**United States**

**Securities and Exchange Commission**

**Washington,DC 20549**

 

**FORM 10-Q**

**(MarkOne)**

 
| **ý** | **Quarterly report pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**Forthe period ended September 30, 2002or**

 
| **o** | **Transition report pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**Forthe transition period from         to**

 

**Commissionfile number 0-11915**

 

**Conductus, Inc.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                                        |   | **77-0162388**                       |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of Incorporation or  organization)                     |   | (I.R.S. Employer Identification No.) |
|                                                                                |   |                                 |
| **969 W. Maude Ave., Sunnyvale,  California**                                       |   | **94085**                            |
| (Address of principal executive offices)                                            |   | (Zip Code)                           |
|                                                                                |   |                                 |
| **(408) 523-9950**                                                                  |
| (Registrant’s Telephone Number, including area code)                           |
|                                                                                |
| **Not  Applicable**                                                                 |
| (Former name, former address and former fiscal year,  if changed since last report) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySections 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days Yes   ý   No   o

 

As of October 31, 2002,there were 22,510,401 shares of the registrant’s common stock outstanding

 

Total pages: Index to Exhibits to be found on page

 

 

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**Conductus,Inc**

**Index**

 
| **Part I: Financial Information** |
|-----------------------------------|
|                              |   |
|                              | *Item 1: Financial  Statements* |
|                              |   |
|                              |   | Unaudited  Condensed Balance Sheets — September 30, 2002 and December 31, 2001 |
|                              |   |   |
|                              |   | Unaudited Condensed  Statements of Operations — Three and Nine months ended September 30, 2002 and  2001 |
|                              |   |   |
|                              |   | Unaudited Condensed  Statements of Cash Flows — Nine months ended September 30, 2002 and 2001 |
|                              |   |   |
|                              |   | Notes To  Unaudited Condensed Financial Statements |
|                              |   |   |
|                              | *Item  2: Management’s Discussion and Analysis of Financial Condition and Results of  Operations* |
|                              |   |   |
|                              | *Item  3: Quantitative and Qualitative Disclosures About Market Risk* |
|                              |   |   |
|                              | *Item 4:  Controls and Procedures* |
|                              |   |   |
| **Part II: Other  Information**   |
|                              |   |   |
|                              | *Item 1: Legal Proceedings* |
|                              |   |   |
|                              | *Item  2: Changes in Securities* |
|                              |   |   |
|                              | *Item 3:  Default Upon Senior Securities* |
|                              |   |   |
|                              | *Item  4: Submission of Matters to a Vote of Security Holders* |
|                              |   |   |
|                              | *Item 5: Other Information* |
|                              |   |   |
|                              | *Item 6:  Exhibits and Reports on Form 8-K* |
|                              |   |   |
| **Signatures**                    |   |   |
|                              |   |   |
| **Certifications**                |
|                              |   |   |
| **Exhibit Index**                 |   |
|                              |   |   |
|                                   |  |  |  |

 

2

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**PartI:  Financial Information**

*ItemI:  Financial Statements*

**Conductus,Inc.**

**Condensed Balance Sheets**

 

(In thousands)

(Unaudited)

 
|                                                                  |   | **September  30, 2002** |   | **December  31, 2001** |   |
|-----------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| **ASSETS**                                                            |   |                    |   |                   |   |
| Current assets:                                                       |   |                    |   |                   |   |
| Cash and cash equivalents                                             |   | $                       | 2,085  |                   | $      | 4,201 |   |
| Short-term investments                                                |   | 450                     |   | 2,696                  |   |
| Accounts receivable,  net                                             |   | 938                     |   | 1,151                  |   |
| Inventories                                                           |   | 2,545                   |   | 3,835                  |   |
| Prepaid expenses and  other current assets                            |   | 557                     |   | 349                    |   |
| Total current assets                                                  |   | 6,575                   |   | 12,232                 |   |
| Property and equipment,  net                                          |   | 2,521                   |   | 3,033                  |   |
| Restricted cash                                                       |   | 374                     |   | 374                    |   |
| Other assets                                                          |   | 503                     |   | 587                    |   |
| Total assets                                                          |   | $                       | 9,973  |                   | $      | 16,226 |   |
|                                                                  |   |                    |   |                   |   |
| **LIABILITIES**                                                       |   |                    |   |                   |   |
| Current liabilities:                                                  |   |                    |   |                   |   |
| Accounts payable                                                      |   | $                       | 1,644  |                   | $      | 725 |   |
| Accrued liabilities                                                   |   | 1,753                   |   | 1,909                  |   |
| Capital lease  obligations                                            |   | 184                     |   | 169                    |   |
| Total current  liabilities                                            |   | 3,581                   |   | 2,803                  |   |
| Capital lease  obligations and long-term debt, net of current portion |   | 66                      |   | 205                    |   |
| Total liabilities                                                     |   | 3,647                   |   | 3,008                  |   |
|                                                                  |   |                    |   |                   |   |
| **STOCKHOLDERS’  EQUITY**                                        |   |                    |   |                   |   |
| Common stock                                                          |   | 2                       |   | 2                      |   |
| Additional paid-in  capital                                           |   | 110,591                 |   | 103,590                |   |
| Receivable from  stockholder                                          |   | (460                    | )      | (460                   | )      |
| Accumulated deficit                                                   |   | (103,807                | )      | (89,914                | )      |
| Total stockholders’  equity                                      |   | 6,326                   |   | 13,218                 |   |
| Total liabilities and  stockholders’ equity                      |   | $                       | 9,973  |                   | $      | 16,226 |   |

 

The accompanying notes are an integral part of these condensedfinancial statements.

