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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q (Mark One) X
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended July 3, 2004
 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from  to
 Commission File Number 0-21074 SUPERCONDUCTOR TECHNOLOGIES INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    77-0158076
(IRS Employer
Identification No.)
 460 Ward Drive,
Santa Barbara, California 93111-2356
(Address of principal executive offices & zip code) (805) 690-4500
(Registrants telephone number including area code)   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesX
    
    No
 Indicate by check mark
whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act YesX
    
    No
 As of August 5, there were 92,101,926 shares of the Registrants Common Stock outstanding. 1




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SUPERCONDUCTOR TECHNOLOGIES INC. INDEX TO FORM 10-Q Three and Six Months Ended July 3, 2004 SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
    
    
    3WHERE YOU CAN FIND MORE INFORMATION
    
    
    3PART I -
    
    FINANCIAL INFORMATIONITEM 1 - Financial StatementsCondensed Consolidated Statement of Operations
    
    
    4Condensed Consolidated Balance Sheet
    
    
    5Condensed Consolidated Statement of Cash Flows
    
    
    6Notes to Unaudited Interim Condensed Consolidated Financial Statements.
    
    
    7ITEM 2 -
Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30ITEM 4. Disclosure Controls and Procedures
    
    
    30PART II -
    
    OTHER INFORMATIONITEM 1 - Legal Proceedings
    
    
    31ITEM 2 - Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
    
    
    31ITEN 4  Submission of Matters to a Vote of Security Holders
    
    
    31ITEM 6 - Exhibits and Reports on Form 8-K(a) Exhibits
    
    
    32(b) Reports on Form 8-K
    
    
    34SIGNATURE
    
    
    
    
    34EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that involve risks and
uncertainties. We have made these statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Our
forward-looking statements relate to future events or our future performance
and include, but are not limited to, statements concerning our business
strategy, future commercial revenues, market growth, capital requirements, new
product introductions, expansion plans and our funding requirements. 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 terminology such as may, will, could,
should, expects, anticipates, intends, plans, believes, seeks,
estimates and other comparable terminology. Forward-looking statements are not guarantees of future performance and
are subject to various risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual results may differ materially from those
expressed in forward-looking statements. They can be affected by many factors,
including, those discussed under the caption Managements Discussion and
Analysis of Financial Condition and Results of Operations. Forward-looking
statements are based on information presently available to senior management,
and we do not assume any duty to update our forward-looking statements. 
 WHERE YOU CAN FIND MORE INFORMATION As a public company, we are required to file annually, quarterly and
special reports, proxy statements and other information with the SEC. You may
read and copy any of our materials on file with the SEC at the SECs Public
Reference Room at 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549, as well as at the SECs regional office at 5757 Wilshire Boulevard,
Suite 500, Los Angeles, California 90036. Our filings are available to the
public over the Internet at the SECs website at http:\\.www.sec.gov. Please
call the SEC at 1-800-SEC-0330 for further information on the Public Reference
Room. STI also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual
Report at no charge to investors upon request and makes electronic copies of
its most recently filed reports available through its website at
www.suptech.com as soon as reasonably practicable after filing such material
with the SEC. 3




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements SUPERCONDUCTOR TECHNOLOGIES INC. 
 CONSOLIDATED STATEMENT OF OPERATIONS  Three Months Ended
    
    Six Months EndedJune 28, 2003
    
    July 3, 2004
    
    June 28, 2003
    
    July 3, 2004Net revenues:Net commercial product revenues
    
    $
    8,939,000
    
    
    $
    4,552,000
    
    
    $
    14,060,000
    
    
    $
    7,735,000Government and other contract
revenues
    
    
    2,292,000
    
    
    
    1,752,000
    
    
    
    4,742,000
    
    
    
    3,993,000Sub license royalties
    
    
    32,000
    
    
    
    8,000
    
    
    
    41,000
    
    
    
    28,000Total net revenues
    
    
    11,263,000
    
    
    
    6,312,000
    
    
    
    18,843,000
    
    
    
    11,756,000Costs and expenses:Cost of commercial product revenues
    
    
    6,503,000
    
    
    
    5,030,000
    
    
    
    11,300,000
    
    
    
    8,813,000Contract research and development
    
    
    1,548,000
    
    
    
    1,165,000
    
    
    
    2,933,000
    
    
    
    2,677,000Other research and development
    
    
    1,606,000
    
    
    
    1,142,000
    
    
    
    3,317,000
    
    
    
    2,481,000Selling, general and administrative
    
    
    4,580,000
    
    
    
    4,336,000
    
    
    
    12,562,000
    
    
    
    8,953,000Restructuring expenses
    
    
    
    
    
    
    2,513,000
    
    
    
    
    
    
    
    2,513,000Total costs and expenses
    
    
    14,237,000
    
    
    
    14,186,000
    
    
    
    30,112,000
    
    
    
    25,437,000Loss from operations
    
    
    (2,974,000
    )
    
    
    (7,874,000
    )
    
    
    (11,269,000
    )
    
    
    (13,681,000
    )Interest income
    
    
    36,000
    
    
    
    23,000
    
    
    
    103,000
    
    
    
    47,000Interest expense
    
    
    (123,000
    )
    
    
    (1,033,000
    )
    
    
    (238,000
    )
    
    
    (1,160,000
    )Net loss
    
    $
    (3,061,000
    )
    
    $
    (8,884,000
    )
    
    $
    (11,404,000
    )
    
    $
    (14,794,000
    )Basic and diluted loss per common share
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.19
    )
    
    $
    (0.20
    )Weighted average number of common
shares outstanding
    
    
    60,048,444
    
    
    
    79,166,809
    
    
    
    59,937,883
    
    
    
    73,994,379
 See accompanying notes to the condensed consolidated financial statements 4




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SUPERCONDUCTOR TECHNOLOGIES INC. 
 CONSOLIDATED BALANCE SHEET
 December 31,
    
    July 3,2003
    
    2004(See Note)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    11,144,000
    
    
    $
    11,883,000Accounts receivable, net
    
    
    8,809,000
    
    
    
    1,897,000Inventory
    
    
    8,802,000
    
    
    
    13,724,000Prepaid expenses and other current assets
    
    
    760,000
    
    
    
    1,327,000Total Current Assets
    
    
    29,515,000
    
    
    
    28,831,000Property and equipment, net of accumulated depreciation of
$15,061,000 and $15,813,000, respectively
    
    
    12,534,000
    
    
    
    11,727,000Patents, licenses and purchased technology, net of accumulated amortization of
$3,173,000 and $3,293,000, respectively
    
    
    5,367,000
    
    
    
    4,127,000Goodwill
    
    
    20,107,000
    
    
    
    20,107,000Other assets
    
    
    600,000
    
    
    
    571,000Total Assets
    
    $
    68,123,000
    
    
    $
    65,363,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Line of credit
    
    $
    3,308,000
    
    
    $
    775,000Accounts payable
    
    
    5,154,000
    
    
    
    3,504,000Accrued expenses
    
    
    4,832,000
    
    
    
    3,791,000Current portion of capitalized lease obligations and long term debt
    
    
    645,000
    
    
    
    66,000Total Current Liabilities
    
    
    13,939,000
    
    
    
    8,136,000Capitalized lease obligations and long term-debt
    
    
    76,000
    
    
    
    43,000Other long term liabilities
    
    
    1,888,000
    
    
    
    1,622,000Total Liabilities
    
    
    15,903,000
    
    
    
    9,801,000Commitments and contingencies-Note 5, 7 and 8Stockholders Equity:Preferred stock, $.001 par value, 2,000,000 shares authorized,
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.001 par value, 125,000,000 shares
authorized, 68,907,109 and 92,101,926 shares issued and outstanding, respectively
    
    
    69,000
    
    
    
    92,000Capital in excess of par value
    
    
    168,776,000
    
    
    
    186,889,000Notes receivable from stockholder
    
    
    (820,000
    )
    
    
    (820,000
    )Accumulated deficit
    
    
    (115,805,000
    )
    
    
    (130,599,000
    )Total Stockholders Equity
    
    
    52,220,000
    
    
    
    55,562,000Total Liabilities and Stockholders Equity
    
    $
    68,123,000
    
    
    $
    65,363,000
 See accompanying notes to the condensed consolidated financial statements Note: December 31, 2003 balances were derived from audited financial statements 5




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SUPERCONDUCTOR TECHNOLOGIES INC. 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 Six Months EndedJune 28, 2003
    
    July 3, 2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (11,404,000
    )
    
    $
    (14,794,000
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,521,000
    
    
    
    1,757,000Asset write-down
    
    
    
    
    
    
    1,834,000Warrant charges
    
    
    
    
    
    
    893,000Changes in assets and liabilities:Accounts receivable
    
    
    (113,000
    )
    
    
    6,912,000Inventory
    
    
    (2,242,000
    )
    
    
    (4,922,000
    )Prepaid expenses and other current assets
    
    
    (176,000
    )
    
    
    (567,000
    )Patents, licenses and purchased technology
    
    
    (209,000
    )
    
    
    (218,000
    )Other assets
    
    
    (129,000
    )
    
    
    30,000Accounts payable, accrued expenses and other long-
term liabilities
    
    
    1,723,000
    
    
    
    (2,957,000
    )Net cash used in operating activities
    
    
    (11,029,000
    )
    
    
    (12,032,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,612,000
    )
    
    
    (1,326,000
    )Net cash used in investing activities
    
    
    (1,612,000
    )
    
    
    (1,326,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from short-term borrowings
    
    
    1,616,000
    
    
    
    4,577,000Payments on short-term borrowings
    
    
    (463,000
    )
    
    
    (7,110,000
    )Payments on long-term obligations
    
    
    
    
    
    
    (611,000
    )Proceeds from sale of common stock and warrants and exercise of stock
options
    
    
    10,069,000
    
    
    
    17,241,000Net cash
provided by financing activities
    
    
    11,222,000
    
    
    
    14,097,000Net
(decrease) increase in cash and cash equivalents
    
    
    (1,419,000
    )
    
    
    739,000Cash and cash equivalents at beginning of period
    
    
    18,191,000
    
    
    
    11,144,000Cash and cash equivalents at end of period
    
    $
    16,772,000
    
    
    $
    11,883,000
 See accompanying notes to the condensed consolidated financial statements. 6




