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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------
For The Quarter Ended: September 30, 2002 Commission File Number 0-19672
------------------
American Superconductor Corporation
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2959321
- ------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
organization or incorporation)
Two Technology Drive
Westborough, Massachusetts 01581
--------------------------------
(Address of principal executive offices, including zip code)
(508) 836-4200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 21,184,170
- -------------------------------------- ---------------------------------------
Class Outstanding as of November 12, 2002
AMERICAN SUPERCONDUCTOR CORPORATION
INDEX
Page No.
--------
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 and March 31, 2002 3
Consolidated Statements of Operations
for the three months ended
September 30, 2002 and 2001 and the 4
six months ended September 30, 2002 and 2001
Consolidated Statements of Comprehensive Loss
for the three months ended
September 30, 2002 and 2001 and the 5
six months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows
for the six months ended
September 30, 2002 and 2001 6
Notes to Interim Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-28
Item 3. Quantitative and Qualitative Disclosures About Market Risks 29
Item 4. Controls and Procedures 29
Part II - Other Information
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures and Certifications 32-34
Exhibit: 99.1 35
2
Part I. Financial Information
Item 1. Financial Statements
AMERICAN SUPERCONDUCTOR CORPORATION
Consolidated Balance Sheets
September 30, March 31,
2002 2002
--------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $10,877,070 $37,170,927
Accounts receivable 7,301,107 7,583,505
Inventory 13,159,244 13,212,831
Prepaid expenses and other current assets 857,691 708,079
--------------------- -------------------
Total current assets 32,195,112 58,675,342
Property, plant and equipment:
Land 4,044,611 4,244,611
Construction in progress - building and equipment 22,452,153 79,685,813
Building 51,157,910 ---
Equipment 37,294,380 24,939,124
Furniture and fixtures 3,835,452 3,833,016
Leasehold improvements 6,243,110 6,226,267
--------------------- -------------------
125,027,616 118,928,831
Less: accumulated depreciation (24,090,033) (21,209,230)
--------------------- -------------------
Property, plant and equipment, net 100,937,583 97,719,601
Long-term marketable securities 24,154,190 31,028,683
Long-term inventory 3,787,000 3,787,000
Goodwill 1,107,735 1,107,735
Other assets 5,406,224 5,476,563
--------------------- -------------------
Total assets $167,587,844 $197,794,924
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $11,752,406 $20,784,931
Deferred revenue 222,815 1,056,806
--------------------- -------------------
Total current liabilities 11,975,221 21,841,737
Long-term deferred revenue 3,787,000 3,787,000
Commitments
Stockholders' equity:
Common stock, $.01 par value
Authorized shares-50,000,000; issued and outstanding
- 20,588,234 and 20,497,514 at September 30, 2002 and
March 31, 2002, respectively 205,882 204,975
Additional paid-in capital 358,602,772 357,781,718
Deferred compensation (442,483) (318,199)
Deferred contract costs (48,969) (121,167)
Accumulated other comprehensive income 36,868 95,641
Accumulated deficit (206,528,447) (185,476,781)
----------------------- -------------------
Total stockholders' equity 151,825,623 172,166,187
----------------------- -------------------
Total liabilities and stockholders' equity $167,587,844 $197,794,924
======================= ===================
The accompanying notes are an integral part of the consolidated financial
statements.
3
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------- -------------- -------------- --------------
Revenues:
Contract revenue $158,252 $704,671 $289,377 $1,294,100
Product sales and prototype development contracts 4,321,303 2,552,028 7,050,151 3,621,408
--------------- -------------- -------------- --------------
Total revenues 4,479,555 3,256,699 7,339,528 4,915,508
Costs and expenses:
Costs of revenue-contract revenue 209,697 696,940 337,815 1,282,835
Costs of revenue-product sales and prototype
development contracts 5,869,878 2,682,453 10,100,700 4,378,135
Research and development 5,609,542 6,724,289 11,826,877 13,459,124
Selling, general and administrative 3,292,129 3,626,385 6,756,052 7,340,948
--------------- -------------- -------------- --------------
Total costs and expenses 14,981,246 13,730,067 29,021,444 26,461,042
Operating loss (10,501,691) (10,473,368) (21,681,916) (21,545,534)
Interest income 255,415 1,356,146 626,221 3,173,072
Other income (expense), net 23,849 1,008 4,029 211,930
--------------- -------------- -------------- --------------
Net loss $(10,222,427) $(9,116,214) $(21,051,666) $(18,160,532)
=============== ============== ============== ==============
Net loss per common share
Basic and Diluted $(0.50) $(0.45) $(1.02) $(0.89)
=============== ============== ============== ==============
Weighted average number of common shares outstanding
Basic and Diluted 20,571,386 20,375,836 20,553,379 20,353,930
=============== ============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
4
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
----------------- ---------------- ------------------ -----------------
Net loss $(10,222,427) $(9,116,214) $(21,051,666) $(18,160,532)
Other comprehensive income (loss)
Foreign currency translation (1,303) 14,388 18,524 13,041
Unrealized gain (loss)
on investments (75,609) 60,520 (77,297) (176,614)
----------------- ---------------- ------------------ -----------------
Other comprehensive income (loss) (76,912) 74,908 (58,773) (163,573)
Comprehensive loss $(10,299,339) $(9,041,306) $(21,110,439) $(18,324,105)
================= ================ ================== =================
The accompanying notes are an integral part of the consolidated financial
statements.