 

3

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**Conductus,Inc.**

**Condensed Statements Of Operations**

 

(In thousands, except per share amounts)

(Unaudited)

 
|                                                            |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|-----------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
|                                                            |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
| Revenues:                                                       |   |                                  |   |                                      |   |   |   |   |   |
| Product                                                         |   | $                                     | 341    |                                      | $      | 703 |   | $ | 2,320 |   | $ | 1,997 |   |
| Contract                                                        |   | 941                                   |   | 1,170                                     |   | 2,523 |   | 2,854 |   |
|                                                            |   |                                  |   |                                      |   |   |   |   |   |
| Total revenues                                                  |   | 1,282                                 |   | 1,873                                     |   | 4,843 |   | 4,851 |   |
| Operating costs and  expenses:                                  |   |                                  |   |                                      |   |   |   |   |   |
| Cost of product  revenues                                       |   | 1,711                                 |   | 3,049                                     |   | 5,968 |   | 7,754 |   |
| Research and  development                                       |   | 2,232                                 |   | 2,212                                     |   | 6,360 |   | 6,668 |   |
| Selling, general and  administrative                            |   | 2,022                                 |   | 1,901                                     |   | 6,513 |   | 5,384 |   |
|                                                            |   |                                  |   |                                      |   |   |   |   |   |
| Total operating costs  and expenses                             |   | 5,965                                 |   | 7,162                                     |   | 18,841 |   | 19,806 |   |
|                                                            |   |                                  |   |                                      |   |   |   |   |   |
| Loss from operations                                            |   | (4,683                                | )      | (5,289                                    | )      | (13,998 | ) | (14,955 | ) |
| Interest and other  income                                      |   | 51                                    |   | 140                                       |   | 178 |   | 566 |   |
| Interest expense                                                |   | (24                                   | )      | (26                                       | )      | (74 | ) | (99 | ) |
|                                                            |   |                                  |   |                                      |   |   |   |   |   |
| Net loss                                                        |   | (4,656                                | )      | (5,175                                    | )      | (13,894 | ) | (14,488 | ) |
|                                                            |   |                                  |   |                                      |   |   |   |   |   |
| Net loss per share:                                             |   |                                  |   |                                      |   |   |   |   |   |
| Basic and diluted                                               |   | $                                     | (0.21  | )                                         | $      | (0.28 | ) | $ | (0.65 | ) | $ | (0.84 | ) |
|                                                            |   |                                  |   |                                      |   |   |   |   |   |
| Weighted average common  shares used in per share calculations: |   |                                  |   |                                      |   |   |   |   |   |
| Basic and diluted                                               |   | 22,510                                |   | 18,710                                    |   | 21,352 |   | 17,150 |   |
|                                                                 |        |                                       |        |                                           |        |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these condensedfinancial statements.

 

4

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**Conductus,Inc.**

**Condensed Statements of Cash Flows**

 

(In thousands)

(Unaudited)
|                                                                         |   | **Nine  Months Ended September 30,** |    |
|------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                         |   | **2002**                             |    | **2001** |   |
| Cash flows from  operating activities:                                       |   |                                 |    |   |   |
| Net loss                                                                     |   | $                                    | (13,894 | ) | $ | (14,488 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                 |    |   |   |
| Depreciation and  amortization                                               |   | 748                                  |    | 603 |   |
| Amortization of  discount on long term debt                                  |   | 44                                   |    | 15 |   |
| Gain on disposal of  equipment                                               |   | (9                                   | )  | (80 | ) |
| Non-cash charge for  warrants vesting upon commercial product sales          |   | 5                                    |    | 114 |   |
| Changes in operating  assets and liabilities:                                |   |                                 |    |   |   |
| Accounts receivable                                                          |   | 213                                  |    | (875 | ) |
| Inventories                                                                  |   | 1,290                                |    | (1,121 | ) |
| Prepaid expenses and  other current assets                                   |   | (191                                 | )       | (310 | ) |
| Accounts payable and  accrued liabilities                                    |   | 763                                  |    | 1,459 |   |
|                                                                         |   |                                 |    |   |   |
| Net cash used in  operating activities                                       |   | (11,031                              | )       | (14,683 | ) |
| Cash flows from  investing activities:                                       |   |                                 |    |   |   |
| Maturities of  short-term investments                                        |   | 2,250                                |    | 9,027 |   |
| Purchases of short-term  investments                                         |   | (4                                   | )       | (3,753 | ) |
| Acquisition of property  and equipment                                       |   | (216                                 | )       | (1,277 | ) |
| Net proceeds from  disposal of property and equipment                        |   | 13                                   |    | 80 |   |
|                                                                         |   |                                 |    |   |   |
| Net cash provided by  investing activities                                   |   | 2,043                                |    | 4,077 |   |
| Cash flows from  financing activities:                                       |   |                                 |    |   |   |
| Net proceeds from  issuance of common stock                                  |   | 6,997                                |    | 12,143 |   |
| Principal payments on  long-term debt and capital leases                     |   | (125                                 | )       | (712 | ) |
|                                                                         |   |                                 |    |   |   |
| Net cash provided by  financing activities                                   |   | 6,872                                |    | 11,431 |   |
| Net increase (decrease)  in cash and cash equivalents                        |   | (2,116                               | )  | 825 |   |
| Cash and cash  equivalents at beginning of period                            |   | 4,201                                |    | 7,202 |   |
|                                                                         |   |                                 |    |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                                    | 2,085   |   | $ | 8,027 |   |

 

The accompanying notes are an integral part of these condensedfinancial statements.

