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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 1934
 For the quarterly period ended April 3, 2004
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from
__________ to __________
 Commission File Number 0-21074 SUPERCONDUCTOR TECHNOLOGIES INC.  Delaware
    
    77-0158076(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    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. Yes x     No o Indicate by check mark
whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act Yes x     No o As of May 1, 2004 there were 69,097,299 shares of the Registrants Common Stock outstanding. 1




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SUPERCONDUCTOR TECHNOLOGIES INC. INDEX TO FORM 10-Q Three Months Ended April 3, 2004 PART I -
    
    FINANCIAL INFORMATIONITEM 1 - Financial StatementsConsolidated Statement of Operations
    
    
    3Consolidated Balance Sheet
    
    
    4Consolidated Statement of Cash Flows
    
    
    5Notes to Unaudited Interim Consolidated Financial Statements
    
    
    6ITEM 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23ITEM 4. Disclosure Controls and Procedures
    
    
    23PART II -
    
    OTHER INFORMATIONITEM 1 - Legal Proceedings
    
    
    24ITEM 6 - Exhibits and Reports on Form 8-K(a) Exhibits
    
    
    24(b) Reports on Form 8-K
    
    
    28SIGNATURE
    
    
    
    
    29EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements SUPERCONDUCTOR TECHNOLOGIES INC. 
 CONSOLIDATED STATEMENT
OF OPERATIONS
 Three Months EndedMarch 29, 2003
    
    April 3, 2004Net revenues:Net commercial product revenues
    
    $
    5,121,000
    
    
    $
    3,183,000Government and other contract revenues
    
    
    2,450,000
    
    
    
    2,241,000Sub license royalties
    
    
    9,000
    
    
    
    20,000Total net revenues
    
    
    7,580,000
    
    
    
    5,444,000Costs and expenses:Cost of commercial product revenues
    
    
    4,797,000
    
    
    
    3,783,000Contract research and development
    
    
    1,385,000
    
    
    
    1,512,000Other research and development
    
    
    1,711,000
    
    
    
    1,339,000Selling, general and administrative
    
    
    7,982,000
    
    
    
    4,617,000Total costs and expenses
    
    
    15,875,000
    
    
    
    11,251,000Loss from operations
    
    
    (8,295,000
    )
    
    
    (5,807,000
    )Interest income
    
    
    67,000
    
    
    
    24,000Interest expense
    
    
    (115,000
    )
    
    
    (127,000
    )Net loss
    
    
    (8,343,000
    )
    
    
    (5,910,000
    )Basic and diluted loss per common share
    
    ($
    0.14
    )
    
    ($
    0.09
    )Weighted average number of common
shares outstanding
    
    
    59,823,553
    
    
    
    69,042,053
 See accompanying notes to the consolidated financial statements 3




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SUPERCONDUCTOR TECHNOLOGIES INC. 
 CONSOLIDATED BALANCE SHEET
  December 31,
    
    April 3,2003
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    11,144,000
    
    
    $
    3,920,000Accounts receivable, net
    
    
    8,809,000
    
    
    
    2,628,000Inventory
    
    
    8,802,000
    
    
    
    13,377,000Prepaid expenses and other current assets
    
    
    760,000
    
    
    
    635,000Total Current Assets
    
    
    29,515,000
    
    
    
    20,560,000Property and equipment, net of accumulated depreciation of
$15,061,000 and $15,723,000, respectively
    
    
    12,534,000
    
    
    
    12,924,000Patents, licenses and purchased technology, net of accumulated amortization of
$3,173,000 and $3,380,000, respectively
    
    
    5,367,000
    
    
    
    5,278,000Goodwill
    
    
    20,107,000
    
    
    
    20,107,000Other assets
    
    
    600,000
    
    
    
    600,000Total Assets
    
    $
    68,123,000
    
    
    $
    59,469,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Line of credit
    
    $
    3,308,000
    
    
    $
    1,188,000Accounts payable
    
    
    5,154,000
    
    
    