5
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $(21,051,666) $(18,160,532)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization 3,369,450 2,479,210
Deferred compensation expense 69,156 53,034
Deferred warrant costs 98,842 137,452
Stock compensation expense 7,189 11,843
Changes in operating asset and liability accounts :
Accounts receivable 282,398 3,185,772
Inventory 53,587 (3,722,780)
Prepaid expenses and other current assets (131,088) 3,813
Accounts payable and accrued expenses (9,032,525) 213,238
Deferred revenue - current and long-term (833,991) 243,452
-------------- --------------
Net cash used by operating activities (27,168,648) (15,555,498)
Cash flows from investing activities:
Purchase of property and equipment (6,098,785) (38,042,752)
Purchase of long-term marketable securities (770,000) ---
Sale of long-term marketable securities 7,567,196 26,272,888
Increase in other assets (418,308) (736,540)
-------------- --------------
Net cash (used in) provided by investing activities 280,103 (12,506,404)
Cash flows from financing activities:
Net proceeds from issuance of common stock 594,688 696,012
-------------- --------------
Net cash provided by financing activities 594,688 696,012
Net decrease in cash and cash equivalents (26,293,857) (27,365,890)
Cash and cash equivalents at beginning of period 37,170,927 89,063,299
-------------- --------------
Cash and cash equivalents at end of period $10,877,070 $61,697,409
============== ==============
Supplemental schedule of cash flow information:
Noncash issuance of common stock $ 421,845 $ 64,877
The accompanying notes are an integral part of the consolidated financial
statements.
6
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business:
American Superconductor Corporation (the "Company"), which was formed on
April 9, 1987, is a world leader in developing and manufacturing products
using superconducting materials and power electronic converters for
electric power applications. The focus of the Company's development and
commercialization efforts is on electrical equipment for electric
utilities, transmission grid operators, industrial and commercial users of
electrical power, and commercial and military ships. For large-scale
applications, the Company's development efforts are focused on high
temperature superconductor ("HTS") wire for use in power transmission
cables, motors, and generators. The Company is also developing and
commercializing electric motors and generators based on its HTS wire. For
power quality and reliability applications, the Company is focused on
proprietary power electronic converters that rapidly switch, control and
modulate power. The Company also designs, manufactures, and sells systems
based on those power electronic converters for power quality and
reliability solutions. The Company operates in three business segments -
HTS Wire, Electric Motors and Generators, and Power Electronic Systems.
The Company currently derives a portion of its revenue from research and
development contracts. The Company recorded contract revenue related to
research and development contracts of $158,252 and $704,671 for the three
months ended September 30, 2002 and 2001, respectively. For the six months
ended September 30, 2002 and 2001, contract revenue was $289,377 and
$1,294,100, respectively. In addition, the Company recorded prototype
development contract revenues on U.S. Navy contracts of $2,044,730 and
$975,031, which are included under "Revenues - Product sales and prototype
development contracts", in the three months ended September 30, 2002, and
2001, respectively. For the six months ended September 30, 2002 and 2001,
prototype development contract revenue on U.S. Navy contracts was
$4,316,341 and $1,838,738, respectively.
Costs of revenue include research and development and selling, general and
administrative expenses that are incurred in the performance of these
development contracts.
Research and development and selling, general and administrative expenses
included as costs of revenue were as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Research and development expenses $2,441,988 $1,689,252 $4,529,735 $2,913,159
Selling, general and administrative expenses $342,791 $448,070 $651,536 $887,871
7
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Basis of Presentation:
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. Certain
information and footnote disclosure normally included in the Company's
annual consolidated financial statements have been condensed or omitted.
The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods ended September 30, 2002 and 2001 and the financial position at
September 30, 2002.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
It is suggested that these interim consolidated financial statements be
read in conjunction with the audited consolidated financial statements for
the year ended March 31, 2002 which are contained in the Company's Annual
Report on Form 10-K covering the year ended March 31, 2002.
Effective April 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," and ceased amortizing the goodwill recorded as a result
of the acquisition of substantially all of the assets of Integrated
Electronics, LLC ("IE") on June 1, 2000. The Company reviews its goodwill
and other long-term assets at least annually or when events or changes in
circumstances indicate that the carrying amount of such assets may not be
fully recoverable. If the carrying amount of the net tangible and
intangible assets in a given reporting unit exceed the reporting unit's
fair value, a detailed impairment loss analysis would be performed to
calculate the amount of impairment, if any, as prescribed by SFAS 142.
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
3. Net Loss Per Common Share:
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" which requires
presentation of basic earnings per share ("EPS") and, for companies with
complex capital structures, diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS includes dilution and is computed using the weighted average
number of common shares and dilutive common equivalent shares outstanding
during the period. Common equivalent shares include the dilutive effect of
stock options and warrants. For the three months ended September 30, 2002
and 2001, common equivalent shares of 4,969,150 and 2,622,421 were not
included in the calculation of diluted EPS as their effect was
antidilutive. For the six months ended September 30, 2002 and 2001, common
equivalent shares of 4,865,047 and 2,819,430 were not included for the
calculation of diluted EPS as their effect was antidilutive.