 

5

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**Conductus,Inc.**

 

**NotesTo Condensed Financial Statements**

**(Unaudited)**

 

**1.          Summaryof Significant Accounting Policies:**

 

**Basis of Presentation:**

 

The accompanyingunaudited condensed financial statements have been prepared pursuant to therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in the financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations. These unaudited condensed financial statements should beread in conjunction with the audited financial statements and notes theretoincluded in our Report on Form 10-K for the year ended December 31, 2001, and filedwith the Securities and Exchange Commission. The unaudited condensed financialstatements as of September 30, 2002, and for the three and nine months endedSeptember 30, 2002 and 2001, include, in the opinion of management, alladjustments, consisting of normal recurring adjustments, necessary to presentfairly the financial information set forth herein. The unaudited condensedresults of operations for the interim periods are not necessarily indicative ofthe results to be expected for an entire year. The December 31, 2001 balancesheet included in this unaudited interim report was derived from auditedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America.

**RecentAccounting Pronouncements:**

In June 2002, the FASB issued SFAS No. 146, Accountingfor Exit or Disposal Activities. SFAS No. 146 addresses significant issuesregarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3, LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring). The scope ofSFAS No. 146 also includes costs related to terminating a contract that is nota capital lease and termination benefits that employees who are involuntarilyterminated receive under the terms of a one-time benefit arrangement that is notan ongoing benefit arrangement or an individual deferred-compensation contract.SFAS No. 146 will be effective for exit or disposal activities that areinitiated after December 31, 2002 and early application is encouraged. TheCompany will adopt SFAS No. 146 during the first quarter of 2003. Theprovisions of EITF No. 94-3 shall continue to apply for an exit activityinitiated under an exit plan that met the criteria of EITF No. 94-3 prior tothe adoption of SFAS No. 146. The adoption of SFAS No. 146 will change on aprospective basis the timing of when restructuring charges are recorded from acommitment date approach to when the liability is incurred; however, theCompany does not expect the adoption of SFAS No. 146 will have a materialimpact on our financial position and results of operations.

**Substantial Future Capital Needs:**

 

The Company’sfuture capital requirements will depend, generally, on future levels ofrevenues and spending. The Company believes that its cash balance at September30, 2002, should be sufficient to fund anticipated cash requirements throughDecember 2002.

 Conductus believes that the merger transaction contemplatedbetween Conductus and Superconductor Technologies will close by the end ofDecember 2002.  If the close of the mergeris delayed beyond the end of December 2002, Conductus believes that its cashbalance should be sufficient to fund operations into the first quarter of 2003;however, there can be no assurance that changes in Conductus’ plans or otherevents affecting Conductus will not result in the expenditure of its resourcesbefore then.  If the merger transactionis delayed significantly or is not completed at all, Conductus will be requiredto seek additional financing, however it can give no assurance that additionalfinancing will be available on acceptable terms or at all.  Additionally, if the merger transaction isnot completed and Conductus is unable to raise significant additional fundsthrough debt or equity issuances, asset sales, or otherwise, it will be requiredto delay, reduce or eliminate one or more of its research and developmentprograms or obtain funds from collaborative partners or others that may requireConductus to relinquish rights to its technologies or potential products thatConductus would not otherwise relinquish. Conductus’ financial statements have been prepared assuming thatConductus will continue as a going concern. The unaudited condensed financialstatements do not include any adjustments that might be necessary if Conductusis unable to continue as a going concern or that may result from the outcome ofany of these other uncertainties.

6

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**2.          SupplementalSchedule of Non-Cash Investing and Financing Activities:**

 
|                                    |   | **Nine  Months Ended   September 30,** |   |
|-----------------------------------------|--------|----------------------------------------|--------|
|                                    |   | **2002**                               |   | **2001** |   |
|                                    |   |                                   |   |   |   |
| Equipment acquired  under capital lease |   | $                                      | — |   | 514 |   |
|                                         |        |                                        |        |  |  |  |

 

**3.          Basicand Diluted Net Loss Per Share:**

 

The followingtable summarizes the Company’s loss per share computations for the three andnine months ended September 30, 2002 and 2001 (in thousands, except per share data):

 
|                                                      |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                      |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Numerator — basic and  diluted net loss per share:   |   |                                   |   |                                  |   |   |   |   |   |
| Net loss                                                  |   | $                                      | (4,656 | )                                     | $      | (5,175 | ) | $ | (13,894 | ) | $ | (14,488 | ) |
| Denominator — basic and  diluted net loss per share: |   |                                   |   |                                  |   |   |   |   |   |
| Weighted average common  shares outstanding               |   | 22,510                                 |   | 18,710                                |   | 21,352 |   | 17,150 |   |
| Net loss per share:                                       |   |                                   |   |                                  |   |   |   |   |   |
| Basic and diluted                                         |   | $                                      | (0.21  | )                                     | $      | (0.28 | ) | $ | (0.65 | ) | $ | (0.84 | ) |

 

In the abovecomputations, common equivalent shares are excluded from the diluted net lossper share calculations, as their effect is anti-dilutive.  Common equivalent shares, including commonstock options and warrants, that could potentially dilute basic earnings pershare in the future and that were not included in the computations of dilutedloss per share because of anti-dilution were approximately 3,000 and 842,000for the three months ended September 30, 2002 and 2001, respectively, and85,000 and 935,000 for the nine months ended September 30, 2002 and 2001,respectively.