    6,112,000Accrued expenses
    
    
    4,832,000
    
    
    
    3,637,000Current portion of capitalized lease obligations and long term debt
    
    
    645,000
    
    
    
    67,000Total Current Liabilities
    
    
    13,939,000
    
    
    
    11,004,000Capitalized lease obligations and long term-debt
    
    
    76,000
    
    
    
    59,000Other long term liabilities
    
    
    1,888,000
    
    
    
    1,623,000Total Liabilities
    
    
    15,903,000
    
    
    
    12,686,000Commitments and contingencies-Note 5Stockholders 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 69,097,299 shares issued and outstanding,
respectively
    
    
    69,000
    
    
    
    69,000Capital in excess of par value
    
    
    168,776,000
    
    
    
    169,249,000Notes receivable from stockholder
    
    
    (820,000
    )
    
    
    (820,000
    )Accumulated deficit
    
    
    (115,805,000
    )
    
    
    (121,715,000
    )Total Stockholders Equity
    
    
    52,220,000
    
    
    
    46,783,000Total Liabilities and Stockholders Equity
    
    $
    68,123,000
    
    
    $
    59,469,000
 See accompanying notes to the consolidated financial statements 4




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SUPERCONDUCTOR TECHNOLOGIES INC. 
 CONSOLIDATED STATEMENT OF CASH FLOWS
  Three Months EndedMarch 29, 2003
    
    April 3, 2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    ($
    8,343,000
    )
    
    ($
    5,910,000
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    745,000
    
    
    
    869,000Changes in assets and liabilities:Accounts receivable
    
    
    1,677,000
    
    
    
    6,181,000Inventory
    
    
    (1,135,000
    )
    
    
    (4,575,000
    )Prepaid expenses and other current assets
    
    
    149,000
    
    
    
    125,000Patents, licenses and purchased technology
    
    
    (134,000
    )
    
    
    (118,000
    )Other assets
    
    
    (99,000
    )
    
    
    Accounts payable, accrued expenses and other long-
term liabilities
    
    
    1,677,000
    
    
    
    (502,000
    )Net cash used in operating activities
    
    
    (5,463,000
    )
    
    
    (3,930,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (512,000
    )
    
    
    (1,052,000
    )Net cash used in investing activities
    
    
    (512,000
    )
    
    
    (1,052,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from short term borrowings
    
    
    
    
    
    
    1,188,000Payments on short term borrowings
    
    
    
    
    
    
    (3,308,000
    )Payments on long-term obligations
    
    
    (93,000
    )
    
    
    (595,000
    )Proceeds from sale of common stock and warrants and
exercise of stock options
    
    
    
    
    
    
    473,000Net cash used in financing activities
    
    
    (93,000
    )
    
    
    (2,242,000
    )Net decrease in cash and cash equivalents
    
    
    (6,068,000
    )
    
    
    (7,224,000
    )Cash and cash equivalents at beginning of period
    
    
    18,191,000
    
    
    
    11,144,000Cash and cash equivalents at end of period
    
    $
    12,123,000
    
    
    $
    3,920,000
 See accompanying notes to the consolidated financial statements. 5




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SUPERCONDUCTOR TECHNOLOGIES INC. 
 NOTES TO UNAUDITED INTERIM 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 142 units in the quarter ended April 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 quarters ended March 29, 2003 and April 3, 2004, government
related contracts account for 32% and 41%, 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
months ended April 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 During 2003, the Company incurred a net loss of $11,345,000 and negative
cash flows from operations of $18,458,000. For the quarter ended April 3,
2004, the Company had a net loss of $5,910,000 and negative cash flows from
operations of $3,930,000. In response, the Company adjusted its inventory
build plan, reduced direct labor, cut certain fixed costs and implemented a
reduced workweek. The Company is also pursuing additional financing and has
taken two actions toward that end. First, the Company closed a transaction on April 25, 2004 to expand its
credit facility. Silicon Valley Bank amended the Companys existing line of
credit to increase borrowing capacity from 80% to 95% of eligible accounts
receivable. The Company concurrently secured a $2.0 million secured bridge
loan from an investor. The investor funded $1.0 million of the bridge loan at
closing and will fund the remainder in two $500,000 installments tied to
certain milestones. 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 is due July 30, 2004, and the Company would be required to issue
additional warrants if the bridge loan is not paid by that date. Second, the Company commenced a public offering of 20,000,000 shares of
common stock. The offering is being led by Needham & Company, Inc. and
co-managed by Merriman Curhan Ford & Co. The Company plans to use the net 6