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SUPERCONDUCTOR TECHNOLOGIES INC. 
 NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. General Superconductor Technologies Inc. was incorporated in Delaware on May 11,
1987 and maintains its headquarters in Santa Barbara, California. The Company
has operated in a single industry segment, the research, development,
manufacture and marketing of high-performance filters to service providers and
original equipment manufacturers in the mobile wireless communications
industry. The Companys principal commercial product, the SuperLink Rx®,
combines high-temperature superconductors with cryogenic cooling technology to
produce a filter with significant advantages over conventional filters. From
1987 to 1997, the Company was engaged primarily in research and development and
generated revenues primarily from government research contracts. The Company
began full-scale commercial production of the SuperLink Rx® in 1997 and shipped
1,884 units in 2003 and 353 units in the six months ended July 3, 2004. The Company continues to be involved as either contractor or subcontractor
on a number of contracts with the United States government. These contracts
have been and continue to provide a significant source of revenues for the
Company. For the six months ended June 28, 2003 and July 3, 2004, government
related contracts account for 26% and 33%, respectively, of the Companys net
revenues. The unaudited consolidated financial information furnished herein has been
prepared in accordance with generally accepted accounting principles and
reflects all adjustments, consisting only of normal recurring adjustments,
which in the opinion of management, are necessary to fairly state the Companys
financial position, the results of its operations and its cash flows for the
periods presented. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates and
such differences may be material to the financial statements. This quarterly
report on Form 10-Q should be read in conjunction with the Companys Form 10-K
for the year ended December 31, 2003. The results of operations for the three
and six months ended July 3, 2004 are not necessarily indicative of results for
the entire fiscal year ending December 31, 2004. 2. Summary of Significant Accounting Policies Basis of Presentation The
Companys independent registered public accounting firm have included in their audit report for 2003-year
an explanatory paragraph expressing doubt about the Companys 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. In
2003, the Company incurred a net loss of $11,345,000 and negative cash flows
from operations of $18,458,000. For the six months ended July 3, 2004, the
Company had a net loss of $14,794,000 and negative cash flows from operations
of $12,032,000. In response, the Company adjusted its inventory build plan,
reduced direct and indirect labor, cut certain fixed costs and implemented a
reduced workweek. The Company also implemented a restructuring program consolidating its
research and development operations in Sunnyvale into its Santa Barbara
facility, eliminating an additional 50 positions and accerating the
implementation of a new lower cost wafer deposition process. The Company completed two financing transactions during the quarter ended
July 3, 2004. First, the Company closed a transaction on April 28, 2004 to
expand its credit facility. Silicon Valley Bank amended the Companys
existing line of 7




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credit to increase borrowing capacity from 80% to 95% of
eligible accounts receivable. The Company concurrently secured a
commitment for a $2.0 million
secured bridge loan from an investor. The investor subsequently funded $1.5
million of the bridge loan. The Company issued to the lenders warrants to
purchase in the aggregate 600,000 shares of common stock at $1.85 per share.
The bridge loan was subsequently paid in full on May 26, 2004. Upon repayment
of the bridge loan the Silicon Valley credit facility reverted back to it
original terms. Second, the Company completed a public offering of 23,000,000 shares of
common stock at $0.80 per share during the quarter raising net
proceeds of $16.8 million. Based on current forecasts, the Company believes it has sufficient
resources to fund normal operations into 2005. It needs to significantly
increase sales to achieve profitability and positive cash flows. If it is
unable to do so, it may need additional debt or equity financing. The
Company cannot assure you that its cash resources will be sufficient to fund
the growth of its business. Its cash requirements will depend on numerous
factors, including the rate of growth of its sales, the timing and levels of
products purchased, payment terms and credit limits from manufacturers, the
timing and level of its accounts receivable collections and its ability to
manage its business profitability. There is no assurance that additional financing (public or private) will
be available on acceptable terms or at all. If it issues 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 the Company
cannot raise needed funds, it might be forced to make further substantial
reductions in its operating expenses, which could adversely affect its ability
to implement its current business plan and ultimately its viability as a
company. The Companys interim financial statements have been prepared assuming
that it will continue as a going concern. The factors described above raise
substantial doubt about its ability to continue as a going concern. These
financial statements do not include any adjustments that might result from this
uncertainty. Principles of Consolidation The interim condensed consolidated financial statements include the
accounts of Superconductor Technologies Inc. and its wholly owned subsidiaries
(the Company). 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. Accounts Receivable The Company sells predominantly to entities in the wireless communications
industry and to entities of the United States government. The Company grants
uncollateralized credit to its customers. The Company performs ongoing credit
evaluations of its customers before granting credit. Revenue Recognition Commercial revenues are principally derived from the sale of the Companys
SuperLink Rx® products and are recognized once all of the following conditions
have been met: a) an authorized purchase order has been received in writing, b)
customers credit worthiness has been established, c) shipment of the product
has occurred, d) title has transferred, and e) if stipulated by the contract,
customer acceptance has occurred and all significant vendor obligations, if
any, have been satisfied. Contract revenues are principally generated under research and development
contracts. Contract revenues are recognized utilizing the
percentage-of-completion method measured by the relationship of costs incurred
to total estimated contract costs. If the current contract estimate were to
indicate a loss, utilizing the funded amount of the contract, a provision would
be made for the total anticipated loss. Revenues from research related
activities are derived primarily from contracts with agencies of the United
States Government. Credit risk related to accounts receivable arising from
such contracts is considered minimal. These contracts include cost-plus, fixed
price and cost sharing arrangements and are generally short-term in nature. 8




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All payments to the Company for work performed on contracts with agencies
of the U.S. Government are subject to adjustment upon audit by the Defense
Contract Audit Agency. These audits have been completed and agreed
to through 2001. Based on historical experience and review of current
projects in process, management believes that the audits will not have a
significant effect on the financial position, results of operations or cash
flows of the Company. Warranties The Company offers warranties generally ranging from one to five years,
depending on the product and negotiated terms of purchase agreements with its
customers. Such warranties require the Company to repair or replace defective
product returned to the Company during such warranty period at no cost to the
customer. An estimate by the Company for warranty related costs is recorded by
the Company at the time of sale based on its actual historical product return
rates and expected repair costs. Such costs have been within managements
expectations. Guarantees In connection with the sales of its commercial products, the Company
indemnifies, without limit or term, its 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 its products or other claims arising from its
products. The Company cannot reasonably develop an estimate of the maximum
potential amount of payments that might be made under its guarantee because of
the uncertainty as to whether a claim might arise and how much it might total. 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. Provision for potentially obsolete
or slow moving inventory is made based on managements analysis of inventory
levels and sales forecasts. Property and Equipment Property and equipment are recorded at cost. 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 as other income or
expense. 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. is recorded at its estimated fair value and is
amortized using the straight-line method over seven years. Goodwill Goodwill represents the excess of purchase price over fair value of net
assets acquired. Goodwill is tested for impairment annually in the fourth
quarter after the annual planning process, or earlier if events occur which
require an impairment analysis be performed. The first step of the impairment
test, used to identify potential impairment, compares the fair value of a
reporting unit with its carrying value, including goodwill. If the fair value
of a reporting unit exceeds its carrying value, goodwill of the 9




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reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test shall be
performed to measure the amount of impairment loss. The second step of the
goodwill impairment test, used to measure the amount of impairment loss,
compares the implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
shall be recognized in an amount equal to that excess. Long-Lived Assets The realizability of long-lived assets is evaluated periodically as events
or circumstances indicate a possible inability to recover the carrying amount.
Such evaluation is based on various analyses, including cash flow and
profitability projections. The analyses necessarily involve significant
management judgment. In the event the projected undiscounted cash flows are
less than net book value of the assets, the carrying value of the assets will
be written down to their estimated fair value. Loss Contingencies In the normal course of business the Company is subject to claims and
litigation. 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 defending the Company in such matters are expensed as
incurred. The company is currently involved as a defendant in several lawsuits  a
patent infringement case and several substantially identical securities class
actions. These matters are discussed below in Legal Proceedings. The
company does not believe that a loss is probable or reasonably estimable in any
of these cases and therefore have not recorded any liabilities relating to
these proceedings. The company periodically reassesses its potential
liability as additional information becomes available. If the company later
determines that a loss is probable and the amount reasonably estimable, the
company would record a reserve for the potential loss. The ultimate amount of
the loss, if any, could materially impact our results of operations, financial
condition or cash flows. Income Taxes The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income
Taxes. SFAS 109 utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Companys financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of changes
in the tax laws or rates. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. Marketing Costs All costs related to marketing and advertising the Companys products are
expensed as incurred or at the time the advertising takes place. Advertising
costs were not material in each of the quarters and six months ended June 28,
2003 and July 3, 2004. 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. Potentially dilutive shares are not included in the
calculation of diluted loss per share because their effect is antidilutive. Stock-based Compensation As permitted under Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation, the Company has
elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees in accounting for its stock options and other
stock-based employee awards. Pro forma information regarding net loss and loss
per share, as calculated under the provisions of SFAS 123, are disclosed in the
notes to the financial statements. 10




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The Company accounts for equity securities
issued to non-employees in accordance with the provision of SFAS 123 and
Emerging Issues Task Force 96-18. If the Company had elected to recognize compensation expense for employee
awards based upon the fair value at the grant date consistent with the
methodology prescribed by SFAS 123, the Companys net loss and net loss per
share would have been increased to the pro forma amounts indicated below: Three Months Ended
    
    Six Months EndedJune 28, 2003
    
    July 3, 2004
    
    June 28, 2003
    
    July 3, 2004Net loss:As reported
    
    $
    (3,061,000
    )
    
    $
    (8,884,000
    )
    
    $
    (11,404,000
    )
    
    $
    (14,794,000
    )Stock-based
employee
compensation
included in net
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based
compensation
expense determined
under fair value
method
    
    
    (1,027,000
    )
    
    
    (1,593,000
    )
    
    
    (1,935,000
    )
    
    
    (3,357,000
    )Pro forma
    
    $
    (4,088,000
    )
    
    
    (10,477,000
    )
    
    $
    (13,339,000
    )
    
    
    (18,151,000
    )Basic and DilutedLoss per ShareAs reported
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.19
    )
    
    $
    (0.20
    )Stock-based
compensation
expense determined
under fair value
method
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.05
    )Pro forma
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.22
    )
    
    $
    (0.25
    )
 Due to the fact that the Companys employee stock options have
characteristics significantly different from those of traded options and any
changes in the subjective input assumptions can materially affect the fair
value estimates, management does not believe that the existing models provide a
reliable single measure of the fair value of its employee stock options.
Therefore, the Company believes that the pro forma net expense per SFAS 123
calculated above is not a reliable measure of the costs of the Companys stock
option plans. Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The significant estimates in the preparation of the
financial statements relate to the assessment of the carrying amount of
accounts receivable, inventory, intangibles, estimated provisions for warranty
costs, accruals for restructuring and lease abandonment costs in connection
with the Conductus acquisition, income taxes and disclosures related to
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. The Company estimates that the
carrying amount of the debt approximates fair value based on the Companys
current incremental borrowing rates for similar types of borrowing
arrangements. 11




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##### Table of Contents



Comprehensive Income (Loss) The
Company has no items of other comprehensive income (loss) in any period and
does not report comprehensive income. Segment Information The Company operates in a single business segment, the development,
manufacture and marketing of high performance products to service providers,
systems integrators and original equipment manufacturers in the commercial
wireless telecommunications industry. The Companys principal commercial
product, the SuperLink Rx® combines high-temperature superconductors with
cryogenic cooling technology to produce a filter with significant advantages
over conventional filters. We currently sell most of our product directly to
wireless network operators in the United States. Net revenues derived
principally from government research and development contracts are presented
separately on the statement of operations for all periods presented. Management
views its government research and development contracts as a supplementary
source of revenue to fund its development of high temperature superconducting
products. Net commercial product revenues are derived from the following products: For the three months ended
    