 

**4.          Inventories:**

 

Inventoriesconsist of the following (in thousands):

 
|            |   | **September  30,** **2002** |   | **December  31,   2001** |   |
|-----------------|--------|----------------------------------|--------|--------------------------|--------|
| Raw materials   |   | $                                | 658    |                     | $      | 2,349 |   |
| Work in process |   | 785                              |   | 888                      |   |
| Finished goods  |   | 1,102                            |   | 598                      |   |
| Total           |   | $                                | 2,545  |                     | $      | 3,835 |   |

 

7

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**5.          LegalProceedings:**

 

On July 17, 2001, ISCO International, Inc.(“ISCO”) filed a complaint in the United States District Court for the Districtof Delaware against the Company, alleging that its current base stationfront-end systems containing cryogenically cooled superconducting filtersinfringe ISCO’s U.S. Patent No. 6,263,215, entitled “CryoelectronicallyCooled Receiver Front End for Mobile Radio Systems,” which was issued onJuly 17, 2001. On September 17, 2001, ISCO amended its complaint toallege willful infringement and to seek treble damages for the allegedinfringement. The complaint seeks injunctive relief and damages forinfringement. The Company denied infringement, denied that the patent is validand alleged that the patent was procured through inequitable conduct. TheCompany filed counterclaims seeking declarations of invalidity andnon-infringement and damages for unfair competition. The Company believes thatISCO’s claims are without merit and is defending itself vigorously.

Thetrial is scheduled to start March 17, 2003. The parties completed the discovery process by June 28, 2002. On October30, 2002, the Court issued its “Markman” order concerning the scope and meaningof the claims in the case.  After reviewof the ruling, the Company believes that its position remains strong.  Motions for summary judgment are pending.

An adverse outcomein the pending litigation, or in litigation of other intellectual propertyclaims, could subject the Company to significant liabilities or require it tocease using such technology. The cost of defending a patent lawsuit will likelyconstitute a major financial burden for the Company.  The Company is not able at this time to estimate the possibilityof loss or range of loss, if any, that might result. While the outcome of thisclaim cannot be predicted with certainty, the Company does not believe that theoutcome will have a material adverse effect on its financial position, resultsof operations or cash flows.

 

**6.          SubsequentEvents:**

 

On October 10, 2002, Conductus and Superconductor Technologiesjointly announced they have signed adefinitive agreement to merge the two companies and on October 31, 2002Superconductor Technologies Inc. (“STI”) filed a Form S-4.  The new company will retain theSuperconductor Technologies name, and will combine the talents, technologiesand assets of the two pioneers of commercial wireless and governmentapplications of superconducting technology. In addition, the companies have secured firm commitments from existingshareholders and affiliated entities for a $20 million investment through aprivate placement in the combined company, which is expected to closeconcurrent with, and is contingent upon, the close of the merger.

Under the terms of the agreement, which is subject tocustomary regulatory approvals and stockholder approval from each company,Conductus stockholders will receive 0.6 shares of newly issued STI common stockfor each outstanding share of Conductus common stock. This transaction, whichis expected to be tax-free to stockholders of both companies for U.S. federalincome tax purposes, will be accounted for as a purchase and is expected toclose by December 31, 2002.

 

 

8

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*Item 2: Management’s Discussion and Analysis of FinancialCondition and Results of Operations.*

 

THIS REPORT ONFORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS ANDUNCERTAINTIES. CONDUCTUS, INC.’S (THE “COMPANY” OR “CONDUCTUS” OR “OUR”) ACTUALRESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKINGSTATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOTLIMITED TO, THOSE DISCUSSED IN “RISK FACTORS” IN PART 1 OF OUR ANNUAL REPORT ONFORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 AS SUPPLEMENTED BY AMENDMENT 2TO OUR REGISTRATION STATEMENT ON FORM S-3 FILED JUNE 6, 2002. THE FOLLOWINGDISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED FINANCIALSTATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT ON FORM 10-Q.

 

**Overview**

 

We develop,manufacture and market electronic components and systems based onsuperconductors for applications in the worldwide wireless telecommunicationsmarket. Our products use high-temperature superconductor technology, which hassignificant potential performance advantages over products based on competingmaterials such as copper. These advantages include enhanced sensitivity,efficiency, speed and operating frequency, as well as reduced powerconsumption, size, weight and cost. Our primary commercial product is our lineof ClearSite® front-end receiver systems for cellular and personalcommunication services cell sites. These products may significantly enhance theservices provided by wireless network operators. Taking advantage of the uniqueproperties of high-temperature superconductor materials, ClearSite products canprovide significant benefits in base station performance, including coverageenhancement, reduced interference, increased capacity and enhanced bandwidth.They can also reduce the size of the filter components required and enablenetwork service providers and original equipment manufacturers to deploy new,and enhance existing, analog and digital cellular systems for increasinglydemanding carrier network environments.

 

Our ClearSiteproducts are designed for use with TDMA, CDMA, GSM and analog base stations.They may be installed as part of a new base station, or as a retrofit forexisting base stations. In 2001, we introduced our ClearSite 2100 line offront-end receiver systems. ClearSite 2100 systems are available in both omniand three-sector configurations, and can be retrofitted into existing cellsites resulting in immediate performance improvements, or can be deployed innew network build outs. In 2002, we introduced our ClearSite 2300 Metro line offront-end receiver systems, which incorporates higher performance filteringcapabilities specifically designed to address the needs of the urban market.

 

In addition to ourproducts for the wireless communications infrastructure market, we design,manufacture and sell products for the government market. These specializedproducts use many of the same technologies used in our commercial products and,thus, complement our commercial product line.

 

A significant partof our revenues are derived from government research and development contracts.Many of these contracts are under programs calling for basic research ofpotentially broad application. We expect that this research may result inimprovement of existing products (for example, improved materials, cryogenicsfilter design or tuning performance) or possibly provide the basis for futureproducts. We retain ownership of technology developed under these governmentcontracts. The government obtains a perpetual, royalty-free license to use thetechnology for government purposes. Typically under these contracts, thegovernment has the right to terminate the contract for convenience.