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proceeds from the offering for working capital, general corporate purposes
and repayment of the bridge loan. The Company cannot give assurance that
additional financing (public or private) will be available on acceptable terms
or at all. If the Company issues additional equity securities to raise funds,
the ownership percentage of its 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 any needed
funds, it would be forced to make further substantial reductions in its
operations, which could adversely affect the Companys ability to implement its
current business plan and ultimately its viability as a company. The Companys financial statements have been prepared assuming that the
Company will continue as a going concern. The factors described above raise
substantial doubt about the Companys 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 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. Credit risk related to
accounts receivable arising from such contracts is considered minimal. 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. 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. 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 7




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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 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 8




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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 ended March 29, 2003 and April
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. Common stock equivalents are not included in the
calculation of diluted loss per share because their effect is antidilutive. Stock-based Compensation As permitted under Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation, the Company has
elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees in accounting for its stock options and other
stock-based employee awards. Pro forma information regarding net loss and loss
per share, as calculated under the provisions of SFAS 123, are disclosed in the
notes to the financial statements. The Company accounts for equity securities
issued to non-employees in accordance with the provision of SFAS 123 and
Emerging Issues Task Force 96-18. 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: March 29, 2003
    
    April 3, 2004Net Loss:As reported
    
    ($
    8,343,000
    )
    
    ($
    5,910,000
    )Stock-based employee compensation
included in net loss
    
    
    
    
    
    
    Stock-based compensation expense
determined under fair value method
    
    
    (908,000
    )
    
    
    (1,668,000
    )Pro forma
    
    ($
    9,251,000
    )
    
    ($
    7,578,000
    )Basic and Diluted Loss per Share:As reported
    
    ($
    0.14
    )
    
    ($
    0.09
    )Stock-based compensation expense
determined under fair value method
    
    
    (0.01
    )
    
    
    (0.02
    )Pro forma
    
    ($
    0.15
    )
    
    ($
    0.11
    )
 9




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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. Comprehensive Income The Company has no items of other comprehensive income in any period and
consequently does not report comprehensive income. Segment Information The Company operates in a single business segment, the 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 quarters endedMarch 29, 2003
    
    April 3, 2004SuperLink Rx
    
    $
    4,429,000
    
    
    $
    2,599,000SuperPlex multiplexer
    
    
    629,000
    
    
    
    431,000SuperLink Tx
    
    
    25,000
    
    
    
    Other
    
    
    38,000
    
    
    
    153,000Total
    
    $
    5,121,000
    
    
    $
    3,183,000
 Certain Risks and Uncertainties During the two year period ended December 31, 2003, the Company sold 2,811
SuperFilter® units and in the quarter ended April 3, 2004 sold 142 SuperFilter®
units. The Company has continued to incur operating losses. The Companys
long-term prospects are dependent upon the continued and increased market
acceptance for the product. The Company currently sells most of its products directly to wireless
network operators in the United States. 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 quarter ended April 3, 2004 ALLTEL and Verizon Wireless,
our two largest customers, accounted for 53% and 32% of our net commercial
revenues, respectively, and 37% and 34% of accounts receivable, respectively. 10