8
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Accounts Receivable:
Accounts receivable at September 30, 2002 and March 31, 2002 consisted of
the following:
September 30, 2002 March 31, 2002
------------------ --------------
Accounts Receivable (billed) $ 3,199,742 $ 3,076,361
Accounts Receivable (unbilled) 4,221,753 4,549,144
Less: Allowance for Doubtful Accounts (120,388) (42,000)
---------- ----------
Net Accounts Receivable $ 7,301,107 $ 7,583,505
========== ==========
5. Inventories:
Inventories at September 30, 2002 and March 31, 2002 consisted of the
following:
September 30, 2002 March 31, 2002
------------------ --------------
Raw materials $ 2,326,849 $ 1,545,327
Work-in-progress 9,422,144 10,046,359
Finished goods 1,410,251 1,621,145
----------- -----------
$13,159,244 $13,212,831
6. Long-term Inventory and Deferred Revenue:
Long-term inventory of $3,787,000 represents SMES units that have been
ordered and delivered to one of our customers, Wisconsin Public Service
Corporation ("WPS"). As the sale of these units is subject to certain
return and buyback provisions which expire from 2002 to 2009, the Company
has deferred recognition of the revenue related to this sale until the
buyback provisions lapse. Long-term deferred revenue of $3,787,000
represents the payment received related to this transaction.
9
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The buyback provisions, which are subject to a minimum 6-month written
notice requirement, begin to lapse on December 31, 2002, until which time
WPS has the right to return all the units for the full purchase price of
$3,787,000. On December 31 of each year after 2002, WPS has the right,
subject to a minimum 6-month notice requirement, to sell the units back to
the Company at a reduced price. Between January 1, 2003 and the next annual
buyback date of December 31, 2003, the repurchase price for the units will
be $3,250,000 and that price is further reduced by approximately 12% per
year through December 31, 2009.
The Company will record $537,000 of revenue and an equal amount of cost of
revenue in the quarter ending December 31, 2002, as the buyback price
transitions from $3,787,000 to $3,250,000. The Company will also record a
$537,000 reduction in long-term inventory and long-term deferred revenue at
that time.
WPS has not advised of their intention to sell these units back to the
Company on December 31, 2002 and the Company does not expect the return of
these units, which are installed on WPS's Northern Transmission Loop.
7. Cost-Sharing Agreements:
The Company received funding under a government cost-sharing agreement of
$153,647 and $200,023 for the three months ended September 30, 2002 and
2001, respectively. For the six months ended September 30, 2002 and 2001,
government cost sharing funding was $256,968 and $319,242, respectively.
This funding was used to directly offset research and development and
selling, general and administrative expenses.
8. Restructuring and other charges:
In the fourth quarter of fiscal 2002, the Company announced two events
which resulted in a combined fiscal 2002 charge of $13.9 million.
In March 2002, the Company announced a series of restructuring,
consolidation and cost-cutting measures to create a more streamlined and
flatter organization aimed at reducing the cost structure of the Company as
it drives to commercialize its technologies and products. The Company
incurred an aggregate charge of $9.9 million of restructuring and other
charges, of which $3.5 million was inventory-related and was classified as
"Costs of revenue - product sales and prototype development contracts" and
$0.7 million was related to an allowance for doubtful accounts reserve and
was classified as "Selling, general, and administrative" expense. The
remaining $5.7 million was shown as "Restructuring costs" on the fiscal
2002 Consolidated Statements of Operations.
In addition, the Company announced an agreement with Pirelli in February
2002 in which the Company acquired the right to sell its HTS wire to other
cable manufacturers in addition to Pirelli at a cost of $4.0 million.
10
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The restructuring charges and other charges recorded in the fourth quarter
of fiscal 2002 and their corresponding September 30, 2002 status are
summarized below:
Total
Restructuring & Cash Other Balance as of
other charges Payments Adjustments September 30, 2002
------------- -------- ----------- ------------------
Workforce Reduction $ 1,548,897 $1,407,588 --- $ 141,309
Consolidation of facilities,
fixed asset write-offs,
& other charges 4,117,161 250,441 $2,881,476 985,244
Inventory Write-down 3,464,275 --- 1,881,813 1,582,462
Allowance for Doubtful
Accounts 727,028 --- 727,028 ---
Pirelli License 4,009,890 2,289,390 1,720,500 ---
---------- --------- --------- ---------
$13,867,251 $3,947,419 $7,210,817 $2,709,015
The Company currently anticipates payments for the restructuring activities
and other charges to be completed within fiscal 2003 except for certain
long-term contractual obligations. Of the remaining balance of $2,709,015,
$1,126,553 is expected to be paid out in cash.
9. Business Segment Information:
The Company has three reportable business segments as defined by SFAS
131--HTS Wire, Electric Motors and Generators, and Power Electronic
Systems.
The HTS Wire business segment develops and sells HTS wire. The focus of
this segment's current development, manufacturing and sales efforts is on
HTS wire for power transmission cables, motors and generators.
The Electric Motors and Generators business segment is developing and
commercializing electric motors and generators based on HTS wire. Its
primary focus is on ship propulsion motors and generators.
The Power Electronic Systems business segment develops and sells power
electronic converters and designs, manufactures and sells integrated
systems based on those converters for power quality and reliability
solutions.
The operating results for the three business segments are as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues
--------
HTS Wire $ 374,354 $1,207,598 $ 591,987 $1,970,513
Electric Motors and Generators 1,604,295 975,031 3,140,144 1,838,738
Power Electronic Systems 2,500,906 1,074,070 3,607,397 1,106,257
---------- ---------- ---------- ----------
Total $4,479,555 $3,256,699 $7,339,528 $4,915,508
========== ========== ========== ==========
11
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ----- ---- ----
Operating Loss
--------------
HTS Wire $ (6,705,307) $ (4,998,601) $(13,685,285) (10,117,303)
Electric Motors and Generators (1,950,279) (1,962,821) (3,713,000) (3,961,633)
Power Electronic Systems (1,380,787) (2,888,797) (3,488,793) (6,461,357)
Unallocated Corporate Expenses (465,318) (623,149) (794,838) (1,005,241)
------------- ------------- ------------- -------------
Total $(10,501,691) $(10,473,368) $(21,681,916) $(21,545,534)
============= ============= ============= =============
The assets for the three business segments (plus Corporate Cash) are as
follows:
September 30, 2002 March 31, 2002
------------------ --------------
HTS Wire $105,442,739 $102,010,166
Electric Motors and Generators 4,397,661 6,424,532
Power Electronic Systems 22,716,184 21,160,616
Corporate cash and marketable securities 35,031,260 68,199,610
------------ ------------
Total $167,587,844 $197,794,924
============ ============
The accounting policies of the business segments are the same as those for
the consolidated company, except that certain corporate expenses which we
do not believe are specifically attributable or allocable to any of the
three business segments have been excluded from the segment operating
losses.