 

As of September 30, 2002,we had accumulated losses of approximately $103,807,000 and we expect to incursignificant additional losses during the remainder of 2002. We, alone or withcollaborative partners, must successfully develop, manufacture, introduce andmarket our potential products in order to achieve profitability. Though ourproduct line is commercially available and generates material sales, we do notexpect to recognize revenues equal to or greater than our costs and expensesuntil we achieve significantly larger sales volume and successfully reducecosts of the products.

 

9

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### **Critical Accounting Policies and Estimates**

## ** **

**General**

 

Discussion andanalysis of our financial condition and results of operations are based uponour financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an on-going basis,we evaluate estimates, including those related to revenues, contracts,inventories, contingencies and litigation. Estimates are based on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ materially fromthese estimates under different assumptions or conditions.

 

We believe the followingcritical accounting policies affect the more significant judgments andestimates used in the preparation of our financial statements:

 

## **RevenueRecognition**

 

Our revenuerecognition policy is significant because our revenues are a key component of ourresults of operations. We follow very specific and detailed guidelines inmeasuring revenues; however, certain judgments affect the application of ourrevenue policy.  Revenue results aredifficult to predict, and any shortfall in revenues or delay in recognizingrevenues could cause our operating results to vary significantly from quarterto quarter.

 

We recognizerevenue upon the shipment of our products to the customer provided that we havereceived a purchase order, the price is fixed or determinable, title hastransferred, collection of the resulting receivable is reasonably assured andthere are no remaining obligations. We provide for future returns and warrantyclaims at the time revenue is recognized based on historical experience.

 

When we issuewarrants or other equity instruments in connection with sales transactions, thefair value of the equity instrument, as calculated using the Black–Scholesoption pricing model, is treated as a reduction in the amount of revenuesrecognized in the period, unless the reduction results in negative revenues forthat specific customer on a cumulative basis, in which case the remainder, ifany, increases cost of goods sold in our financial statements.

 

## **Research andDevelopment Contracts**

 

We have enteredinto contracts to perform research and development for the U.S. government.Revenue from these contracts is recognized utilizing thepercentage-of-completion method measured by the relationship of costs incurredto total contract costs. Estimates of costs-to-complete on contracts are basedon significant management judgments including assessing the progress of thecontract and estimating remaining tasks and associated costs. We haveexperienced managers who prepare these estimates, which are subject to review.Management assessments of costs to complete determine the amount of revenue andprofit (or loss) that we recognize in an accounting period. Accordingly, actualrevenue and profit or loss may differ materially from our estimates withdifferent conditions or assumptions. Historically, we have not incurredsignificant unexpected contract losses.

 

Cost of U.S. government contract revenues for thethree and nine months ended September 30, 2002, were $1,158,000 and $4,459,000,respectively, allocated between research and development, and selling, generaland administrative expenses. Costs include direct engineering and developmentcosts and applicable overhead. The company accrues contract losses when theybecome reasonably estimable.

 

## **Inventories**

 

Inventories arestated at the lower of cost (determined on a first-in, first-out basis) ormarket value. We validate our perpetual inventory balances against a quarterlyphysical count making adjustments to the perpetual balance as necessary. Wewrite down our inventory for estimated obsolescence or unmarketable inventoryequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand and market conditions.  If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required. Appropriate consideration is given to obsolescence, excessivelevels, deterioration and other factors in evaluating net realizable value.

 

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**Results of Operations**

 

             *Revenues*

 

Total revenuesconsist of contract and product revenues. Substantially all product sales comprise sales of superconductiveproducts.  Our total revenues decreasedby 32% to $1,282,000 for the quarter ended September 30, 2002, from $1,873,000in the comparable period of 2001. Total revenues for the nine months endedSeptember 30, 2002 were $4,843,000, which compares with $4,851,000 in thecomparable period of 2001.  Productrevenues for the quarter ended September 30, 2002 decreased by 51% to $341,000,compared to product revenues of $703,000 for the comparable period of 2001.This decrease in product revenues during the quarter from the comparable periodof 2001 was the result of a decrease in government product shipments partiallyoffset by an increase in revenues related to commercial product shipments. Forthe nine months ended September 30, 2002, product revenues increased by 16% to$2,320,000 from $1,997,000 for the comparable period of 2001.  The increase in product revenues for thefirst nine months of 2002 is primarily due to increased commercial unitshipments under one major contract during the comparison periods.

 

Product revenuesfor the quarter ended September 30, 2002 and 2001 were offset by non-cashsales discounts in the amount of $0 and $4,000, respectively.  The non-cash sales discounts related to thefair market value of 2,240 and 2,800 warrants, which vested during the thirdquarter of 2002 and 2001, respectively. Product revenues for the nine monthsended September 30, 2002 and 2001 were offset by non-cash sales discountsin the amount of $5,000 and $115,000, respectively.

 

The non-cash salesdiscounts related to the fair market value of 58,220 and 45,380 warrants, whichvested during the first nine months of 2002 and 2001, respectively. Contractrevenues decreased by 20% to $941,000, compared to $1,170,000 for the thirdquarter of 2001.  For the nine months ended September 30, 2002, contractrevenues decreased by 12% to $2,523,000, compared to $2,854,000 for thecomparable period of 2001.  The decreasein contract revenues during the comparison periods is due primarily to delaysin the start dates of anticipated new contracts.