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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 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 since it currently has no SPEs. 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 (4.00%
at April 3, 2004) plus 2.50% subject to a minimum monthly charge. Outstanding
amounts under this borrowing facility at April 3, 2004 totaled $1,188,000 and
are repaid upon collection of the underlying receivables sold. The line of
credit was amended on April 25, 2004. See Note 7  Subsequent Events. 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. 4. Stockholders Equity Stock Options. During the three months ended April 3, 2004, the Company (i) issued
options to purchase 1,414,959 shares of common stock under the Companys stock
option plans and (ii) cancelled options to purchase 152,411 shares of common
stock in connection with employment terminations. Options for 76,021 shares of
common stock were exercised for $379,000 during the period. At April 3, 2004,
options to purchase 8,725,848 shares of common stock were issued and
outstanding under the Companys stock option plans. The outstanding options
expire by the end of March 2014. The exercise prices for these options range
from $0.83 to $49.38 per share, for an aggregate exercise price of
approximately $55.8 million. At April 3, 2004, there were 2,339,604 shares of
common stock available for granting future options. 11




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##### Table of Contents



The following is a summary of outstanding warrants at April 3, 2004: Common SharesCurrently
    
    Price perTotal
    
    Exercisable
    
    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
    
    
    
    476,148
    
    
    
    4.00
    
    
    August 27, 2004Warrants 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
    
    
    6,527,151
    
    
    
    6,003,299
 * 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 quarter ended April 3, 2004 the following warrants were exercised: Common SharesWarrants
    
    
    
    
    
    IssuedIn Accordance WithWarrants
    
    Price per
    
    
    
    
    
    Net ExerciseExercised
    
    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 12




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##### Table of Contents



Company, and also denied the Companys 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 $4,034,000 and $227,000 for
the three-month periods ended March 29, 2003 and April 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 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
reputation, profitability and share price could be adversely affected. 6. Earnings Per Share The computation of per share amounts for the three months ended March 29,
2003 and April 3, 2004 is based on the average number of common shares
outstanding for the period. Options and warrants to purchase 15,265,712 and
15,252,999 shares of common stock during the three months ended March 29, 2003
and April 3, 2004, respectively, were not considered in the computation of
diluted earnings per share because their inclusion would be antidilutive. 7. Subsequent Events Amendment of Credit Facility and Funding of Bridge Loan. The Company closed a transaction on April 25 to 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. The
Company concurrently secured a $2.0 million secured bridge loan from an
investor. The investor funded $1.0 million of the bridge loan at closing and
will fund the remainder in two $500,000 installments tied to certain
milestones. 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
is due July 30, 2004, and the Company would be required to issue additional
warrants if the bridge loan is not paid by that date. Commencement of Public Offering. The Company commenced a public offer of 20,000,000 shares of common stock
on April 29. The offering is being led by Needham & Company, Inc. and
co-managed by Merriman Curhan Ford & Co. The Company plans to use the net
proceeds from the offering for working capital, general corporate purposes and
repayment of the bridge loan. The Company previously filed a shelf
registration statement for a public offering of up to $80 million of
securities, and the Securities and Exchange Commission declared it effective on
March 17, 2004. The Company subsequently filed a prospectus supplement for the
public offering of common stock and are making offers solely by means of a
document which combines the prospectus supplement and the original prospectus
from our registration statement. Copies of this document may be obtained from
Needham & Company, Inc., 445 Park Avenue, New York City, New York 10022, (212)
371-8300. 13




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##### Table of Contents



8. Details of Certain Financial Statement Components and Supplemental
Disclosures of Cash Flow Information and Non-Cash Activities Balance Sheet Data: December 31,2003
    
    April 3, 2004Accounts receivable:Accounts receivable-trade
    
    $
    6,766,000
    
    
    $
    1,935,000U.S. government accounts receivable-billed
    
    
    2,107,000
    
    
    
    760,000Less: allowance for doubtful accounts
    
    
    (64,000
    )
    