    For the six months endedJune 28, 2003
    
    July 3, 2004
    
    June 28, 2003
    
    July 3, 2004SuperLink Rx
    
    $
    8,200,000
    
    
    $
    3,797,000
    
    
    $
    12,629,000
    
    
    $
    6,396,000SuperPlex
multiplexer
    
    
    575,000
    
    
    
    480,000
    
    
    
    1,204,000
    
    
    
    911,000SuperLink Tx
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    Other
    
    
    164,000
    
    
    
    275,000
    
    
    
    202,000
    
    
    
    428,000Total
    
    $
    8,939,000
    
    
    $
    4,552,000
    
    
    $
    14,060,000
    
    
    $
    7,735,000
 Certain Risks and Uncertainties During the two year period ended December 31, 2003, the Company sold 2,811
SuperFilter® units and in the six months ended July 3, 2004 it sold 353
SuperFilter® units. The Company has continued to incur operating losses. The
Companys long-term prospects and execution of its business plan are dependent upon the continued and increased
market acceptance for the product. The Company currently sells most of its products directly to wireless
network operators in the United States and its product sales have historically
been concentrated in a small number of customers. In 2002 U.S. Cellular and
ALLTEL accounted for 8% and 84% of our net commercial revenues, respectively,
and 19% and 24% of accounts receivable, respectively. In 2003, ALLTEL and
Verizon Wireless our two largest customers accounted for 70% and 15% of our net
commercial revenues, respectively, and 21% and 25% of accounts receivable,
respectively. In the six months ended July 3, 2004, ALLTEL and Verizon
Wireless, our two largest customers, accounted for 59% and 25% of our net
commercial revenues, respectively, and 22% and 11% of accounts receivable,
respectively. The loss of, or reduction in, sales to any of these customers
could have a material adverse effect on the Companys business, financial
condition, results of operations and cash flows. 12




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##### Table of Contents



The Company currently relies on two suppliers for purchases of high
quality substrates for growth of high-temperature superconductor films. In connection with the sales of its commercial products, the Company
indemnifies, without limit or term, its 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 its products or other claims arising from its
products. The Company cannot reasonably develop an estimate of the maximum
potential amount of payments that might be made under its guarantee because of
the uncertainty as to whether a claim might arise and how much it might total. Recent Accounting Pronouncements Needs updating In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The Company adopted
the provisions of FIN 46 effective February 1, 2003 and such adoption did not
have an impact on its consolidated financial statements since it currently has
no variable interest entities. In December 2003, the FASB issued FIN 46R with
respect to variable interest entities created before January 31, 2003, which
among other things, revised the implementation date to the first fiscal year or
interim period ending after March 15, 2004, with the exception of Special
Purpose Entities (SPE). The consolidation requirements apply to all SPEs in
the first fiscal year or interim period beginning after December 15, 2003. The
adoption of the provisions of FIN 46R did not have an impact on the Companys
consolidated financial statements. 3. Short Term Borrowings On March 28, 2003, the Company entered into an accounts receivable
purchase agreement with a bank. The line was recently extended for an
additional year until March 17, 2005. The line of credit is structured as a
sale of accounts receivable. The agreement provides for the sale of up to $5
million of eligible accounts receivable, with advances to the Company totaling
80% of the receivables sold. Advances bear interest at the prime rate (4.25%
at July 3, 2004) plus 2.50% subject to a minimum monthly charge. Outstanding
amounts under this borrowing facility at July 3, 2004 totaled $775,000 and are
repaid upon collection of the underlying receivables sold. The line of credit
was amended on April 25, 2004. On April 28, 2004 the Company temporarily expanded its credit facility.
Silicon Valley Bank temporarily amended the Companys existing line of credit
to increase borrowing capacity from 80% to 95% of eligible accounts receivable
on up to the sale of $2.5 million of eligible accounts receivable. Advances
under the modified agreement bore interest at prime rate plus 5.125%. Upon
repayment of the bridge loan described below this credit facility
reverted back to its original terms Advances under the agreement are collateralized by all the Companys
assets. Under the terms of the agreement, the Company continues to service the
sold receivables and is subject to recourse provisions. The
Company concurrently secured a commitment for a $2.0 million secured bridge loan from
an investor. The bridge loan bore interest at 12% per annum, was due by July
31, 2004 and included penalty provisions if there were any defaults under the
agreement. The investor subsequently funded $1.5 million of the bridge loan.
The bridge loan was collateralized by all the Companys assets and was
subordinated to the Silicon Valley Bank line of credit. The bridge loan was
subsequently paid in full on May 26, 2004. In connection with modification of the existing credit facility with
Silicon Valley Bank and $2 million bridge loan, the Company issued to the
lenders warrants to purchase in the aggregate 600,000 shares of common stock at
$1.85 per share. These warrants expire on April 28, 2011. The fair value of the
warrants issued in connection with the bridge loans were estimated using the
Black-Scholes option pricing method, totaled $802,000 and were accounted for as
debt issuances costs and amortized over the term of the loan. Assumptions used
in the calculation were: dividends of zero percent each year, expected
volatilities of 112%, expected life of 7 years and risk free interest rate of
3.99%. 13




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##### Table of Contents



4. Stockholders Equity Common Stock In the quarter ended July 3, 2004 the Company raised net proceeds of
$16,785,000, net of offering costs of $1,615,000, from the public sale of 23,000,000 shares of common stock at $0.80
per share based on a negotiated discount to market. This transaction caused the exercise price and the number of shares of the
warrants under the 2004 Bridge Loan to be adjusted to $1.63 and 681,761,
respectively. The exercise price and shares of the warrants under the Series E
convertible Preferred Stock was not affected. Stock Options The following is a summary of stock option transactions under the
Companys stock option plans: Weighted Average
    
    Number of Options
    
    Weighted AverageNumber of Shares
    
    Price Per Share
    
    Exercise Price
    
    Exercisable
    
    Exercise PriceBalance at December 31, 2003
    
    
    7,545,321
    
    
    $
    0.83 - $49.375
    
    
    $
    6.238
    
    
    
    3,268,894
    
    
    $
    8.21Granted
    
    
    1,580,959
    
    
    $
    0.87 -   $7.03
    
    
    $
    6.049Exercised
    
    
    (80,677
    )
    
    $
    1.57 -   $6.93
    
    
    $
    2.987Canceled
    
    
    (462,934
    )
    
    $
    1.00 - $41.25
    
    
    $
    5.012Balance at July 3, 2004
    
    
    8,582,669
    
    
    $
    0.83 - $49.375
    
    
    $
    6.178
    
    
    
    5,048,187
    
    
    $
    6.34
 Options for 80,677 shares of common stock were exercised for $240,851
during the period. The outstanding options expire by the end of June 2014. The
exercise prices for these options range from $0.83 to $49.38 per share, for an
aggregate exercise price of approximately $54.4 million. At July 3, 2004, there
were 2,337,283 shares of common stock available for granting future options. Warrants In connection with modification of the existing credit facility with
Silicon Valley Bank and $2 million bridge loan, the Company issued to the
lenders warrants to purchase in the aggregate 600,000 shares of common stock at
$1.85 per share. These warrants expire on April 28, 2011. The bridge lender
warrants contain weighted average antidilution provisions which adjust the
warrant exercise price and number of shares in the event the Company sells
equity securities at a discount to then prevailing market prices The amount of
the adjustment depends on the size of the below-market transaction and the
amount of the discount to the market price. These warrants include call, net
exercise, registration rights and penalty provisions if the sale of the shares
underlying the warrants were not registered within a certain
timeframe or if the registration statement effectiveness is not
maintained. The following is a summary of outstanding warrants at July 3, 2004: Common SharesCurrentlyTotal
    
    Exercisable
    
    Price per Share
    
    Expiration DateWarrant related to issuance of Series E Preferred Stock
    
    
    1,166,477
    
    
    
    1,166,477
    
    
    $
    19.28
    
    
    September 29, 2005Warrants related to issuance of common stock
    
    
    397,857
    
    
    
    397,857
    
    
    
    5.50
    
    
    March 10, 20071,406,581
    
    
    
    1,406,581
    
    
    
    1.19
    
    
    December 17, 2007*1,162,790
    
    
    
    1,162,790
    
    
    
    2.90
    
    
    June 24, 2008*Warrants related to sales agreements
    
    
    1,000,000
    
    
    
    482,092
    
    
    
    4.00
    
    
    August 27, 2004
 14




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##### Table of Contents



Common SharesCurrentlyTotal
    
    Exercisable
    
    Price per Share
    
    Expiration DateWarrants related to April 2004 Bridge Loans
    
    
    681,761
    
    
    
    681,761
    
    
    
    1.63
    
    
    April 28, 2011*Warrants assumed in connection with the Conductus,
Inc. acquisition
    
    
    219,690
    
    
    
    219,690
    
    
    
    6.667
    
    
    December 10, 2004*72,756
    
    
    
    72,756
    
    
    
    22.383
    
    
    August 7, 20051,095,000
    
    
    
    1,095,000
    
    
    
    4.583
    
    
    September 27, 20076,000
    
    
    
    6,000
    
    
    
    31.25
    
    
    September 1, 2007Total
    
    
    7,208,912
    
    
    
    6,691,004
 * The terms of these warrants contain call provisions and net exercise
provisions, wherein instead of a cash exercise investors can elect to
receive common stock equal to the difference between the exercise price
and the average closing sale price for common shares over 10-30 days
immediately preceding the exercise date. During the six months ended July 3, 2004 the following warrants were exercised: Warrants
    
    
    
    
    
    Common Shares IssuedIn Accordance WithNet ExerciseWarrants Exercised
    
    Price per Share
    
    For Cash
    
    ProvisionsWarrants related to bank borrowings
    
    
    123,525
    
    
    $
    3-3.25
    
    
    $
    
    
    
    
    71,312Warrants related to issuance of common stock
    
    
    42,857
    
    
    
    5.50
    
    
    
    235,714
    
    
    
    Total
    
    
    166,382
    
    
    
    
    
    
    $
    235,714
    
    
    
    71,312
 5. Legal Proceedings Patent Litigation The Company is engaged in a patent dispute with ISCO
International, Inc. relating to U.S. Patent No. 6,263,215 entitled
Cryoelectronically Cooled Receiver Front End for Mobile Radio Systems. ISCO
filed a complaint on July 17, 2001 in the United States District Court for the
District of Delaware against the company and its wholly owned subsidiary,
Conductus, Inc. The ISCO complaint alleged that the Companys SuperFilter
product and Conductus ClearSite® product infringe ISCOs patent. The matter
went to trial on March 17, 2003. On April 3, 2003, the jury returned a unanimous verdict that the Companys
SuperFilter III product does not infringe the patent in question, and that
ISCOs patent is invalid and unenforceable. The jury also awarded the company
$3.8 million in compensatory damages based upon a finding that ISCO engaged in
unfair competition and acted in bad faith by issuing press releases and
contacting our customers asserting rights under this patent. On April 17, 2003, the company filed a Motion for Attorneys Fees and
Disbursements, in which the company asked the court to award the company its
attorneys fees and other litigation expenses. On the same date, ISCO filed a
motion, asking the court to overturn the verdict and grant a new trial. In
August 2003, the court rejected ISCOs request to overturn the jurys verdict
that the patent is invalid and not infringed by the SuperFilter III product,
and accepted the jurys verdict that the patent is unenforceable because of
inequitable conduct committed by one of the alleged inventors. ISCO
subsequently filed a notice of appeal as to this portion of the courts
decision. The court overturned the jurys verdict of unfair competition and bad
faith on the part of ISCO and the related $3.8 million compensatory damage
award to the company, and also denied the company request for reimbursement of
its legal fees associated with the case. The company has filed a notice of
appeal as to this portion of the courts decision. Litigation expenses on the ISCO matter totaled $660,000 and $4,694,000 for
the three and six month periods ended June 28, 2003 and $186,000 and $413,000
for the three and six month periods ended July 3, 2004, respectively. Class Action Lawsuits The Company recently has been named as a defendant in several
substantially identical class action lawsuits. The plaintiffs in these
lawsuits allege securities law violations by the company and certain of its
officers and directors under SEC 15