 

**Cost andExpenses**

 

**            ***Cost of Product Revenues*

 

Cost of productrevenues was primarily composed of costs of products related to our wirelesstelecommunications products. Cost of product revenues decreased by 44% or$1,338,000 to $1,711,000 for the quarter ended September 30, 2002, compared to$3,049,000 for the comparable period of 2001 and represented 133% and 163% of totalrevenues, respectively.  Cost of product revenues decreased 23% to$5,968,000 for the first nine months of 2002, compared to $7,754,000 for thecomparable period of 2001 and represented 123% and 160% of total revenues,respectively. The decreases in the cost of product revenues as a percentage ofproduct revenues were primarily due to a decrease in indirect manufacturingspending.  These decreases werepartially offset by charges of approximately $608,000 and $1,189,000 recordedfor the three and nine months ended September 30, 2002, respectively,related to write-offs of excess and obsolete inventory during the periods.  We expect product costs, as a percentage ofproduct revenues, to decrease and margins to improve as both our direct andindirect manufacturing costs decline as a result of various cost cuttingmeasures we have implemented, including reductions in headcount, supplypurchases and travel expense.  However,we cannot assure you that margins will improve in the future.

 

###### *Researchand Development Expenses*

 

Research anddevelopment expenses include both externally and internally funded projects.Research and development expenses increased by 1% to $2,232,000 in the quarterended September 30, 2002, compared to $2,212,000 in the comparable period ofthe prior year.  Research anddevelopment represented 174% and 118% of total revenues in the quarters endedSeptember 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 research and developmentexpenses decreased by 5% to $6,360,000 from $6,668,000 in the nine months endedSeptember 30, 2001.  Research anddevelopment expenses as a percentage of total revenues for the nine monthsended September 30, 2002 and 2001 were 131% and 137%, respectively.  The increase in research and developmentexpenses for the quarter ended September 30, 2002 when compared to the quarterended September 30, 2001 was due to an increase in spending on capitalequipment purchases for externally funded research and development contracts of$77,000, other outside services primarily related to new product design of$167,000 and contract labor of $26,000. These increases were partially offset by decreases in spending onrecruiting and relocation of $74,000, personnel costs of $28,000, travel of$15,000, rental of equipment $15,000 and on materials for externally fundedresearch and development contracts of $100,000.  The increase in research and development expenses as a percentageof total revenues for the three months ended September 30, 2002, when comparedto the three months ended September 30, 2001, was primarily due to the decreasein revenues during the comparison periods. The decrease in research and development expenses for the nine monthsended September 30, 2002, when compared to the nine months ended

 

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September 30, 2001, wasprimarily due to a decrease in spending on recruiting and relocation of$305,000 and a decrease in spending on sub-contractors and materials forexternally funded research and development contracts of $165,000 and $128,000,respectively, partially offset by increases in personnel costs of $157,000, dueto increased average headcount and outside services primarily related to newproduct design of $151,000.  Thedecrease in research and development expenses as a percentage of total revenuesfor the nine months ended September 30, 2002, when compared to 2001, wasprimarily due to the decrease in research and development spending.

 

We expect toreduce our research and development spending during the remainder of 2002 as aresult of various cost cutting measures we have implemented, includingreductions in headcount, supply purchases and travel expense, and, as a result,anticipate decreases in research and development expenses compared to the prioryear.  However, there can be noassurance that we will be successful in our research and development costreduction efforts.

 

###### *Selling,General and Administrative Expenses*

 

Selling, generaland administrative expenses include costs associated with marketing, sales andvarious administrative activities. Selling, general and administrative expenses increased by 6% to$2,022,000 from $1,901,000 for the quarters ended September 30, 2002 and 2001,respectively, and by 21% to $6,513,000 from $5,384,000 for the nine monthsended September 30, 2002 and 2001, respectively.  Selling, general and administrative expenses as a percentage oftotal revenues for the quarters ended September 30, 2002 and 2001 were 158% and101%, respectively, and 134% and 111% for the nine months ended September 30,2002 and 2001, respectively.  Theincrease in spending for the three and nine months ended September 30, 2002,compared to the same periods in the prior year, both as a percentage ofrevenues and in dollar value, was primarily due to $590,000 and $1,890,000 inlegal expenses related to the ISCO International litigation incurred in thethree and nine months ended September 30, 2002, respectively.  This represented an increase in legalexpenses of $372,000 and $1,690,000 for the three and nine months ended September30, 2002, respectively, when compared to the same periods in the prior year andwas partially offset by decreases in other outside services of $146,000 and$152,000, recruiting and relocation expenses of $1,000 and $181,000, andpersonnel related expenses of $124,000 and $208,000 for three and nine monthsended September 30, 2002, respectively. We expect to continue to incursignificant legal costs related to the ISCO International, Inc. patentlitigation during the remainder of 2002 and, with the exception of legalspending, we expect to reduce sales, marketing, general and administrativespending during the remainder of 2002 as a result of various cost cuttingmeasures we have implemented, including reductions in headcount, supplypurchases and travel expense.  However,there can be no assurance that we will be successful in our selling, generaland administrative cost reduction efforts.

 

*Interestand Other Income*

 

Interest and otherincome was $51,000 and $140,000 for the three months ended September 30, 2002and 2001, respectively. For the nine months ended September 30, 2002 and 2001,interest and other income was $178,000 and $566,000, respectively.  The decrease in interest income wasprimarily the result of lower average cash balances in 2002 compared to 2001.

 

Interest expensewas $24,000 and $26,000 for the three months ended September 30, 2002 and 2001,respectively. For the nine months ended September 30, 2002 and 2001, interestexpense was $74,000 and $99,000, respectively. Interest expense related primarily to our loan from a leasing company.The decrease in interest expense was primarily the result of lower average debtlevels during the comparison periods.

 

We do not believethat inflation has had a material effect on our financial condition or resultsof operations during the past two fiscal years. However, we cannot assure youthat our business will not be affected by inflation in the future.