    
    (67,000
    )$
    8,809,000
    
    
    $
    2,628,000
 December 31,2003
    
    April 3, 2004Inventories:Raw materials
    
    $
    1,941,000
    
    
    $
    3,342,000Work-in-process
    
    
    4,803,000
    
    
    
    4,675,000Finished goods
    
    
    2,861,000
    
    
    
    6,341,000Less inventory reserve
    
    
    (803,000
    )
    
    
    (981,000
    )$
    8,802,000
    
    
    $
    13,377,000
 December 31,2003
    
    April 3, 2004Property and Equipment:Equipment
    
    $
    21,274,000
    
    
    
    22,249,000Leasehold improvements
    
    
    5,891,000
    
    
    
    5,911,000Furniture and fixtures
    
    
    430,000
    
    
    
    487,00027,595,000
    
    
    
    28,647,000Less: accumulated depreciation and amortization
    
    
    (15,061,000
    )
    
    
    (15,723,000
    )$
    12,534,000
    
    
    $
    12,924,000
  At December 31, 2003 and April 3, 2004, equipment includes $1,430,000 of assets financed under capital lease arrangements, net of $1,220,000 and $1,229,000 of accumulated amortization, respectively.
Depreciation expense amounted to $553,000 and $662,000 for the three-month periods ended March 29, 2003 and April 3, 2004, respectively. December 31,2003
    
    April 3, 2004Patents and Licenses:Patents pending
    
    $
    848,000
    
    
    $
    795,000Patents issued
    
    
    1,182,000
    
    
    
    1,334,000Less accumulated amortization
    
    
    (332,000
    )
    
    
    (356,000
    )Net patents issued
    
    
    850,000
    
    
    
    978,000Licenses
    
    
    3,310,000
    
    
    
    3,329,000Less accumulated amortization
    
    
    (2,322,000
    )
    
    
    (2,391,000
    )Net licenses
    
    
    988,000
    
    
    
    938,000Purchased technology
    
    
    3,200,000
    
    
    
    3,200,000Less accumulated amortization
    
    
    (519,000
    )
    
    
    (633,000
    )Net purchased technology
    
    
    2,681,000
    
    
    
    2,567,000$
    5,367,000
    
    
    $
    5,278,000
 Amortization expense related to these items totaled $189,000 and $207,000 for the three-month periods ended March 29, 2003 and April 3, 2004, respectively. Amortization expenses are expected to
total $788,000 in 2004, $805,000 in 2005 and $825,000 in each of the years 2006, 2007 and 2008. 14




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##### Table of Contents



December 31, 2003
    
    April 3, 2004Accrued Expenses and Other
Long Term Liabilities:Compensation related
    
    $
    2,153,000
    
    
    $
    1,350,000Warranty reserve
    
    
    494,000
    
    
    
    530,000Unfavorable lease costs
    
    
    823,000
    
    
    
    738,000Lease abandonment costs
    
    
    1,329,000
    
    
    
    1,137,000Product line exit costs
    
    
    913,000
    
    
    
    877,000Severance costs
    
    
    285,000
    
    
    
    19,000Other
    
    
    723,000
    
    
    
    609,0006,720,000
    
    
    
    5,260,000Less current portion
    
    
    (4,832,000
    )
    
    
    (3,637,000
    )Long term portion
    
    $
    1,888,000
    
    
    $
    1,623,000
 For the three months ended,March 29,
    
    April 3,2003
    
    2004Warranty Reserve Activity:Beginning balance
    
    $
    351,000
    
    
    $
    494,000Additions
    
    
    35,000
    
    
    
    36,000Deductions
    
    
    (17,000
    )
    
    
    Ending balance
    
    $
    369,000
    
    
    $
    530,000Unfavorable Lease Costs:Beginning balance
    
    $
    1,140,000
    
    
    $
    823,000Additions
    
    
    
    
    
    
    Deductions
    
    
    (75,000
    )
    
    
    (85,000
    )Ending balance
    
    $
    1,065,000
    
    
    $
    738,000Lease Abandonment Costs:Beginning balance
    
    $
    1,995,000
    
    
    $
    1,329,000Additions
    
    
    