10. New Accounting Pronouncements:
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed
of." SFAS 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business". SFAS 144 became effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
thus became effective for the Company
12
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on April 1, 2002. The adoption of SFAS 144 had no impact on the Company's
financial statements and related disclosures.
In November 2001, the Emerging Issues Task Force (EITF), a committee of the
FASB, reached a consensus on EITF Issue 01-9, Accounting for Consideration
Given by a Vendor to a Customer or Reseller of the Vendor's Products ("EITF
01-9"). EITF 01-9 presumes that consideration, including equity
instruments, from a vendor to a customer or reseller of the vendor's
products is a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement and could lead to negative
revenue under certain circumstances. Revenue reduction is required unless
consideration relates to a separate identifiable benefit and the benefit's
fair value can be established. EITF 01-9 was applicable for the Company as
of April 1, 2002. The adoption of EITF Issue 01-9 had no impact on the
Company's financial statements and related disclosures.
During January 2002, the EITF reached consensus on EITF Issue 01-14, Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred ("EITF 01-14"). The EITF concluded in EITF 01-14 that
reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the income statement with the offsetting costs
recorded as costs of revenue. Out-of-pocket expenses generally include, but
are not limited to, expenses related to airfare, mileage, hotel stays,
out-of-town meals, photocopies, and telecommunications and facsimile
charges. EITF 01-14 was applicable for the Company as of April 1, 2002. The
adoption of EITF 01-14 had no impact on the Company's financial statements
and related disclosures.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This
statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. EITF 94-3 allowed for an exit cost liability to be
recognized at the date of an entity's commitment to an exit plan. SFAS 146
also requires that liabilities recorded in connection with exit plans be
initially measured at fair value. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002,
with early adoption encouraged. The Company does not expect the adoption of
SFAS 146 to have a material impact on its financial position or results of
operations.
13
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Subsequent Events:
On October 31, 2002, the Company acquired substantially all of the assets
of Nordic Superconductor Technologies A/S (NST), a subsidiary of Denmark's
NKT Holding A/S. The Company did not assume any debt or other liabilities
in the transaction. NST had developed and marketed HTS wire to customers in
Europe, Asia, and North America. Under the terms of the agreement, NKT
received 546,000 shares of the Company's Common Stock valued at
approximately $2,100,000. NKT has agreed to hold these shares for at least
two years.
14
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
American Superconductor Corporation was founded in 1987. We are focused on
developing, manufacturing and selling products using two core technologies: high
temperature superconductor ("HTS") wires and power electronic converters for
electric power applications. We also assemble superconductor wires and power
electronic converters into fully-integrated products, such as superconductor
magnetic energy storage ("SMES") systems and ship propulsion motors, which we
sell or plan to sell to end users.
Critical Accounting Policies
The preparation of consolidated financial statements requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to long-term production and research and development contracts, accounts
receivable reserve requirements, inventories, investments, intangible assets,
income taxes and potential warranty obligations. We base our estimates on
historical experiences and various other assumptions that are 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 under
different assumptions or conditions.
Our accounting policies that involve the most significant judgments and
estimates are as follows:
. Revenue recognition;
. Long-term inventory and deferred revenue;
. Allowance for doubtful accounts;
. Valuation of long-lived assets;
. Inventory accounting;
. Deferred tax assets; and
. Acquisition accounting.
Revenue recognition. For certain arrangements, such as contracts to perform
research and development and prototype development contracts, we record revenues
using the percentage of completion method, measured by the relationship of costs
incurred to total estimated contract costs. We follow this method since
reasonably dependable estimates of the revenue and costs applicable to various
stages of a contract can be made. Since many contracts extend over a long period
of time, revisions in cost and funding estimates during the progress of work
have the effect of adjusting earnings applicable to performance in prior periods
in the current period. Recognized revenues and profit or loss are subject to
revisions as the contract progresses to completion. Revisions in profit or loss
estimates are charged to income in the period in which the facts that give rise
to the revision become known.
15
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
We recognize revenue from product sales upon shipment, installation or
acceptance, where applicable, provided persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and
collectibility is reasonably assured, or for some programs, on the percentage of
completion method of accounting. When other significant obligations remain after
products are delivered, revenue is recognized only after such obligations are
fulfilled.