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##### Table of Contents



Rule 10b-5 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaints were each filed on
behalf of purported classes of people who purchased our stock during the period
between January 9, 2004 and March 1, 2004. The plaintiffs base their
allegations primarily on the fact that the company did not achieve our
forecasted revenue guidance of $10 to $13 million for the first quarter of
2004. The complaints seek unspecified damages. The Company believes the
complaints are without merit and intend to defend these actions vigorously.
However, the Company cannot assure you that the Company will prevail in these
actions, and, if the outcome is unfavorable to the Company, the Companys
reputation, profitability and share price could be adversely affected. 6. Earnings Per Share The computation of per share amounts for the three and six month periods
ended June 28, 2003 and July 3, 2004 is based on the average number of common
shares outstanding for the period. Options and warrants to purchase 18,725,825
and 15,791,581 shares of common stock during the three and six months periods
ended June 28, 2003 and July 3, 2004, respectively, were not considered in the
computation of diluted earnings per share because their inclusion would be
antidilutive. 7. Commitments and Contingencies Operating Leases The Company leases its offices and production facilities under
non-cancelable operating leases that expire at various times over the next ten
years. Generally leases contain escalation clauses for increases in annual
renewal options and require the Company to pay utilities, insurance, taxes and
other operating expenses. For the three and six months ended June 28, 2003, rent expense was
$302,000 and $622,000, respectively. For the three and six months ended July 3,
2004, rent expense was $335,000 and $646,000, respectively. Capital Leases The Company leases certain property and equipment under capital lease
arrangements that expire at various dates through 2007. The leases bear
interest at various rates ranging from 8.56% to 14.95%. Patents and Licenses The Company has 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 the Company fails to pay minimum annual
royalties, these licenses may automatically become non-exclusive or be
terminated. These royalty obligations terminate in 2009 to 2020. Royalty
expenses totaled $179,000 in 2001, $294,000 in 2002 and $572,000 in 2003. For
the three and six months ended June 28, 2003, royalty expense totaled $115,000
and $245,000, respectively. For the three and six months ended July 3, 2004,
royalty expense totaled $159,000 and $275,000, respectively. Under the terms of
certain royalty agreements , royalty payments made may be subject to audit.
There have been no audits to date and the Company does 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: Year ending December 31,
    
    Licenses
    
    Operating Leases
    
    Capital LeasesRemainder of 2004
    
    $
    135,000
    
    
    $
    1,239,000
    
    
    $
    42,0002005
    
    
    270,000
    
    
    
    2,440,000
    
    
    
    52,0002006
    
    
    270,000
    
    
    
    1,552,000
    
    
    
    22,0002007
    
    
    253,000
    
    
    
    1,405,000
    
    
    
    15,0002008
    
    
    158,000
    
    
    
    1,448,000
    
    
    
    
 16




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##### Table of Contents



Year ending December 31,
    
    Licenses
    
    Operating Leases
    
    Capital LeasesThereafter
    
    
    1,775,000
    
    
    
    4,516,000
    
    
    
    Total payments
    
    $
    2,861,000
    
    
    $
    12,600,000
    
    
    
    131,000Less: amount representing
interest
    
    
    
    
    
    
    
    
    
    
    (22,000
    )Present value of minimum lease
    
    
    
    
    
    
    
    
    
    
    109,000Less current portion
    
    
    
    
    
    
    
    
    
    
    (66,000
    )Long term portion
    
    
    
    
    
    
    
    
    
    $
    43,000
 In connection with the acquisition of Conductus, Inc. as of December 31,
2002 operating leases with remaining commitments totaling $2,044,000 and
$1,758,000 have been abandoned or are considered unfavorable, respectively. A
liability totaling $1,995,000 representing the present value of the minimum
lease payments and executory costs was recorded at December 18, 2002 relating
to the abandoned leases. A liability totaling $1,140,000 representing the
present value of the difference between the fair market rental and lease
commitment was recorded at December 31, 2002 relating to unfavorable leases. As
of July 3, 2004 the remaining commitments on these operating leases total
$990,000 and $689,000, respectively. At July 3, 2004, the present value of the
remaining liability related to the abandoned leases and unfavorable leases
totaled $989,000 and $649,000, respectively. These amounts are included in
accrued liabilities. Note 8  Contractual Guarantees and Indemnities Warranties The Company establishes reserves for future product warranty costs that
are expected to be incurred pursuant to specific warranty provisions with its
customers. The Companys warranty reserves are established at the
time of sale and updated throughout the warranty period based upon numerous
factors including historical warranty return rates and expenses over various
warranty periods. During its normal course of business, the Company makes certain
contractual guarantees and indemnities pursuant to which the Company may be
required to make future payments under specific circumstances. The Company has
not recorded any liability for these contractual guarantees and indemnities in
the accompanying consolidated financial statements. A description of
significant contractual guarantees and indemnities existing as of July 3, 2004
is included below: Intellectual Property Indemnities The Company indemnifies certain customers and its contract manufacturers
against liability arising from third-party claims of intellectual property
rights infringement related to the Companys 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, the
Company is unable to determine the maximum amount of losses that it could incur
related to such indemnifications. Director and Officer Indemnities and Contractual Guarantees The Company has entered into indemnification agreements with certain of
its directors and executive officers which require the Company to indemnify
such individuals to the fullest extent permitted by Delaware law. The
Companys 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, the Company is unable to determine the maximum
amount of losses that it could incur relating to such indemnifications.
Historically, any amounts payable pursuant to such director and officer 17




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##### Table of Contents



indemnifications have not had a material negative effect on the Companys
business, financial condition or results of operations. The Company has also entered into severance and change in control
agreements with certain of its executives. These agreements provide for the
payment of specific compensation benefits to such executives upon the
termination of their employment with the Company. General Contractual Indemnities/Products Liability In
connection with the sales of its commercial products, the Company
indemnifies, without limit or term, its 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 its
products or other claims arising from its products. The Company
cannot reasonably develop an estimate of the maximum potential amount
of payments that might be made under its guarantee because of the
uncertainty as to whether a claim might arise and how much it might
total. 9. Restructuring Expenses In the quarter ended July 3, 2004, the Company implemented a restructuring
program to streamline its operations and reduce its cost structure. In
connection with this during the quarter ended July 3, 2004 the Company recorded
cash and non-cash restructuring charges of $2.5 million. The Company
consolidated its research and development operations in Sunnyvale into its
Santa Barbara facility. Also, the Company reduced its workforce by
approximately 50 positions. The workforce reduction included reductions
associated with the Sunnyvale facilities consolidation, as well as other
strategic reductions in the organization. In addition, as part of the
consolidation the Company accelerated the implementation of a new, lower cost
wafer deposition process called Reactive Co-Evaporation. Accruals relating to
these restructuring charges are included in accrued expenses at July 3, 2004,
amounted to $214,000 and related to severances costs. As a result of these
cost reduction initiatives, the Company expects annual savings of approximately
$1.7 million per quarter as compared to the first quarter of 2004. The Company expects to complete the restructuring actions by the end of
the third quarter of 2004 and will therefore incur additional period expenses
in the third quarter of 2004 to relocate machinery and equipment and employees
and lease abandonment costs relating to its Sunnyvale facility closed in July. A summary of the restructuring charges for the quarter ended July 3, 2004
and estimated charges for the subsequent quarter is as follows: Quarter EndedJuly 3, 2004
    
    Subsequent Quarter
    
    TotalSeverance costs
    
    $
    679,000
    
    
    
    
    
    
    $
    679,000Fixed assets write offs
    
    
    783,000
    
    
    
    
    
    
    
    783,000Purchased technology
write-off
    
    
    1,051,000
    
    
    
    
    
    
    
    1,051,000Lease abandonment costs
    
    
    
    
    
    $
    300,000
    
    
    
    300,000Facility consolidation
costs
    
    
    
    
    
    
    150,000
    
    
    
    150,000Employee relocation
cost
    
    
    
    
    
    
    300,000
    
    
    
    300,000Other
    
    
    
    
    
    
    125,000
    
    
    
    125,000Total
    
    $
    2,513,000
    
    
    $
    875,000
    
    
    $
    3,388,000
 18




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##### Table of Contents



10. Details of Certain Financial Statement Components and Supplemental
Disclosures of Cash Flow Information and Non-Cash Activities Balance Sheet Data: December 31,
    
    July 3,2003
    
    2004Accounts receivable:Accounts receivable-trade
    
    $
    6,766,000
    
    
    $
    928,000U.S. government accounts receivable-billed
    
    
    2,107,000
    
    
    
    1,039,000Less: allowance for doubtful accounts
    
    
    (64,000
    )
    
    
    (70,000
    )$
    8,809,000
    
    
    $
    1,897,000December 31,
    
    July 3,2003
    
    2004Inventories:Raw materials
    
    $
    1,941,000
    
    
    $
    3,020,000Work-in-process
    
    
    4,803,000
    
    
    
    3,687,000Finished goods
    
    
    2,861,000
    
    
    
    7,883,000Less inventory reserve
    
    
    (803,000
    )
    
    
    (866,000
    )$
    8,802,000
    
    
    $
    13,724,000December 31,
    
    July 3,2003
    
    2004Property and Equipment:Equipment
    
    $
    21,274,000
    
    
    $
    20,739,000Leasehold improvements
    
    
    5,891,000
    
    
    
    6,185,000Furniture and fixtures
    
    
    430,000
    
    
    
    488,00027,595,000
    
    
    
    27,412,000Less: accumulated depreciation and amortization
    
    
    (15,061,000
    )
    
    
    (15,685,000
    )$
    12,534,000
    
    
    $
    11,727,000
 At December 31, 2003 and July 3, 2004, equipment includes $1,430,000 of assets financed under capital lease arrangements, net of $1,220,000 and $1,356,000 of
accumulated amortization, respectively. Depreciation expense amounted to $553,000 and $1,141,000 for the three and six month periods ended June 28, 2003,
respectively and $671,000 and $1,333,000 for the three and six month periods ended July 3, 2004, respectively. In connection with a restructuring of the Companys
operations $1,492,000 of property and equipment cost and $709,000 of related accumulated amortization was written off. 19




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##### Table of Contents



December 31, 2003
    
    July 3, 2004Patents and Licenses:Patents pending
    
    $
    848,000
    
    
    $
    871,000Patents issued
    
    
    1,182,000
    
    
    