 

**Liquidity and Capital Resources**

 

As of September30, 2002, our aggregate cash, cash equivalents and short-term investments,excluding $374,000 of restricted cash, totaled $2,535,000, compared to$6,897,000 as of December 31, 2001.

 

Net cash used inoperations was $11,031,000 during the nine months ended September 30, 2002. Netcash used in operations was primarily the result of the net loss of $13,894,000and an increase in prepaid expenses and other current assets of $191,000,partially offset by decreases in accounts receivable and inventories andincreases in accounts payable and other accrued liabilities of $213,000,$1,290,000 and $763,000, respectively, and the effect of non-cash charges of$788,000 for depreciation, amortization, gain on the disposal of equipment andwarrants vesting upon commercial product sales during the first nine months of 2002.We anticipate that we will incur significant additional net losses during theremainder of 2002. As a result, we anticipate the use of additional cash inoperating activities during the remainder of 2002.  We purchased inventoryduring the first nine months of 2002 to support our

 

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projected 2002sales.  The increase in accounts payable and other accrued liabilities isprincipally a result of legal expenses related to the ISCO International, Inc.patent litigation and, to a lesser extent, inventory purchases.  Shouldactual sales for the remainder of 2002 be less than our projections, thecarrying value of inventory may be adversely affected.

 

Net cash providedby investing activities was $2,043,000 during the nine months ended September30, 2002. The balance was primarily related to proceeds from sales ofshort-term investments during the period of $2,250,000, partially offset byinvestments in additional property and equipment of $216,000. We do notanticipate significant spending on capital expenditures during the remainder of2002.

 

Net cash providedby financing activities was $6,872,000 during the nine months ended September30, 2002, and was primarily the result of an equity financing of $7,300,000,less offering expenses of approximately $422,000, received from the issuance of3,650,000 shares of common stock at $2.00 per share in March 2002, partiallyoffset by principal payments on long-term debt of $125,000.  In connection with the equity financing, wealso issued warrants to purchase an additional 1,825,000 shares of our commonstock at an exercise price of $2.75 per share.

 

We believe that the merger transaction contemplated,and noted in footnote 6, between the Company and Superconductor Technologieswill close by the end of December 2002. If the close of the merger is delayed beyond the end of December 2002,we believe that our cash balance should be sufficient to fund operations intothe first quarter of 2003; however, there can be no assurance that changes inour plans or other events affecting the Company will not result in theexpenditure of our resources before then. If the merger transaction is delayed significantly or is not completedat all, we will be required to seek additional financing, however, we can giveno assurance that additional financing will be available on acceptable terms orat all.  Additionally, if the mergertransaction is not completed and we are unable to raise significant additionalfunds through debt or equity issuances, asset sales, or otherwise, we will be requiredto delay, reduce or eliminate one or more of our research and developmentprograms or obtain funds from collaborative partners or others that may requireus to relinquish rights to our technologies or potential products that we wouldnot otherwise relinquish.  Our financialstatements have been prepared assuming that we will continue as a goingconcern. The financial statements do not include any adjustments that might benecessary if we are unable to continue as a going concern or that may result fromthe outcome of any of these other uncertainties.

 

*Item3: Quantitative and Qualitative Disclosures About Market Risk*

 

Our general policyis to limit the risk of principal loss and ensure the safety of invested fundsby limiting market and credit risk.  Our exposure to financial marketrisks relates primarily to our exposure to the impact of changes in interestrates on our fixed income investment portfolio and long-term debt obligations.

 

*FixedIncome Investments*

 

The primaryobjective of our investment activities is to preserve our principal whilemaximizing yields without significantly increasing risk.  To achieve thisobjective, we maintain a portfolio that consists primarily of short-term,high-quality commercial paper and foreign debt.  All of our fixed incomeinvestments have maturities of less than one year.  Hence, our exposurerelated to changes in interest rates is somewhat limited due to the short-termnature of our portfolio.  We do not use derivative financial instrumentsin our investment portfolio.

 

*DebtObligations*

 

Our outstandingdebt consists of term loan obligations that are primarily based on fixedrates.  Therefore, our exposure to changes in interest rates is limitedbecause any increase or decrease in interest rates would not significantlyincrease or decrease interest expense on our debt obligations.

 

*Item 4:  Controls and Procedures*

Our Chief Executive Officer and the Chief Financial Officer havereviewed, within 90 days of this filing, the disclosure controls and procedures(as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and15d-14(c)) designed to ensure that information relating to the company requiredto be disclosed by us in the reports that we file or submit under the ExchangeAct, is recorded, processed, summarized and reported in a timely and propermanner.  Based upon this review, webelieve that there are adequate controls and procedures in place to ensure thatinformation relating to the company that is required to be disclosed by us inthe reports that we file or submit under the Exchange Act is properly disclosedas required by the Exchange Act and related regulations.  There have been no significant changes inthe controls or other factors that could significantly affect the controlssince the evaluation was performed.

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**Part II:  Other Information**

 

*Item1:              Legal Proceedings.*

 

On July 17,2001, ISCO International, Inc. (“ISCO”) filed a complaint in the UnitedStates District Court for the District of Delaware against us alleging ourcurrent base station front-end systems containing cryogenically cooledsuperconducting filters infringe ISCO’s U.S. Patent No. 6,263,215,entitled “Cryoelectronically Cooled Receiver Front End for Mobile RadioSystems,” which was issued on July 17, 2001.  On September 17, 2001,ISCO amended its complaint to allege willful infringement and to seek trebledamages for the alleged infringement.  The complaint seeks injunctiverelief and damages for infringement.  We have denied infringement, deniedthat the patent is valid and alleged that the patent was procured throughinequitable conduct.  We have filed counterclaims seeking declarations ofinvalidity and non-infringement and damages for unfair competition.  Webelieve that ISCO’s claims are without merit and are defending ourselvesvigorously.