Long-term inventory and deferred revenue. Long-term inventory of $3,787,000
represents SMES units that have been ordered and delivered to one of our
customers, Wisconsin Public Service Corporation ("WPS"). As the sale of these
units is subject to certain return and buyback provisions which expire from 2002
to 2009, we have deferred recognition of the revenue related to this sale until
the buyback provisions lapse. Long-term deferred revenue of $3,787,000
represents the payment received related to this transaction. The buyback
provisions, which are subject to a minimum 6-month written notice requirement,
begin to lapse on December 31, 2002, until which time WPS has the right to
return all the units for the full purchase price of $3,787,000. On December 31
of each year after 2002, WPS has the right, subject to a minimum 6-month notice
requirement, to sell the units back to us at a reduced price. Between January 1,
2003 and the next annual buyback date of December 31, 2003, the repurchase price
for the units will be $3,250,000 and that price is further reduced by
approximately 12% per year through December 31, 2009. We will record $537,000 of
revenue and an equal amount of cost of revenue in the quarter ending December
31, 2002, as the buyback price transitions from $3,787,000 to $3,250,000. We
will also record a $537,000 reduction in long-term inventory and long-term
deferred revenue at that time. WPS has not advised of their intention to sell
these units back to us on December 31, 2002 and we do not expect the return of
these units, which are installed on WPS's Northern Transmission Loop.
Allowance for doubtful accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional provisions for bad debt allowances may be required.
Long-lived assets. We assess the impairment of identifiable intangibles,
long-lived assets and goodwill at least annually or whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.
Factors we consider important which could trigger an impairment review include
the following:
. Significant underperformance relative to expected historical or
projected future operating results;
. Significant changes in the manner of our use of the acquired assets or
the strategy for our overall business; and
. Significant negative industry or economic trends.
16
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
When we determine that the carrying value of intangibles, long-lived assets or
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of potential impairment, we assess whether an impairment has
occurred based on whether net book value of the assets exceeds related projected
undiscounted cash flows from these assets, considering a number of factors
including past operating results, budgets, economic projections and market
trends. When necessary, we write down an impaired asset to its estimated fair
value based on the best information available. Estimated fair value is generally
based on either appraised value or measured by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows.
Inventory accounting. We write down inventory for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
the inventory and the estimated realizable value based upon assumptions of
future demand and market conditions. If actual market conditions are less
favorable than those projected, additional inventory write-downs may be
required.
Deferred tax assets. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we
consider future taxable income and tax planning strategies in assessing the need
for the valuation allowance, if management were to determine that we would be
able to realize deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should we determine that we would
not be able to realize all or part of any deferred tax assets in the future, an
adjustment to the deferred tax asset would decrease income in the period such
determination was made.
Acquisition accounting. In June 2000, we acquired substantially all of the
assets of Integrated Electronics, LLC ("IE"). The IE acquisition was accounted
for under the purchase method of accounting. Goodwill of $1,329,282 represented
the excess of the purchase price of $1,833,125 over the fair value of the
acquired assets of $503,843 at June 1, 2000. The fair value of the assets
acquired were accounts receivable of $52,278, inventory of $259,980 and fixed
assets of $191,585. Significant judgments and estimates were involved in
determining the fair market value of assets acquired and their useful lives.
Different assumptions could yield materially different results.
Restructuring
In March 2002, we announced a series of restructuring, consolidation and
cost-cutting measures to create a more streamlined and flatter organization
aimed at reducing our cost structure as we drive to commercialize our
technologies and products. The restructuring resulted in the elimination of 99
full-time employees across all business functions at our Massachusetts and
Wisconsin locations. Our Power Quality and Reliability business unit, based in
Middleton, WI, and our Power Electronics business unit, based in New Berlin, WI,
were combined into a new
17
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
business unit called Power Electronic Systems. This change leveraged personnel
with similar skills in the two business units and significantly reduced the cost
structure. As part of the restructuring, we also announced that we will
outsource our future requirements for low temperature superconductor (LTS)
magnets used in our SMES systems and as a result discontinued operations in one
of our two buildings in Middleton, WI comprising approximately 27,000 square
feet. Cash payments related to the workforce reduction were substantially
completed in the first quarter of fiscal 2003. Exit costs related to the leased
facility will be incurred over the 19-month period ending December 31, 2003.
Anticipated cost savings as a result of this restructuring are estimated to be
approximately $9.0 million during the fiscal year ending March 31, 2003.
Results of Operations
Total revenues during the three months ended September 30, 2002 were $4,480,000,
a 38% increase compared to the $3,257,000 of revenue recorded for the same
period a year earlier. For the six months ended September 30, 2002, revenues
were $7,340,000, a 49% increase over the $4,916,000 of revenue recorded in the
comparable period of the prior year. These increases in revenue of $1,223,000
and $2,424,000 for the three and six month periods ended September 30, 2002,
respectively, compared to the prior-year periods, resulted from an increase in
system shipments in our Power Electronic Systems business unit and significantly
higher prototype development contract revenues in two of our three business
units--Power Electronic Systems and Electric Motors and Generators.
Power Electronic Systems revenues, which include SMES systems, services power
electronic converters, and prototype development contracts, were $2,501,000 in
the second quarter of fiscal 2003, compared to $1,074,000 in the second quarter
of fiscal 2002, an increase of $1,427,000 due primarily to two system shipments
occurring in the quarter ended September 30, 2002 compared to one system
shipment in the prior-year quarter. For the six months ended September 30, 2002,
revenues in Power Electronic Systems were $3,607,000 compared to $1,106,000 in
the same period of fiscal 2002, an increase of $2,501,000 over prior year. Power
Electronic Systems revenues for the six months ended September 30, 2002
consisted primarily of two system shipments worth $1,928,000 and $1,176,000 of
prototype development revenue for work performed on a U.S. Navy contract
relating to the Power Electronics Building Blocks program. We expect sales of
power electronics systems will continue to increase over the remainder of the
fiscal year.