    1,357,000Less accumulated amortization
    
    
    (332,000
    )
    
    
    (389,000
    )Net patents issued
    
    
    850,000
    
    
    
    968,000Licenses
    
    
    3,310,000
    
    
    
    3,331,000Less accumulated amortization
    
    
    (2,322,000
    )
    
    
    (2,460,000
    )Net licenses
    
    
    988,000
    
    
    
    871,000Purchased technology
    
    
    3,200,000
    
    
    
    1,862,000Less accumulated amortization
    
    
    (519,000
    )
    
    
    (445,000
    )Net purchased technology
    
    
    2,681,000
    
    
    
    1,417,000$
    5,367,000
    
    
    $
    4,127,000
 Amortization expense related to these items totaled $189,000 and $380,000 for the three and six month periods ended June 28, 2003, respectively and $216,000 and
$423,000 for the three and six months ended July 3, 2004,
respectively. In connection with a restructuring of the
Companys operations in the second quarter of 2004, $1,338,000
of purchased technology cost and $287,000 of related accumulated
amortization was written off. Amortization expenses are expected to
total $771,000 in 2004, $500,000 in 2005 and $440,000 in each of the years 2006, 2007 and 2008. December 31, 2003
    
    July 3, 2004Accrued Expenses and Other Long Term Liabilities:Compensation related
    
    $
    2,153,000
    
    
    $
    1,578,000Warranty reserve
    
    
    494,000
    
    
    
    534,000Unfavorable lease costs
    
    
    823,000
    
    
    
    649,000Lease abandonment costs
    
    
    1,329,000
    
    
    
    989,000Product line exit costs
    
    
    913,000
    
    
    
    840,000Severance costs
    
    
    285,000
    
    
    
    232,000Other
    
    
    723,000
    
    
    
    591,0006,720,000
    
    
    
    5,413,000Less current portion
    
    
    (4,832,000
    )
    
    
    (3,791,000
    )Long term portion
    
    $
    1,888,000
    
    
    $
    1,622,000
 For the six months ended,June 28,
    
    July 3,2003
    
    2004Warranty Reserve Activity:Beginning balance
    
    $
    351,000
    
    
    $
    494,000Additions
    
    
    95,000
    
    
    
    40,000Deductions
    
    
    (32,000
    )
    
    
    Ending balance
    
    $
    414,000
    
    
    $
    534,000Unfavorable Lease Costs:Beginning balance
    
    $
    1,140,000
    
    
    $
    823,000Additions
    
    
    
    
    
    
    Deductions
    
    
    (154,000
    )
    
    
    (174,000
    )Ending balance
    
    $
    986,000
    
    
    $
    649,000
 20




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##### Table of Contents



For the six months ended,June 28,
    
    July 3,2003
    
    2004Lease Abandonment Costs:Beginning balance
    
    $
    1,995,000
    
    
    $
    1,329,000Additions
    
    
    
    
    
    
    Deductions
    
    
    (310,000
    )
    
    
    (340,000
    )Ending balance
    
    $
    1,685,000
    
    
    $
    989,000Product Line Exit Costs:Beginning balance
    
    $
    1,042,000
    
    
    $
    913,000Additions
    
    
    
    
    
    
    Deductions
    
    
    (65,000
    )
    
    
    (73,000
    )Ending balance
    
    $
    977,000
    
    
    $
    840,000Severance Costs:Beginning balance
    
    $
    1,600,000
    
    
    $
    285,000Additions
    
    
    
    
    
    
    213,000Deductions
    
    
    (1,091,000
    )
    
    
    (266,000
    )Ending balance
    
    $
    509,000
    
    
    $
    232,000
 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations General We develop, manufacture and market 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. Our solutions leverage our expertise in
high-temperature superconducting filters to hear wireless devices with the
best possible clarity while rejecting interfering signals. We believe that
this combination of interference rejection and receiver sensitivity is only
possible using HTS technology. We sell our products directly to wireless
carriers in the Americas, and we have plans to expand internationally. Our
customers to date include ALLTEL, AT&T Wireless, U.S. Cellular, and Verizon
Wireless. We derive our commercial revenues from three product lines:  
    
    SuperLink Rx. In order to receive uplink signals from wireless
handsets, base stations require a wireless filter system to
eliminate, or filter out, out-of-band interference. To address this
need, we offer the SuperLink Rx product line for the receiver
front-end of base stations. These products combine specialized
filters using HTS technology with a proprietary cryogenic cooler and
a cryogenically cooled low-noise amplifier. The result is a highly
compact and reliable cryogenic receiver front-end that can
simultaneously deliver both high selectivity (interference rejection)
and high sensitivity (detection of low level signals). SuperLink Rx
products thereby offer significant advantages over conventional
filter systems.
    
    AmpLink Rx. The recently introduced AmpLink Rx is our
lower-cost receiver front-end product designed specifically to
address the sensitivity requirements of wireless base stations. The
AmpLink Rx is a ground-mounted unit which includes a high-performance
amplifier and up to six dual duplexers. The enhanced uplink provided
by AmpLink Rx 1900 improves PCS network coverage immediately and
avoids the installation and maintenance costs associated with tower
mounted amplifiers. As network interference increases, the AmpLink
Rx 1900 is easily upgradeable to include a SuperLink Rx front-end,
which uses HTS technology to maintain the same sensitivity
improvement while eliminating the effects of increasing interference. 21




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##### Table of Contents




    
    SuperPlex. SuperPlex, our antenna sharing solution is a line
of multiplexers that provides extremely low insertion loss and
excellent cross-band isolation. Products in our SuperPlex line of
high-performance multiplexers are designed to eliminate the need for
additional base station antennas and reduce infrastructure costs.
Relative to competing technologies, these products offer increased
transmit power delivered to the base station antenna, higher
sensitivity to subscriber handset signals, fast and cost-effective
network overlays. The SuperPlex product family offers network
performance benefits synergistic with SuperLink Rx. We began commercial production of the SuperFilter (the precursor to the
SuperLink Rx) in 1997. Our initial commercial sales of our SuperLink products
were to small rural providers who had the most immediate need for range
extension and coverage enhancement. We sold our first systems in the fourth
quarter of 1997. We sold 83 more systems in 1998, 123 systems in 1999, 393
systems in 2000, 438 systems in 2001, 927 systems in 2002, 1,884 systems in
2003 and 353 units in the six months ended July 3, 2004. In 2001, U.S. Cellular
accounted for 12% of our net commercial revenues and ALLTEL accounted for 73%
of our net commercial revenues. In 2002, U.S. Cellular accounted for 8% of our
net commercial revenues and ALLTEL for 84% of our net commercial revenues. In
2003, ALLTEL accounted for 70% of our net commercial revenues and Verizon
accounted for 15% of our net commercial revenues. In the six months ended July
3, 2004, ALLTEL accounted for 59% of our net commercial revenues and Verizon
accounted for 25% of our net commercial revenues. In our business model, we use government contracts as a source of funds
for our commercial technology development. We typically own the intellectual
property developed under these contracts, and the Federal Government receives a
royalty-free, non-exclusive and nontransferable license to use the intellectual
property for the United States. We acquired Conductus, Inc. on December 18,
2002. Conductus was a competing supplier of high-temperature superconducting
technology for wireless networks. The acquisition of Conductus contributed
$4.6 million to our government revenues in 2003. During 2002 and 2003, we were marketing a power amplifier product called
the SuperLink Tx manufactured by another company. The SuperLink Tx was for
wireless networks that suffer from insufficient transmit power on the downlink
signal path. A competitor acquired our supplier for this product in November
2003. We have not had significant sales of the SuperLink Tx product to date.
We are evaluating alternative sources of power amplifiers for our customers. 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. On an
on-going basis, we evaluate our estimates, including those related to bad
debts, inventories, intangible assets, income taxes, warranty obligations,
contingencies and litigation. 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. 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. 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. Our warranty obligation is effected 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. In connection with the sales of its commercial products, the Company
indemnifies, without limit or term, its customers against all claims, suits,
demands, damages, liabilities, expenses, judgments, settlements and penalties
arising from 22




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##### Table of Contents



actual or alleged infringement or misappropriation of any
intellectual property relating to its products or other claims arising from its
products. The Company cannot reasonably develop an estimate of the maximum
potential amount of payments that might be made under its guarantee 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. Revenues from research related
activities are derived primarily from contracts with agencies of the United
States Government. Credit risk related to accounts receivable arising from
such contracts is considered minimal. These contracts include cost-plus, fixed
price and cost sharing arrangements and are generally short-term in nature. All payments to the Company for work performed on contracts with agencies
of the U.S. Government are subject to adjustment upon audit by the Defense
Contract Audit Agency. Based on historical experience and review of current
projects in process, management believes that the audits will not have a
significant effect on the financial position, results of operations or cash
flows of the Company. In connection with the acquisition of Conductus we recognized $20 million
of goodwill. During the fourth quarter of 2003 we tested the goodwill for
possible impairment and determined that there was no impairment. This goodwill
will again be tested for impairment in the fourth quarter of 2004 or earlier if
events occur which require an earlier assessment. If the carrying amount
exceeds its implied fair value, an impairment loss will be recognized equal to
the excess. We also review the recoverability of the carrying value of identified
intangibles and other long lived assets on an annual basis or whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of these assets is determined based upon
the forecasted undiscounted future net cash flows from the operations to which
the assets relate, utilizing our best estimates, appropriate assumptions and
projections at the time. These projected future cash flows may vary
significantly over time as a result of increased competition, changes in
technology, fluctuations in demand, consolidation of our customers and
reductions in average selling prices. If the carrying value is determined not
to be recoverable from future operating cash flows, the asset is deemed
impaired and an impairment loss is recognized to the extent the carrying value
exceeded the estimated fair market value of the asset. We account for employee stock-based compensation under the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25), as opposed to the fair
value method prescribed by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation(SFAS 123). Pursuant to the
provisions of APB 25, we generally do not record an expense for the value of
stock-based awards granted to employees. If proposals currently under
consideration by various accounting standard organizations are adopted, such as
the Financial Accounting Standards Board Proposed Statement of Financial
Accounting Standard, Share-Based Payment, an amendment of FASB Statements No.
123 and 95,we may be required to treat the value of stock-based awards
granted to employees as compensation expense in the future, which could have a
material adverse effect on our reported operating results and could negatively
affect the price of our Common Stock. If these proposals are adopted, we could
decide to reduce the number of stock-based awards granted to employees in the
future, which could adversely impact our ability to attract qualified
candidates or retain existing employees without increasing their cash
compensation and, therefore, have a material adverse effect on our business,
results of operations and financial condition. As permitted under No. 123, the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees in
accounting for its stock options and other stock-based employee awards. Pro
forma information regarding net loss and loss per share, as calculated under
the provisions of SFAS 123, are disclosed in the notes to the financial
statements. The Company accounts for equity securities issued to non-employees
in accordance with the provision of SFAS 123 and Emerging Issues Task Force
96-18. If the Company had elected to recognize compensation expense for employee
awards based upon the fair value at the grant date consistent with the
methodology prescribed by SFAS 123, the Companys net loss and net loss per
share would have been increased to the pro forma amounts indicated below: Three Months Ended
    