    
    
    
    Deductions
    
    
    (152,000
    )
    
    
    (192,000
    )Ending balance
    
    $
    1,843,000
    
    
    $
    1,137,000Product Line Exit Costs:Beginning balance
    
    $
    1,042,000
    
    
    $
    913,000Additions
    
    
    
    
    
    
    Deductions
    
    
    (32,000
    )
    
    
    (36,000
    )Ending balance
    
    $
    1,010,000
    
    
    $
    877,000Severance Costs:Beginning balance
    
    $
    1,600,000
    
    
    $
    285,000Additions
    
    
    
    
    
    
    Deductions
    
    
    (1,065,000
    )
    
    
    (266,000
    )Ending balance
    
    $
    535,000
    
    
    $
    19,000
 15




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##### Table of Contents



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.
    
    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 and 1,884 systems in
2003. 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 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 16




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##### Table of Contents



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 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 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. 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. 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. 17




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##### Table of Contents



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: March 29, 2003
    
    April 3, 2004Net Loss:As reported
    
    
    ($8,343,000
    )
    
    
    ($5,910,000
    )Stock-based compensation
included in net loss
    
    
    
    
    
    
    Stock-based compensation
expense determined under fair
value method
    
    
    (908,000
    )
    
    
    (1,668,000
    )Pro forma
    
    
    ($9,251,000
    )
    
    
    ($7,578,000
    )Basic and diluted loss per share:As reported
    
    
    ($0.14
    )
    
    
    ($0.09
    )Stock compensation expense
    
    
    (0.01
    )
    
    
    (0.02
    )Pro forma
    
    
    ($0.15
    )
    
    
    ($0.11
    )
 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 April 3, 2004 to be $955,000, 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 also expect increased competition in 2004 from venders of other
sensitivity and interference solutions such as tower mount amplifiers and
conventional filters. We expect this will increase customer pressure on our
product pricing in 2004. 18




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##### Table of Contents



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. Quarter ended April 3, 2004 as compared to the quarter ended March 29, 2003. Total net revenue decreased by $2.1 million, or 28%, from $7.6 million in
first quarter of 2003 to $5.4 million in the first quarter of 2004. Total
revenues primarily consist of commercial revenue and government contract
revenue. Our commercial revenue is generated from (i) the sales of our SuperLink Rx
product line which combines specialized filters using high-temperature
superconducting (HTS) technology with a proprietary cryogenic cooler and a
low-noise amplifier in highly compact systems and (ii) from the sales of our
multiplexer product line. 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
quarter of 2003 and 2004: For the three months endedDollars in thousands
    
    March 29, 2003
    
    April 3, 2004Gross commercial product sales proceeds
    
    $
    5,178
    
    
    $
    3,219Less sales discounts
    
    
    (57
    )
    
    
    (36
    )Net commercial product revenues
    
    $
    5,121
    
    
    $
    3,183
 Net commercial product revenues in the first quarter of 2004 decreased to
$3.2 million from $5.1 million in the same period last year, a decrease of $1.9
million, or 38%. This decrease is primarily the result of lower sales of our
SuperLink Rx products of $1.8 million and multiplexer products of $198,000 and
a 5% decrease in average selling price on our SuperLink Rx products. Our two
largest customers accounted for 92% of our net commercial revenues in the three
months ended March 29, 2003 and 85% in the three months ended April 3, 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 stopped 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 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 also expect 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. Government contract revenues decreased by $241,000, or 10%, from $2.5
million in the first quarter of 2003 to $2.2 million in the same quarter of
2004. This decrease is primarily attributable to the completion of one contract
in 2003 that was not replaced. In our business model, we use government
contracts as a source of funds for our commercial technology development. We
primarily pursue government research and development contracts, which
compliment our commercial product development. In other words, we undertake
government contract work, which has the potential to add to or improve our
commercial product line. These contracts often yield valuable intellectual
property relevant to our commercial business. Under the terms of our
government contracts, we retain exclusive rights to this technology for
commercial applications and the federal government has a non-exclusive license
to exploit the technology for government applications. Cost of commercial product revenue includes all direct costs and
manufacturing overhead. The cost of commercial product revenue totaled $3.8
million and $4.8 million for the first quarter ended April 3, 2004 and March
29, 2003, respectively. 19