Revenues in the Electric Motors and Generators business unit were $1,604,000 in
the second quarter of fiscal 2003, compared to $975,000 for the first quarter in
fiscal 2002, an increase of $629,000. For the six months ended September 30,
2002, revenues in Electric Motors and Generators were $3,140,000 compared to
$1,839,000 in the comparable period of the prior year, an increase of
$1,301,000. The increases in revenue in the three and six month periods ended
September 30, 2002 were the result of higher prototype development contract
revenue with the U.S. Navy relating to work performed on a 5-megawatt HTS ship
propulsion motor. We have
18
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
$2,669,000 of backlog on the existing Navy motor program as of September 30,
2002 and we expect additional contracts from the U.S. Navy for HTS ship
propulsion motors and generators during the rest of this year and over the next
four years.
These increases in revenues were partially offset by lower HTS Wire business
unit revenues, which declined to $374,000 in the second quarter of fiscal 2003,
compared to $1,208,000 in the second quarter of fiscal 2002 a decrease of
$834,000. For the six months ended September 30, 2002, revenues in HTS Wire were
$592,000 compared to $1,971,000 in the comparable period of the prior year, a
decrease of $1,379,000, primarily as a result of lower contract revenues, mainly
with Pirelli Energy Cables and Systems. Pirelli provided us with $1,000,000 of
research and development funding in the first six months of fiscal 2002, and no
funding in the first six months of fiscal 2003, as a result of the
discontinuance of its funding commitment as part of an agreement reached with
Pirelli in February 2002 that allows us to sell our HTS wire to other cable
manufacturers in addition to Pirelli.
For the three months ended September 30, 2002, we recorded approximately
$154,000 in funding under a government cost-sharing agreement with the U.S. Air
Force. For the three months ended September 30, 2001, we recorded approximately
$200,000 of funding under this agreement. For the six months ended September 30,
2002, funding under this government cost-sharing agreement was $257,000,
compared to $319,000 for the comparable period of fiscal 2002. We anticipate
that a portion of our funding in the future will continue to come from
cost-sharing agreements as we continue to develop joint programs with government
agencies. We received a new $2,000,000 cost-sharing contract from the Department
of Commerce's Advanced Technology Program (ATP) at the end of September for
continued development of second generation HTS wire. Work on the ATP program
will begin in the quarter ending December 31, 2002. Funding from government
cost-sharing agreements is recorded as an offset to research and development and
selling, general and administrative expenses, as required by government contract
accounting guidelines, rather than as revenues.
Total costs and expenses for the quarter ended September 30, 2002 were
$14,981,000 compared to $13,730,000 for the same period last year. For the six
months ended September 30, 2002, total costs and expenses were $29,021,000,
compared to $26,461,000 for the same period last year. "Costs of revenue -
product sales and prototype development contracts" increased due to the higher
level of prototype development contract revenue with the U.S. Navy in both the
Electric Motors and Generators and Power Electronic Systems business units. It
also increased by $1,521,000 and $2,417,000 for the three and six month periods
ended September 30, 2002, respectively, as a result of increased costs
(including building and equipment depreciation) related to the HTS Wire business
unit's occupancy of the Devens, Massachusetts manufacturing plant and initial
test production runs of multifilamentary composite wire in that facility.
Finally, "Costs of revenue - product sales and prototype development contracts"
increased due to the higher level of product sales in the Power Electronic
Systems business unit. "Costs of revenue - contract revenue" declined
proportionally with the lower level of contract revenue, particularly with
regards to Pirelli.
19
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
Adjusted research and development ("R&D") expenses, which include amounts
classified as costs of revenue and amounts offset by cost sharing funding,
decreased to $8,131,000 in the three months ended September 30, 2002 from
$8,517,000 for the same period last year. For the six-month periods ended
September 30, 2002 and 2001, adjusted R&D expenses were $16,489,000 and
$16,537,000, respectively. These small decreases were primarily the result of
reduced R&D spending in the HTS Wire and Power Electronic Systems business
units, relating to the reduction in force implemented as part of our March 2002
restructuring. The decreases in R&D spending was partially offset by higher R&D
spending, both internally and externally funded, in the Electric Motors and
Generators business unit. A portion of the R&D expenditures related to
externally funded development contracts has been classified as costs of revenue
(rather than as R&D expenses). These amounts increased significantly in fiscal
2003 compared to fiscal 2002 as a result of the higher level of funded prototype
development contract work in HTS Wire and Power Electronic Systems.
Additionally, a portion of R&D expenses was offset by cost sharing funding. Net
R&D expenses (exclusive of amounts classified as costs of revenues and amounts
offset by cost sharing funding) decreased to $5,610,000 in the three months
ended September 30, 2002 from $6,724,000 for the same period last year. For the
six months ended September 30, 2002 and 2001, these amounts were $11,827,000 and
$13,459,000, respectively.
Our R&D expenditures are summarized as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
R&D expenses per Consolidated
Statements of Operations ........................... $5,610,000 $6,724,000 $11,827,000 $13,459,000
R&D expenditures classified as
Costs of revenue ................................... 2,442,000 1,690,000 4,530,000 2,913,000
R&D expenditures offset by cost
sharing funding .................................... 79,000 103,000 132,000 165,000
---------- ---------- ----------- -----------
Adjusted R&D expenses ............................... $8,131,000 $8,517,000 $16,489,000 $16,537,000
========== ========== =========== ===========
Adjusted selling, general and administrative ("SG&A") expenses, which include
amounts classified as costs of revenue and amounts offset by cost sharing
funding, decreased to $3,709,000 for the three months ended September 30, 2002,
compared to $4,171,000 for the same period last year. For the six-month periods
ended September 30, 2002 and 2001, adjusted SG&A expenses were $7,532,000 and
$8,383,000, respectively. These decreases were primarily the result of the
reductions in force implemented as part of our March 2002 restructuring program,
partially offset by a non-recurring $200,000 write-off of a land option at
Devens that was not renewed in the second quarter of fiscal 2003. A portion of
the SG&A expenditures related to externally funded development contracts has
been classified as costs of revenue (rather than as SG&A expenses).