    Six Months EndedJune 28, 2003
    
    July 3, 2004
    
    June 28, 2003
    
    July 3, 2004Net loss:As reported
    
    $
    (3,061,000
    )
    
    $
    (8,884,000
    )
    
    $
    (11,404,000
    )
    
    $
    (14,794,000
    )Stock-based
employee
compensation
included in net
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based
compensation
expense determined
under fair value
method
    
    
    (1,027,000
    )
    
    
    (1,593,000
    )
    
    
    (1,935,000
    )
    
    
    (3,357,000
    )
 23




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 28, 2003
    
    July 3, 2004
    
    June 28, 2003
    
    July 3, 2004Pro forma
    
    $
    (4,088,000
    )
    
    $
    (10,471,000
    )
    
    $
    (13,339,000
    )
    
    $
    (18,151,000
    )Basic and Diluted
Loss per ShareAs reported
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.19
    )
    
    $
    (0.20
    )Stock-based
compensation
expense determined
under fair value
method
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.05
    )Pro forma
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.22
    )
    
    $
    (0.25
    )
 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
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. We are currently involved as a defendant in several lawsuits  a patent
infringement case and several substantially identical securities class actions.
These matters are discussed below in Legal Proceedings. We do not believe
that a loss is probable or reasonably estimable in any of these cases and
therefore have not recorded any liabilities relating to these proceedings. We
periodically reassess our potential liability as additional information becomes
available. If we later determine that a loss is probable and the amount
reasonably estimable, we would record a reserve for the potential loss. The
ultimate amount of the loss, if any, could materially impact our results of
operations, financial condition or cash flows. Backlog Our commercial backlog consists of accepted product purchase orders
scheduled for delivery within 24 months and consists of purchase orders for
both dollar and unit purchase commitments. The exact dollar commitment for
unit commitments may vary depending on the exact units purchased. Based on past
purchasing patterns and expected purchasing trends of customers with unit
commitments, we estimate our backlog at July 3, 2004 to be $1.8 million, as
compared to $250,000 at December 31, 2003. Results of Operations Trends for 2004 We are a manufacturer of equipment to a relatively small number of
customers and are highly sensitive to any changes experienced by our customers.
We are currently experiencing the downside of such changes with two customers
that we consider important for our revenues in 2004. One of our customers is
being acquired. We believe that this customer has suspended work temporarily
on certain infrastructure projects because of the acquisition. Some of these
projects involved our products. We also believe that another customer
meanwhile has decided to greatly accelerate a project to roll out a new third
generation technology that has diverted their human resources. This is
delaying some projects to deploy our product for improvements to their existing
network. We believe these are temporary impediments but cannot be certain of
their duration. We are also aggressively pursuing efforts to have our product
incorporated into our customers new third generation wireless networks. We
believe our product sales will, in the long run, continue to be driven by the
need for efficient capital spending and improved network performance of both
the existing wireless technologies and the new third generation wireless
technologies such as 1X-EVDO, EDGE and W-CDMA. We are experiencing increased competition in 2004 from venders of other
interference solutions such as tower mount amplifiers and conventional filters.
We expect this will increase customer pressure on our product pricing in 2004.
Our product pricing has always been influenced by this competition, and we
have responded by continually and substantially reducing our product costs. We
expect our product costs will continue to decline in 2004, but we cannot
predict whether they will decline at a rate sufficient to keep pace with the
competitive pricing pressure. This could adversely affect our net commercial
product revenues and gross margins in 2004. 24




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##### Table of Contents



Quarter and six months ended July 3, 2004 as compared to the quarter six
months ended June 28, 2003. Total net revenue decreased by $5.0 million, or 44%, from $11.3 million in
second quarter of 2003 to $6.3 million in the second quarter of 2004. Total
revenues decreased by $7.0 million, or 38%, from $18.8 million in the first six
months of 2003 to $11.8 million in the same period this year. Total revenues
primarily consist of commercial revenue and government contract revenue. Net commercial product revenue consists of gross commercial product sales
proceeds less sales discounts. The following table summarizes the calculation
of net commercial product revenue for the first and second quarters of 2003 and
2004: Three Months Ended
    
    Six Months EndedDollars in thousands
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003
    
    July 3, 2004Gross commercial product sales proceeds
    
    $
    8,995
    
    
    $
    4,584
    
    
    $
    14,173
    
    
    $
    7,803Less allocation of proceeds to
warrants issued to
U.S. Cellular
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )
    
    
    Less sales discounts
    
    
    (54
    )
    
    
    (32
    )
    
    
    (111
    )
    
    
    (68
    )Net commercial product revenues
    
    $
    8,939
    
    
    $
    4,552
    
    
    $
    14,060
    
    
    $
    7,735
 Net commercial product revenues in the second quarter of 2004 decreased to
$4.6 million from $9.0 million in the same period last year, a decrease of $4.4
million, or 49%. For the first six months of 2004, net commercial product
revenues decreased to $7.7 million from $14.1 million in the same period last
year, a decrease of 45%. The decrease in the second quarter of 2004 as
compared to the prior year period is primarily the result of lower unit sales
of our SuperLink Rx products of $4.4 million. The decrease in the first half
2004 as compared to the prior year period is primarily the result of lower
unit sales of our SuperLink Rx products of $6.2 million. The average selling
price of our SuperLink Rx product are comparable between the periods. Our two
largest customers accounted for 94% of our net commercial revenues in the six
months ended June 28, 2003 and 84% in the six months ended July 3, 2004. Government contract revenues decreased by $620,000, or 27%, from $2.3
million in the second quarter of 2003 to $1.7 million in the same quarter of
2004. For the first six months of 2003, government contract revenues decreased
to $3.9 million from $4.7 million in the same period last year, a decrease of
$829,000, or 17%. This decrease is primarily attributable to the completion of
one contract in 2003 that was not replaced. Cost of commercial product revenue includes all direct costs and
manufacturing overhead. The cost of commercial product revenue totaled $5.0
million for the second quarter ended July 3, 2004 and $6.5 million for the
second quarter ended June 28, 2003. The cost of commercial product revenue
totaled $8.8 million for the six months ended July 3, 2004 and $11.3 million
for the six months ended June 28, 2003. Decreased costs result primarily from
decreased unit shipments. Our cost of sales includes both variable and fixed cost components and
consists primarily of materials, assembly and test labor, overhead, which
includes equipment and facility depreciation, transportation costs and warranty
costs. Components of our fixed cost structure include 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. The following is an analysis of our gross profit and margins: 25




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##### Table of Contents



Three Months Ended
    
    
    
    
    
    Six Months EndedDollars in thousands
    
    June 28, 2003
    
    
    
    
    
    July 3, 2004
    
    
    
    
    
    June 28, 2003
    
    
    
    
    
    July 3, 2004Net commercial product sales
    
    $
    8,939
    
    
    
    100
    %
    
    $
    4,552
    
    
    
    100
    %
    
    $
    14,060
    
    
    
    100
    %
    
    $
    7,735
    
    
    
    100
    %Cost of commercial product sales
    
    
    6,503
    
    
    
    73
    %
    
    
    5,030
    
    
    
    111
    %
    
    
    11,300
    
    
    
    80
    %
    
    
    8,813
    
    
    
    114
    %Gross profit
    
    $
    2,436
    
    
    
    27
    %
    
    $
    (478
    )
    
    
    (11
    %)
    
    $
    2,760
    
    
    
    20
    %
    
    $
    (1,078
    )
    
    
    (14
    %)
 For the second quarter ended July 3, 2004 we had negative gross profit of
$478,000 from sale of our commercial products as compared to positive gross
profit of $2.4 million in our second quarter of 2003. For the six months ended
July 3, 2004 we had negative gross profit of $1.1 million from sale of our
commercial products as compared to positive gross profit of $2.8 million in the
six months ended June 28, 2003. We experienced negative gross
profits because
the reduced level of commercial sales were insufficient to cover our fixed
manufacturing overhead costs. Contract research and development expenses totaled $1.2 million in the
second quarter of 2004 and $1.5 million in the second quarter of 2003. These
expenses totaled $2.7 million in the first six months of 2004 and $2.9 million
in the first six months of 2003. These decreases were the result of lower
expenses associated with completing government contracts. Other research and development expenses relate to development of our
commercial products. These expenses totaled $1.1 million in the second quarter
of 2004, as compared to $1.6 million in the same period last year. These
expenses totaled $2.5 million in the first six months of 2004 and $3.3 million
in the first six months of 2003. The decline is due to lower commercial product
development efforts. Selling, general and administrative expenses totaled $4.3 million in the
second quarter of 2004 as compared to $4.6 million in the same period last
year. In the first six months of 2004 these expenses totaled $9.0 million as
compared to $12.6 million in the same period last year. These decreases results
primarily from lower ISCO litigation expenses. In the second quarter of 2004
these expenses totaled $186,000 as compared to $660,000 in the second quarter
of 2003. In the first six months of 2004 these expenses totaled $413,000 as
compared to $4.7 million in the same period last year. These decreases were
partially offset by higher sales and marketing expenses. During the quarter ended July 3, 2004, we implemented a restructuring
program to streamline its operations and reduce its cost structure and recorded
cash and non-cash restructuring charges of $2.5 million. We consolidated our
research and development operations in Sunnyvale into our Santa Barbara
facility. We reduced our workforce by approximately 50 positions. The workforce
reduction included reductions associated with the Sunnyvale facilities
consolidation, as well as other strategic reductions in the organization. In
addition, as part of the consolidation we accelerated the implementation of a
new, lower cost wafer deposition process called Reactive Co-Evaporation. As a
result of these cost reductions initiatives, we expect annual savings of
approximately $1.7 million per quarter as compared to the first quarter of
2004. We expect to complete the restructuring actions by the end of the third
quarter of 2004 and will therefore incur additional period expenses of
approximately $875,000 in the third quarter of 2004 to relocate machinery and
equipment and employees and lease abandonment costs relating to its Sunnyvale
facility closed in July. Interest income decreased in the second quarter and first six months of
2004 as compared to the same periods in the prior year because we had less cash
available for investment. Interest expense in the quarter ended July 3, 2004 totaled $1.0 million as
compared to $123,000 in the same period last year. For the six months ended
July 3, 2004 interest expense totaled $1.2 million as compared to $238,000 in
the six months ended June 28, 2003. These increases related primarily to an
$802,000 non-cash charge relating to warrants issued in connection with the
Bridge Loans entered into in April 2004. We had a net loss of $8.9 million for the quarter ended July 3, 2004 as
compared to $3.1 million in the same period last year. For the six months ended
July 3, 2004 our net loss totaled $14.8 million as compared to $11.4 million
in the same period last year. The net loss available to common shareholders totaled $0.11 per common
share in the current quarter, as compared to $0.05 per common share, in the
same period last year. The net loss available to common shareholders totaled
$0.20 per common share in the six months ended July 3, 2004, as compared to
$0.19 per common share, in the same period last year. 26