Thetrial is scheduled to start March 17, 2003. The parties completed the discovery process by June 28, 2002.  On October 30, 2002, the Court issued its“Markman” order concerning the scope and meaning of the claims in thecase.  After review of the ruling, webelieve that our position remains strong. Motions for summary judgment are pending.

An adverse outcomein the pending litigation, or in litigation of other intellectual propertyclaims, could subject us to significant liabilities or require us to ceaseusing such technology. The cost of defending a patent lawsuit will likelyconstitute a major financial burden for us. We are not able at this time toestimate the possibility of loss or range of loss, if any that might result. Whilethe outcome of this claim cannot be predicted with certainty, we do not believethat the outcome will have a material adverse effect on our financial position,results of operations or cash flows.

 

*Item2:              Changes in Securities andUse of Proceeds.*

 

Not Applicable.

 

*Item 3:*             *Default UponSenior Securities*.

 

Not Applicable.

 

*Item4:*             *Submissionof Matters to a Vote of Security Holders.*

 

Not Applicable.

 

*Item5:              Other Information*.

 

Not Applicable.

 

 

 

 

 

 

 

 

 

 

 

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*Item6:*             *Exhibits andReports on Form 8-K*

 

(A)  Exhibits

 

99.1      Certification Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

99.2      Certification Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

(B) Reports on Form 8-K.

 

On October 16, 2002, wefiled a current report on form 8-K reporting that on October 10, 2002,Conductus, Inc., a Delaware corporation (the “Company”) entered into a mergeragreement providing for the merger of the Company with STI Acquisition, Inc., aDelaware corporation and wholly-owned subsidiary of Superconductor TechnologiesInc., a Delaware corporation.  The merger is subject to conditions,including the approval of the stockholders of each of the Company and SuperconductorTechnologies, Inc.

 

On October 23, 2002, wefiled a current report on form 8-K reporting that the Company had entered intoa Third Amendment to Rights Agreement, dated as of October 10, 2002 (the “ThirdRights Agreement Amendment”), with EquiServe Trust Company, N.A. as successorRights Agent, which amends the Rights Agreement, dated as of January 29, 1998(the “Rights Agreement”), originally between the Company and Boston EquiServeL.P., as Rights Agent.  Among other things, the Third Rights AgreementAmendment amends the Rights Agreement such that (i) none of SuperconductorTechnologies Inc., a Delaware corporation (“Superconductor”), STI Acquisition,Inc., a Delaware corporation (“Merger Sub”) or any of their affiliates orassociates shall be deemed to be an Acquiring Person, as such term is definedin the Rights Agreement, and (ii) neither a Shares Acquisition Date nor aDistribution Date, as such terms are defined in the Rights Agreement, shall bedeemed to occur by virtue of the execution of the Agreement and Plan of Mergerdated October 10, 2002 among Superconductor, Merger Sub and the Company, or bythe announcement or the consummation of the transactions contemplatedtherein.  The Third Rights Agreement Amendment is attached hereto as Exhibit4.1 and is incorporated herein by reference.  The foregoing description ofthe Third Rights Agreement Amendment is qualified in its entirety by referenceto such exhibit.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|   |   | CONDUCTUS, INC. |
|--------|--------|-----------------|
|   |   |            |
|   |   |            |
|   |   |            |
|   |   | Registrant      |

 

 
|                                  |   |                                                                 |
|---------------------------------------|--------|----------------------------------------------------------------------|
| Dated:  November  14,  2002 |   | /s/ Ron Wilderink                                                    |
|                                  |   |                                                                 |
|                                  |   | Ron Wilderink                                                        |
|                                  |   | Vice President of  Finance  Chief Financial Officer and Secretary    |
|                                  |   |                                                                 |
|                                  |   | /s/ Charles E. Shalvoy                                               |
|                                  |   |                                                                 |
|                                  |   | Charles E. Shalvoy                                                   |
|                                  |   | President and Chief  Executive Officer

and Duly Authorized  Officer |

 

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**CERTIFICATIONS**

I, Charles E. Shalvoy, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Conductus,Inc.;

2.     Based on my knowledge, this quarterly report does not containany untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3.     Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport;

4.     The registrant’s other certifying officers and I are responsiblefor establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)     designedsuch disclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b)    evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c)     presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

5.     The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

a)     allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)    any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicatedin this quarterly report whether or not there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.
| Date:     November 14, 2002 |   |                                   |
|-------------------------------------------------|--------|----------------------------------------|
|                                            |   | /s/ Charles E. Shalvoy                 |
|                                            |   | Charles E. Shalvoy                     |
|                                            |   | President and Chief  Executive Officer |
|                                            |   | *(Principal  Executive Officer)*       |

 

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I, Ron Wilderink, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Conductus,Inc.;

2.     Based on my knowledge, this quarterly report does not containany untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3.     Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport;

4.     The registrant’s other certifying officers and I are responsiblefor establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)     designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

b)    evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c)     presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

5.     The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

a)     allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)    any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicatedin this quarterly report whether or not there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.
| Date:     November 14, 2002 |   |                                                   |
|-------------------------------------------------|--------|--------------------------------------------------------|
|                                            |   | /s/ Ron Wilderink                                      |
|                                            |   | Ron Wilderink                                          |
|                                            |   | Vice President of Finance  and Chief Financial Officer |
|                                            |   | *(Principal  Financial Officer)*                       |

 

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