Additionally, a portion of SG&A expenses was offset by cost sharing funding. Net
SG&A expenses (exclusive of amounts classified as costs of revenue and amounts
20
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
offset by cost sharing funding) decreased to $3,292,000 in the three months
ended September 30, 2002 from $3,626,000 for the same period last year. For the
six months ended September 30, 2002 and 2001, these amounts were $6,756,000 and
$7,341,000, respectively.
Our SG&A expenditures are summarized as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
SG&A expenses per Consolidated
Statements of Operations .............. $3,292,000 $3,626,000 $6,756,000 $7,341,000
SG&A expenditures classified as
Costs of revenue ...................... 342,000 448,000 651,000 888,000
SG&A expenditures offset by cost
sharing funding ....................... 75,000 97,000 125,000 154,000
---------- ---------- ---------- ----------
Adjusted SG&A expenses ................. $3,709,000 $4,171,000 $7,532,000 $8,383,000
========== ========== ========== ==========
Interest income was $255,000 in the quarter ended September 30, 2002, compared
to $1,356,000 for the same period in the prior year. For the six months ended
September 30, 2002 and 2001, these amounts were $626,000 and $3,173,000,
respectively. These decreases in interest income reflect the lower cash balances
available for investment as a result of cash being used to fund our operations
and to purchase property, plant and equipment, as well as lower interest rates
available on our investments. Other income (expense), net in the six months
ended September 30, 2002 was $4,000, compared to $212,000 in the prior-year
period, which reflected investment gains from the sale of long-term marketable
securities, partially offset by taxes on investment income.
We expect to continue to incur operating losses until the end of the fiscal year
ending March 31, 2005 as we continue to devote significant financial resources
to our research and development activities and commercialization efforts.
We expect to be party to agreements which, from time to time, may result in
costs incurred exceeding expected revenues under such contracts. We may enter
into such agreements for a variety of reasons including, but not limited to,
entering new product application areas, furthering the development of key
technologies, and advancing the demonstration of commercial prototypes in
critical market applications.
Please refer to the "Future Operating Results" section below for a discussion of
certain factors that may affect our future results of operations and financial
condition.
21
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
Liquidity and Capital Resources
At September 30, 2002, we had cash, cash equivalents and long-term marketable
securities of $35,031,000 compared to $68,200,000 at March 31, 2002. The
principal uses of cash during the six months ended September 30, 2002 were
$27,169,000 for the funding of our operations (including $9,033,000 to reduce
our fiscal 2002 year-end accounts payable liabilities resulting from equipment
purchases and restructuring and other charges incurred during the fourth quarter
of fiscal 2002), and $6,099,000 for the acquisition of equipment, primarily for
our HTS manufacturing facility in Devens, Massachusetts.
Cash, cash equivalents, and long-term marketable securities declined by
$10,581,000 in the three months ended September 30, 2002 from $45,612,000 to
$35,031,000. Cash was used to fund net losses of $8,282,000 (excluding
depreciation and other non-cash items of $1,940,000) and to fund higher
operating capital of $1,228,000 and new capital expenditures of $1,311,000. Cash
use in the second quarter of fiscal 2003 was reduced by $12,007,000 or 53% from
the previous quarter ended June 30, 2002, primarily as a result of reduced level
of investment in operating capital and capital expenditures as shown in the
following table:
- ---------------------------------------------------------------------------------------------------------
Cash (Use)/generation 3 months ended 3 months ended 6 months ended
September 30, 2002 June 30, 2002 September 30, 2002
- ---------------------------------------------------------------------------------------------------------
Net loss excluding non-cash items $ (8,282,000) $ (9,225,000) $ (17,507,000)
- ---------------------------------------------------------------------------------------------------------
Operating capital funding:
- ---------------------------------------------------------------------------------------------------------
Receivables $ 376,000 $ (94,000) $ 282,000
- ---------------------------------------------------------------------------------------------------------
Inventory $ (14,000) $ 68,000 $ 54,000
- ---------------------------------------------------------------------------------------------------------
Payables/accrued liabilities $ (1,450,000) $ (7,583,000) $ (9,033,000)
- ---------------------------------------------------------------------------------------------------------
Deferred revenue/Other operating
capital $ (140,000) $ (825,000) $ (965,000)
- ---------------------------------------------------------------------------------------------------------
Subtotal - increase in operating $ (1,228,000) $ (8,434,000) $ (9,662,000)
capital
- ---------------------------------------------------------------------------------------------------------
Net Cash Used by Operating $ (9,510,000) $ (17,659,000) $ (27,169,000)
Activities
- ---------------------------------------------------------------------------------------------------------
Capital Expenditures $ (1,311,000) $ (4,788,000) $ (6,099,000)
- ---------------------------------------------------------------------------------------------------------
Other Assets/Liabilities $ 240,000 $ (141,000) $ 99,000
- ---------------------------------------------------------------------------------------------------------
Total Cash (Use) $(10,581,000) $ (22,588,000) $ (33,169,000)
- ---------------------------------------------------------------------------------------------------------
22
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
For the quarter, operating capital funding requirements were used primarily to
pay accounts payable and accrued liabilities which had increased at the end of
last fiscal year as a result of large capital expenditures in the new Devens HTS
wire manufacturing plant and restructuring costs. During the quarter, the
investment in receivables declined by $376,000.