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##### Table of Contents



Liquidity and Capital Resources We have historically financed our operations through a combination of cash
on hand, cash provided from operations, equipment lease financings, available
borrowings under bank lines of credit and both private and public equity
offerings. Our principal sources of liquidity consist of existing cash
balances and funds expected to be generated from future operations. As of July
3, 2004, we had working capital of $20.7 million, including $11.9 million in
cash and cash equivalents, as compared to working capital of $ 15.6 million at
December 31, 2003, which included $11.1 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. We typically
hold such investments until maturity and then reinvest the proceeds in similar
money market instruments. We believe that all of our cash investments would be
readily available to us should the need arise. Cash Flows Cash and cash equivalents increased by $739,000 from $11.1 million at
December 31, 2003 to $11.9 million at July 3, 2004. Cash was used in
operations, for the purchase of property and equipment and for the payment of
short and long-term borrowings and was offset by cash received from the sale of
common stock in a public offering during the second quarter of 2004. Cash and
cash equivalents decreased by $1.4 million from $18.2 million at December 31,
2002 to $16.8 million at June 28, 2003. Cash used in operations and investing
activities during the first six months of 2003 was partially offset by cash
received from the sale of common stock and warrants in a private placement
during the second quarter. Cash used in operations totaled $12.0 million in the first six months of
2004. We used $10.3 million to fund the cash portion of our net losses. We
also used cash to fund a $8.7 million increase in inventory, prepaid expenses
and other current assets, patents and licenses and accounts payable payments.
Inventory increased during the first six months of 2004 due to lower than
expected sales. These uses were partially offset by cash generated from the
collection of accounts receivable and from the decline in other assets totaled
$6.9 million. Cash used in operations totaled $11.0 million in the first six
months of 2003. We used $9.9 million to fund the cash portion of our net
losses. We also used cash to fund a $2.9 million increase in accounts
receivable, inventory, patents and licenses and other assets. Cash generated
from the increase in accounts payable and other accrued expenses totaled $1.7
million. Net cash used to purchase manufacturing related equipment and tenant
improvements totaled $1.3 million in the first six months of 2004 and $1.6
million the same period last year. Net cash provided by financing activities totaled $14.1 million in the
first six months of 2004. Cash received from the sale of common stock and
exercise of warrants totaled $17.2 million and borrowings against our credit
and bridge loan facilities totaled $4.6 million. These sources of cash were
partially offset by payments against our credit and bridge loan facilities
totaling $7.1 million and payments against our long-term debt totaling
$611,000. Net cash provided by financing activities totaled $11.2 million in
the first six months of 2003. Cash received from the sale of common stock and
warrants totaled $10.1 million and borrowings against our credit facility
totaled $1.6 million and was partially offset by the reduction in long-term
borrowings of $463,000. We have a line of credit from a bank. It is a material source of funds
for our business. We recently renewed the line of credit for an additional
year until March 17, 2005 and on April 28, 2004 we temporarily modified our
credit facility in connection with an additional bridge loan described below.
The line of credit is structured as a sale of our accounts receivable. The
bank agreement provides for the sale of up to $5.0 million of eligible accounts
receivable, with advances to us totaling 80% of the receivables sold. Advances
bear interest at the prime rate (4.25% at July 3, 2004) plus 2.50% subject to a
minimum monthly charge. Outstanding amounts under this borrowing facility at
July 3, 2004 totaled $775,000. The amount outstanding is repaid upon
collection of the underlying accounts receivable. 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. At July 3, 2004, we had the following cash commitments: 27




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##### Table of Contents



Payments Due by PeriodContractual Obligations
    
    Total
    
    Less than 1 year
    
    2-3 years
    
    4-5 years
    
    After 5 yearsCapital lease obligations
    
    $
    131,000
    
    
    $
    81,000
    
    
    $
    47,000
    
    
    $
    3,000
    
    
    $
    Operating leases
    
    
    12,600,000
    
    
    
    2,451,000
    
    
    
    3,482,000
    
    
    
    2,898,000
    
    
    
    3,769,000Minimum license
commitment
    
    
    2,861,000
    
    
    
    270,000
    
    
    
    540,000
    
    
    
    351,000
    
    
    
    1,700,000Fixed asset purchase
commitments
    
    
    268,000
    
    
    
    268,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    15,860,000
    
    
    $
    3,070,000
    
    
    $
    4,069,000
    
    
    $
    3,252,000
    
    
    $
    5,469,000
 There were no material changes to commitments outside the ordinary course
of business. We plan to invest approximately $500,000 to $1.0 million in fixed assets
during the remainder of 2004 to continue to expand manufacturing capacity if
there is sufficient market demand for our products. Our independent registered public accounting firm have included in their audit report for 2003-year an
explanatory paragraph expressing doubt about the 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. In 2003, we
incurred a net loss of $11,345,000 and had negative cash flows from operations
of $18,458,000. For the six months ended July 3, 2004, we had a net loss of
$14.8 million and negative cash flows from operations of $12.0 million. In
response, we adjusted our inventory build plan, reduced direct and indirect
labor, cut certain fixed costs and implemented a reduced workweek. We also
implemented a restructuring program consolidating its research and development
operations in Sunnyvale into our Santa Barbara facility, eliminating an
additional 50 positions and accerating the implementation of a new lower
cost wafer deposition process. We completed two financing transactions during the quarter ended July 3,
2004. First, we closed a transaction on April 25, 2004 to temporarily expand
our credit facility. Silicon Valley Bank amended our existing line of credit
to increase borrowing capacity from 80% to 95% of eligible accounts receivable.
We concurrently secured a commitment for a $2.0 million secured bridge loan from an investor.
The investor subsequently funded $1.5 million of the bridge loan. We issued to
the lenders warrants to purchase in the aggregate 600,000 shares of common
stock at $1.85 per share. The bridge loan was subsequently paid in full on May
26, 2004. Upon repayment of the bridge loan the Silicon Valley credit facility
reverted back to it original terms. Second, we completed a public offering of 23,000,000 shares of common
stock at $0.80 per share during the quarter raising net proceeds of $16.8 million. Based on current forecasts, we believe we have sufficient resources to
fund normal operations into 2005. We need to significantly increase sales to
achieve profitability and positive cash flows. If we are unable to do so, we
may need additional debt or equity financing. We cannot assure you that our
cash resources will be sufficient to fund the growth of our business. Our cash
requirements will depend on numerous factors, including the rate of growth of
our sales, the timing and levels of products purchased, payment terms and
credit limits from manufacturers, the timing and level of our accounts
receivable collections and our ability to manage our business profitability. In the last several years, we have raised money from investors to cover
our operating losses through public and private offerings. Our ability to
continue to raise funds using these methods may be adversely impacted by any
future NASDAQ listing issues. Our continued NASDAQ listing requires us to
maintain a minimum of $1 share price. Our stock has traded at less than $1 per
share recently. Although NASDAQ de-listing would not be immediate, our lower
share price could make capital raising more difficult. We cannot assure 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. 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 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. Our interim financial statements have been prepared assuming that it will
continue as a going concern. The factors described above raise substantial
doubt about its ability to continue as a going concern. These financial
statements do not include any adjustments that might result from this
uncertainty. 28




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Net Operating Loss Carryforward As of December 31, 2003, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $215.1 million and
$90.6 million, respectively, which expire in the years 2004 through 2023. Of
these amounts $93.9 million and $30.2 million, respectively resulted from the
acquisition of Conductus. Included in the net operating loss carryforwards are
deductions related to stock options of approximately $24.0 million and $13.0
million for federal and California income tax purposes. 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, the Company has research and development and
other tax credits for federal and state income tax purposes of approximately
$2.6 million and $2.3 million, respectively, which expire in the years 2004
through 2023. Of these amounts $972,000 and $736,000, respectively resulted
from the acquisition of Conductus. Due to the uncertainty surrounding their realization, the Company has
recorded a full valuation allowance against its 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 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. Recently, the Company
completed an analysis of its equity transactions and determined that it had a
change in ownership in August 1999 and December 2002. Therefore, the ability
to utilize net operating loss carryforwards incurred prior to the change of
ownership totaling $101.6 million will be subject in future periods to an
annual limitation of $1.3 million. In addition, the Company acquired the right
to Conductus net operating losses, which are also subject to the limitations
imposed by Section 382. Conductus underwent three ownership changes, which
occurred in February 1999, February 2001 and December 2002. Therefore, the
ability to utilize Conductus net operating loss carryforwards of $93.9 million
incurred prior to the ownership changes will be subject in future periods to
annual limitation of $700,000. Net operating losses incurred by the Company
subsequent to the ownership changes totaled $19.5 million and are not subject
to this limitation. Future Accounting Requirements In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The Company adopted
the provisions of FIN 46 effective February 1, 2003 and such adoption did not
have an impact on its consolidated financial statements since it currently has
no variable interest entities. In December 2003, the FASB issued FIN 46R with
respect to variable interest entities created before January 31, 2003, which
among other things revised the implementation date to the first fiscal year or
interim period ending after March 15, 2004, with the exception of Special
Purpose Entities (SPE). The consolidation requirements apply to all SPEs in
the first fiscal year or interim period beginning after December 15, 2003. The
adoption of the provisions of FIN 46R did not have an impact on the
Companys consolidated financial statements. Forward-Looking Statements This report contains forward-looking statements that involve risks and
uncertainties. We have made these statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Our
forward-looking statements relate to future events or our future performance
and include, but are not limited to, statements concerning our business
strategy, future commercial revenues, market growth, capital requirements, new
product introductions, expansion plans and the adequacy of our funding. Other
statements contained in this report that are not historical facts are also
forward-looking statements. We have tried, wherever possible, to identify
forward-looking statements by terminology such as may, will, could,
should, expects, anticipates, intends, plans, believes, seeks,
estimates and other comparable terminology. Forward-looking statements are not guarantees of future performance and
are subject to various risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual results may differ materially from those
expressed in forward-looking statements. They can be affected by many factors,
including, but not limited to the following: 29




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##### Table of Contents




    
    fluctuations in product demand,
    
    the impact of competitive filter products, technologies and pricing,
    
    manufacturing capacity constraints and difficulties,
    
    market acceptance risks, and
    
    general economic conditions. Please read Exhibit 99 to our report on Form 10-K for the year ended
December 31, 2003 entitled Disclosure Regarding Forward-Looking Statements
for a description of additional uncertainties and factors that may affect our
forward-looking statements. Forward-looking statements are based on
information presently available to senior management, and we do not assume any
duty to update our forward-looking statements. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk There was no material change in our exposure to market risk at July 3,
2004 as compared with our market risk exposure on December 31, 2003. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Market Risk in our 2003 Annual Report on Form 10K. 
 Item 4. Disclosure Controls and Procedures. Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys reports
under the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e)
as of the end of the period covered by this report (the Evaluation Date).
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company that as of the Evaluation Date is required to be included in our
periodic SEC filings. Changes in Internal Controls There has been no change in our internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15(d)  15(f)) during the second
quarter of 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 30