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##### Table of Contents



Decreased costs result primarily from decreased unit shipments partially
offset by higher costs associated with ramping up the Companys manufacturing
capacity in 2003. For the quarter ended April 3, 2004 we had negative gross profit of
$600,000 from sale of our commercial products as compared to positive gross
profit of $324,000 in our first quarter of 2003. Negative gross
profit was generated due to fixed manufacturing overhead costs. Contract research and development expenses totaled $1.5 million and $1.4
million in the first quarter of 2004 and 2003, respectively. This increase
results from higher expenses associated with completing government contracts. Other research and development expenses relate to development of our
commercial products. These expenses decreased to $1.3 million in the first
quarter of 2004, as compared to $1.7 million in the same period last year. The
decline is due to lower commercial product development efforts. Selling, general and administrative expenses totaled $4.6 million in the
first quarter of 2004 as compared to $8.0 million in the same period last year.
This decrease results primarily from lower ISCO litigation expenses. In the
first quarter of 2004 these expenses totaled $227,000 as compared to $4.0
million in the first quarter of 2003. This decrease was partially offset by
higher sales and marketing expenses. Interest income decreased in the first quarter of 2003 as compared to the
same period in the prior year because we had less cash available for
investment. . Interest expense is comparable to the prior year. We had a net loss of $5.9 million for the quarter ended April 3, 2004 as
compared to $8.3 million in the same period last year. The net loss available to common shareholders totaled $0.09 per common
share in the current quarter, as compared to $0.14 per common share, in the
same period last year. Liquidity and Capital Resources Cash and cash equivalents decreased by $7.2 million from $11.1 million at
December 31, 2003 to $3.9 million at April 3, 2004. Cash was used in
operations, for the purchase of property and equipment and for the payment of
short and long-term borrowings. Cash used in operations totaled $3.9 million in the first quarter of 2004.
We used $5.0 million to fund the cash portion of our net losses. We also used
cash to fund a $5.2 million increase in inventory, patents and licenses and
accounts payable payments. Inventory increased during the first
quarter 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 $6.3 million. Net cash used to purchase manufacturing related equipment and tenant
improvements totaled $1.1 million in the first quarter of 2004 and $512,000 the
same period last year. Net cash used in financing activities totaled $2.2 million in the first
quarter of 2004. Net payments against our credit facility and payment against
our long-term debt totaled $2.7 million. This use of cash was partially offset
by cash received from the exercise of warrants and options. 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 expanded 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 95% of the receivables sold. Advances bear
interest at the prime rate (4.00% at April 3, 2004) plus 2.50% subject to a
minimum monthly charge. Outstanding amounts under this borrowing facility at
April 3, 2004 totaled $1,188,000. The amount outstanding is repaid upon
collection of the underlying accounts receivable. Advances are secured 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. 20




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At April 3, 2004, we had following cash commitments: Payments Due by PeriodContractual Obligations
    
    Total
    
    Less than 1 year
    
    2-3 years
    
    4-5 years
    
    After 5 yearsCapital lease
obligations
    
    $
    153,000
    
    
    $
    85,000
    
    
    $
    59,000
    
    
    $
    9,000
    
    
    $
    Operating leases
    
    
    12,750,000
    
    
    
    2,407,000
    
    
    
    3,623,000
    
    
    
    2,753,000
    
    
    
    3,967,000Minimum license
commitment
    
    
    3,082,000
    
    
    
    270,000
    
    
    
    540,000
    
    
    
    540,000
    
    
    
