASDAQ Capital Market to secure additional time for regaining compliance with the minimum stock price requirement |
| NASDAQ originally notified us on April 4, 2005 of a potential delisting from the NASDAQ National Market due to a sustained price decline below the dlra1dtta00 minimum requirement |
| We were given six months to regain compliance |
| In order to regain compliance, the bid price of the common stock must close at dlra1dtta00 per share or more for a minimum of 10 consecutive trading days before the end of the grace period |
| When our stock price did not recover by the end of the first grace period, we transferred our listing to the Capital Market and were given an additional six months to regain compliance (until March 30, 2006) |
| Our common stock continues to trade below the minimum price requirement |
| Therefore, we have decided to implement a 1-for-10 reverse stock split in an effort to protect our NASDAQ listing |
| We have already obtained stockholder approval and will implement the reverse split on March 13, 2006 |
| We received discretionary authority for the reverse stock split from our stockholders at last year’s annual meeting |
| We cannot predict, however, whether the reverse stock split will achieve the desired result of maintaining our listing on the NASDAQ Stock Market |
| The price per share of our common stock is also a function of our financial performance and other factors, some of which may be unrelated to the number of shares outstanding |
| Accordingly, there can be no assurance that the closing bid price of the our common stock after the reverse stock split will increase in an amount proportionate to the decrease in the number of issued and outstanding shares, or will increase at all, or that any increase can be sustained for a prolonged period of time or a sufficient amount of time to regain compliance with the NASDAQ minimum price requirement |
| Even if we regain compliance, we may not meet all of the continued listing requirements in the future, particularly if the price of our common stock again falls below dlra1dtta00 per share for thirty consecutive trading days |
| If our common stock is not listed with NASDAQ, it may be difficult or impossible to sell it |
| 17 _________________________________________________________________ [54]Table of Contents We have decided to implement a reverse stock split, and the reverse stock split could reduce our total market capitalization |
| We will implement the reverse split on March 13, 2006 |
| At our 2005 annual meeting, we sought and received from our stockholders discretionary authority to implement a reverse stock split in the range of 1-for-2 to 1-for-10 within one year of the meeting date without further stockholder approval |
| We sought this authority in response to the fact that our stock price had been trading below dlra1dtta00 per share – the minimum price for maintaining our NASDAQ listing |
| We can regain compliance if the bid price of the common stock closes at dlra1dtta00 per share or more for a minimum of 10 consecutive trading days before the end of the current grace period (March 30, 2006) |
| The reverse stock split is one method for achieving this goal |
| We value our listing on the NASDAQ National Market and have decided to implement the reverse split to maintain our listing |
| There can be no assurance that the per share price of the common stock after the reverse stock split will actually increase in an amount proportionate to the decrease in the number of outstanding shares |
| In other words, our total market capitalization could decrease as a result of the reverse stock split |
| 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 December 31, 2005, we had outstanding warrants and options exercisable for an aggregate of 20cmam312cmam134 shares of common stock at a weighted average exercise price of dlra3dtta24 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 STI 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 2cmam000cmam000 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 |
| The rights of the holders of common stock may be subordinate to, and adversely affected by, the rights of holders of preferred sock 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 Superconductor 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 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 |