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Patent Litigation We are engaged in a patent dispute with ISCO International, Inc. relating
to U.S. Patent No. 6,263,215 entitled Cryoelectronically Cooled Receiver Front
End for Mobile Radio Systems. ISCO filed a complaint on July 17, 2001 in the
United States District Court for the District of Delaware against us and our
wholly owned subsidiary, Conductus, Inc. The ISCO complaint alleged that our
SuperFilter product and Conductus ClearSite® product infringe ISCOs patent.
The matter went to trial on March 17, 2003. On April 3, 2003, the jury returned a unanimous verdict that our
SuperFilter III product does not infringe the patent in question, and that
ISCOs patent is invalid and unenforceable. The jury also awarded us $3.8
million in compensatory damages based upon a finding that ISCO engaged in
unfair competition and acted in bad faith by issuing press releases and
contacting our customers asserting rights under this patent. On April 17, 2003, we filed a Motion for Attorneys Fees and
Disbursements, in which we asked the court to award us our attorneys fees and
other litigation expenses. On the same date, ISCO filed a motion, asking the
court to overturn the verdict and grant a new trial. In August 2003, the court
rejected ISCOs request to overturn the jurys verdict that the patent is
invalid and not infringed by the SuperFilter III product, and accepted the
jurys verdict that the patent is unenforceable because of inequitable conduct
committed by one of the alleged inventors. ISCO subsequently filed a notice of
appeal as to this portion of the courts decision. The court overturned the
jurys verdict of unfair competition and bad faith on the part of ISCO and the
related $3.8 million compensatory damage award to us, and also denied our
request for reimbursement of our legal fees associated with the case. We have
filed a notice of appeal as to this portion of the courts decision. If the appellate court overturns the jurys verdict and grants ISCO a new
trial, there is a risk that we may not prevail in a second trial. If this
should happen, we could be subject to significant liabilities and be required
to cease using key technology. In any case, the cost of defending continued
litigation by ISCO, or any other intellectual property lawsuit, could
constitute a major financial burden and materially and adversely affect our
results of operations and cash flows. Class Action Lawsuits We were named as a defendant in several substantially identical class
action lawsuits filed in the United States District Court for the Central
District of California in April 2004. The plaintiffs in these lawsuits allege
securities law violations by us and certain of our officers and directors under
Rule 10b-5 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended. The complaints were filed on behalf of purported classes of people
who purchased our stock during the period between January 9, 2004 and March 1,
2004 and both seek unspecified damages. The plaintiffs base their allegations
primarily on the fact that we did not achieve our forecasted revenue guidance
of $10 to $13 million for the first quarter of 2004. We believe these
complaints are without merit and intend to defend these actions vigorously.
However, we cannot assure you that we will prevail in such litigation and, if
the outcome is unfavorable to us, our reputation, profitability and share price
could be adversely affected. 
 Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities Pursuant to an effective registration statement dated March 17, 2004 , in
May and June 2004 we raised net proceeds of $16.8 million from the public sale
of 23,000,000 shares of common stock at $0.80 per share. 
 Item 4. Submission of Matters to a Vote of Security Holders The following matters were submitted to the shareholders at the Companys
Annual Meeting of Shareholders held May 25, 2004: 31




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##### Table of Contents



(1)
    
    The two (2) Class 3 nominated directors were elected to serve
for the ensuing three years and until their successors are duly
elected and qualified. NUMBER OF SHARESNUMBER OF SHARES FOR
    
    % OF SHARES VOTING
    
    WITHHELD
    
    % OF SHARES VOTINGJohn F.
Carlson
    
    
    62,510,821
    
    
    
    98.9
    
    
    
    669,879
    
    
    
    1.1M. Peter
Thomas
    
    
    62,511,121
    
    
    
    98.9
    
    
    
    669,579
    
    
    
    1.1
  (2)
    
    The appointment of PricewaterhouseCoopers LLP as independent
auditors of the Company was ratified for the year ending December 31,
2004. NUMBER OF SHARES FOR
    
    % OF SHARES VOTINGVotes For
    
    
    62,707,680
    
    
    
    99.3Votes Against
    
    
    369,961
    
    
    
    0.6Votes
Abstaining
    
    
    103,059
    
    
    
    0.1
 
 Item 6. Exhibits and Reports on Form 8-K Number
    
    Description of Document3.1
    
    Amended and Restated Certificate of Incorporation of the Company (1)3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation (2)3.3
    
    Bylaws of the Registrant (3)3.4
    
    Certificate of Amendment of Bylaws dated May 17, 2001 (2)3.5
    
    Certificate of Amendment of Bylaws dated August 8, 2001 (2)4.1
    
    Form of Common Stock Certificate (4)4.2
    
    Third Amended and Restated Stockholders Rights Agreement (3)4.3
    
    Warrant Issued to PNC Bank, National Association in connection with Credit Agreement (3)4.4
    
    Registration Rights Agreement to United States Cellular Corporation (5)4.5
    
    Form of Warrant to United States Cellular Corporation (5)4.6
    
    Warrant Purchase Agreement dated December 1, 1999 with PNC Bank (6)4.7
    
    Warrant Purchase Agreement dated January 12, 2000 with PNC Bank (6)4.8
    
    Certificate of Designations, Preferences and Rights of Series E Convertible Stock (7)4.9
    
    Securities Purchase Agreement dated as of September 29, 2000 between the Company and
RGC International Investors, LDC. (Exhibits and Schedules Omitted) (7)4.10
    
    Registration Rights Agreement dated as of September 29, 2000 between the Company and
RGC International Investors, LDC. (7)4.11
    
    Initial Stock Purchase Warrant dated as of September 29, 2000 between the Company
and RGC International Investors, LDC. (7)4.12
    
    Incentive Stock Purchase Warrant dated as of September 29, 2000 between the Company
and RGC International Investors, LDC. (7)4.13
    
    Registration Rights Agreement, dated March 6, 2002 (8)4.14
    
    Warrants to Purchase Shares of Common Stock, dated March 11, 2002 (8)
 32




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##### Table of Contents



Number
    
    Description of Document4.15
    
    Registration Rights Agreement dated October 10, 2002 (9)4.16
    
    Warrants to Purchase Common Stock dated October 10, 2002 (9)4.17
    
    Common Stock Purchase Agreement, dated March 8, 2002 between Conductus, Inc. and the
investors signatory thereto (10)4.18
    
    Warrant to Purchase Common Stock, dated March 8, 2002 by Conductus, Inc. to certain
investors (11)4.19
    
    Registration Rights Agreement, dated March 26, 2002, between Conductus, Inc. and
certain investors (11)4.20
    
    Warrant to Purchase Common Stock, dated August 7, 2000, issued by Conductus to
Dobson Communications Corporation (12) *4.21
    
    Form of Series B Preferred Stock and Warrant Purchase Agreement dated September 11,
1998 and September 22, 1998 between Conductus and Series B Investors (13)4.22
    
    Form of Warrant to Purchase Common Stock between Conductus and Series B investors,
dated September 28, 1998, issued by Conductus in a private placement (13)4.23
    
    Form of Series C Preferred Stock and Warrant Purchase Agreement, dated December 10,
1999, between Conductus and Series C Investors (14)4.24
    
    Form of Warrant Purchase Common Stock between Conductus and Series C investors,
dated December 10, 1999, issued by Conductus in a private placement (14)4.25
    
    Form of Warrant to Purchase Common Stock dated March 28, 2003, issued to Silicon
Valley Bank (15)4.26
    
    Form of Warrant (16)4.27
    
    Form of Registration Rights Agreement (16)4.28
    
    Agility Capital Warrant dated May 2004 (17)4.29
    
    Silicon Valley Bank Warrant dated May 2004(17)10.1
    
    Undertaking of M. PeterThomas dated July 28, 200410.2
    
    Undertaking of Martin S. McDermut dated July 28, 200410.3
    
    Loan and Security Agreement dated as of April 28, 2004 with Agility Capital, LLC10.4
    
    Modification of Silicon Valley Loan Agreement31.1
    
    Statement of CEO Pursuant to 302 of the Sarbanes-Oxley Act of 200231.2
    
    Statement of CFO Pursuant to 302 of the Sarbanes-Oxley Act of 200232.1
    
    Statement of CEO Pursuant to 906 of the Sarbanes-Oxley Act of 200232.2
    
    Statement of CFO Pursuant to 906 of the Sarbanes-Oxley Act of 2002
   (1)
    
    Incorporated by reference from the Registrants Quarterly Report on Form
10-Q filed for the quarter ended April 3, 1999.(2)
    
    Incorporated by reference from the Registrants Quarterly Report on Form
10-Q filed for the quarter ended June 30, 2001.(3)
    
    Incorporated by reference from the Registrants Quarterly Report on Form
10-Q filed for the quarter ended July 3, 1999.(4)
    
    Incorporated by reference from the Registrants Registration Statement on
Form S-1 (Reg. No. 33-56714).(5)
    
    Incorporated by reference from the Registrants Quarterly Report on Form
10-Q filed for the quarter ended October 2, 1999.(6)
    
    Incorporated by reference from the Registrants Registration Statement on
Form S-8 (Reg. No. 333-90293).(7)
    
    Incorporated by reference from the Registrants Annual Report on Form
10-K for the year ended December 31, 1999.(8)
    
    Incorporated by reference from Registrants Annual Report on Form 10-K
for the year ended December 31, 2001.(9)
    
    Incorporated by reference from the Registrants Current Report on Form
8-K, filed October 2, 2002.(10)
    
    Incorporated by reference from the Registrants Annual Report on Form
10-K filed for the year ended December 31, 1997.(11)
    
    Incorporated by reference from the Conductus, Inc.s Registration
Statement on Form S-3 (Reg. No. 333-85928), filed on April 9, 2002.(12)
    
    Incorporated by reference from Conductus, Inc.s Quarterly Report on Form
10-Q, filed with the SEC on November 16, 1998. 33




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##### Table of Contents



(13)
    
    Incorporated by reference from Conductus, Inc.s Annual Report on Form
10-K, filed with the SEC on March 30, 2000.(14)
    
    Incorporated by reference from Conductus, Inc.s Annual Report on Form
10-K for the year ended December 31, 1999.(15)
    
    Incorporate by reference from Registrants Quarterly Report on Form 10-Q
for the quarter ended March 29, 2003.(16)
    
    Incorporated by reference from Registrants Current Report on Form 8-K
filed June 25, 2003.(17)
    
    Incorporated by reference from Registrants Registration Statement of Form
S-3 9Reg. 333-89184)  *
    
    Confidential treatment has been previously granted for certain portions
of these exhibits. (b) Reports on Form 8-K. We filed or furnished the following Current Reports on Form 8-K during the
quarter ended July 3, 2004:  
    
    Furnished April 29, 2004  Items 5, 9 and 12
Announcing filing of preliminary prospectus of a stock offering
and first quarter of 2004 financial results.
    
    Furnished May 21, 2004  Item 5 Filing form of
underwriting agreement and legal option in connection with an
effective S-3 Registration Statement.
    
    Furnished June 16, 2004  Items 5 & 7 Announcing
certain cost reduction measures and the closing of an over
allotment option in the Companys public offering. 
 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. SUPERCONDUCTOR TECHNOLOGIES INC.Dated:      August 10, 2004
    /s/ Martin S. McDermutMartin S. McDermutSenior Vice President, Chief
Financial Officer and Secretary /s/ M. Peter ThomasM. Peter ThomasPresident and Chief Executive Officer 34