    1,732,000Fixed asset purchase
commitments
    
    
    300,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    16,285,000
    
    
    $
    3,062,000
    
    
    $
    4,222,000
    
    
    $
    3,302,000
    
    
    $
    5,699,000
 There were no material changes to commitments outside the ordinary course
of business. The Company plans to invest approximately $1.0 to 2.0 million in fixed
assets during the remainder of 2004 to continue to expand manufacturing
capacity if there is sufficient market demand for its product. This plan is
contingent on the Company ability to raise additional capital later this year. The Company auditors have included in their audit report for 2003-year an
explanatory paragraph expressing doubt about the Company 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 quarter ended April 3, 2004, the Company
had a net loss of $5,910,000 and negative cash flows from operations of
$3,928,000. The Company also experienced lower than expected revenues in the
first quarter of 2004. In response, the Company adjusted its inventory build
plan, reduced direct labor, cut certain fixed costs and implemented a reduced
workweek. The Company believes these steps will provide the Company with
sufficient capital resources to continue normal operations until the Company
can complete a financing transaction. The Company needs additional financing in the second quarter and is
exploring financing alternatives. The Company has taken two steps to secure
the required funds. First, the Company closed a transaction on April 25 to
expand the its credit facility. Silicon Valley Bank amended the Companys
existing line of credit to increase borrowing capacity from 80% to 95% of
eligible accounts receivable. The Company concurrently secured a $2.0 million
secured bridge loan from an investor. The investor funded $1.0 million of the
bridge loan at closing and will fund the remainder in two $500,000 installments
tied to certain milestones. 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 is due July 30, 2004, and the Company would be required to
issue additional warrants if the bridge loan is not paid by that date. Second, the Company commenced a public offer of 20,000,000 shares of
common stock on April 29. The offering is being led by Needham & Company, Inc.
and co-managed by Merriman Curhan Ford & Co. The Company plans to use the net
proceeds from the offering for working capital, general corporate purposes and
repayment of the bridge loan. The Company previously filed a shelf
registration statement for a public offering of up to $80 million of
securities, and the Securities and Exchange Commission declared it effective on
March 17, 2004. The Company subsequently filed a prospectus supplement for the
public offering of common stock and is making offers solely by means of a
document which combines the prospectus supplement and the original prospectus
from the Companys registration statement. Copies of this document may be
obtained from Needham & Company, Inc., 445 Park Avenue, New York City, New York
10022, (212) 371-8300. The Company cannot give assurance that additional financing (public or
private) will be available on acceptable terms or at all. If the Company
issues additional equity securities to raise funds, the ownership percentage of
its 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 any needed funds, it would also 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 financial statements has 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. 21




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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 is not expected to have an impact on the
Companys consolidated financial statements since it currently has no SPEs. 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: 22




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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 April 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 first
quarter of 2004 that has materially affected, or is reasonable likely to
materially affect, our internal control over financial reporting. 23




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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. 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. 24




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##### Table of Contents



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)4.15
    
    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)10.1
    
    Accounts Receivable Purchase Modification Agreement dated March 17, 200431.1
    
    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. 25




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##### Table of Contents



(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.(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.*
    
    Confidential treatment has been previously granted for certain portions
of these exhibits.**
    
    Confidential treatment has been requested for certain portions of this
exhibit. 26




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##### Table of Contents



(b) Reports on Form 8-K. We filed or furnished the following Current Reports on Form 8-K during the
quarter ended April 3, 2004:  
    
    Furnished February 4, 2004  Items 9 and 12
Announcing preliminary financial results for the fourth quarter
and year ended December 31, 2003.
    
    Furnished March 1, 2004  Items 9 and 12 Announcing
financial results for the fourth quarter and year ended
December 31, 2003. 
 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: May 12, 2004
    
    /s/ Martin S. McDermutMartin S. McDermutSenior Vice President, Chief Financial Officer and Secretary/s/ M. Peter ThomasM. Peter ThomasPresident and Chief Executive Officer
 27