We expect to continue to make progress in reducing our rate of cash usage over
the next six months via a further decline in receivables and inventory,
primarily in our Power Electronics Systems business unit, where we expect to
close additional orders and recognize revenue, thereby converting existing
inventory into cash.
Due to scheduled billing requirements specified under certain contracts, a
portion of our accounts receivable balance is unbilled. As of September 30,
2002, $4,222,000, or approximately 58%, of our receivable balance of $7,301,000,
was unbilled. Included in unbilled accounts receivable is $2,624,000 due from
one customer related to their joint marketing of power quality and reliability
products with us. We expect to invoice most of these unbilled amounts during the
next six months as work is completed on these contracts.
Goodwill of $1,108,000 at September 30, 2002 represents the excess of the
purchase price paid for the acquisition of substantially all of the assets of
Integrated Electronics, LLC ("IE") on June 1, 2000, over the fair value of IE's
assets, less amortization taken between June 1, 2000 and March 31, 2001.
Effective April 1, 2001 we adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
and ceased amortizing the goodwill acquired in the IE purchase.
The possibility exists that we may pursue acquisition and joint venture
opportunities in the future that may affect liquidity and capital resource
requirements.
We have potential funding commitments (excluding amounts included in accounts
receivable) of approximately $8,715,000 to be received after September 30, 2002
from government and commercial customers, compared to $11,020,000 at March 31,
2002. However, these current funding commitments, including $7,483,000 on U.S.
government contracts, are subject to certain cancellation provisions. Of the
current commitment amount of $8,715,000, approximately 74% is potentially
collectable within the next 12 months.
We believe, based upon our current business plan, that our existing capital
resources will be sufficient to fund our operations until the end of fiscal
2005, at which time we expect to reach corporate-wide profitability. However, we
may need additional funds sooner than anticipated if our performance deviates
significantly from our current business plan, if there are significant changes
in competitive or other market factors, or if unforeseen circumstances arise.
There can be no assurance that such funds, whether from equity or debt
financing, development contracts or other sources, will be available, or
available under terms acceptable to us.
To date, inflation has not had a material impact on our financial results.
23
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
New Accounting Pronouncements
See Note 10 of the Notes to the Interim Consolidated Financial Statements for a
discussion of new accounting pronouncements.
FUTURE OPERATING RESULTS
Various statements included herein, as well as other statements made from time
to time by our representatives, which relate to future matters (including but
not limited to statements concerning our future commercial success, revenues and
available cash) constitute forward looking statements and are made under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. There are a number of important factors which could cause our actual
results of operations and financial condition in the future to vary from that
indicated in such forward looking statements. Factors that may cause such
differences include, without limitation, the risks, uncertainties and other
information set forth below.
We have a history of operating losses and we expect to continue to incur losses
in the future.
We have been principally engaged in research and development activities. We
have incurred net losses in each year since our inception. Our net loss for
fiscal 2000, fiscal 2001, fiscal 2002, and the first six months of fiscal 2003
was $17,598,000, $21,676,000, $56,985,000, and $21,052,000 respectively. Our
accumulated deficit as of September 30, 2002 was $206,528,000. We expect to
continue to incur operating losses until the end of fiscal 2005 and there can be
no assurance that we will ever achieve profitability.
We believe, based upon our current business plan, that our existing capital
resources will be sufficient to fund our operations until the end of fiscal
2005. However, we may need additional funds sooner than anticipated if our
performance deviates significantly from our current business plan, if there are
significant changes in competitive or other market factors, or if unforeseen
circumstances arise. Such funds, whether from equity or debt financing,
development contracts or other sources, may not be available, or may not be
available under terms acceptable to us.
There are a number of technological challenges that must be successfully
addressed before our superconductor products can gain widespread commercial
acceptance.
Many of our products are in the early stages of commercialization and
testing, while others are still under development. We do not believe any company
has yet successfully developed and commercialized significant quantities of HTS
wire or wire products. There are a number of
24
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
technological challenges that we must successfully address to complete our
development and commercialization efforts. For example, we face engineering
challenges in producing HTS wire in longer lengths and commercial quantities. We
also believe that several years of further development in the cable and motor
industries will be necessary before a substantial number of additional
commercial applications for our HTS wire in these industries can be developed
and proven. We may also need to improve the performance and or reduce the cost
of our HTS wire to expand the number of commercial applications for it. We may
be unable to meet such technological challenges. Delays in development, as a
result of technological challenges or other factors, may result in the
introduction or commercial acceptance of our products later than anticipated.
The commercial uses of superconductor products are very limited today, and a
widespread commercial market for our products may not develop.
To date, there has been no widespread commercial use of HTS products.
Commercial acceptance of low temperature superconductor (LTS) products, other
than for medical magnetic resonance imaging and superconductor magnetic energy
storage products, has been significantly limited by the cooling requirements of
LTS materials. Even if the technological hurdles currently limiting commercial
uses of HTS and LTS products are overcome, it is uncertain whether a robust
commercial market for those new and unproven products will ever develop. It is
possible that the market demands we currently anticipate for our HTS and LTS
products will not develop and that superconductor products will never achieve
widespread commercial acceptance.
We expect to spend significant amounts on the expansion of our manufacturing
capacity, and our expansion projects may not be successful.
In anticipation of significantly increased demand for our products, we are
completing a project to expand our HTS wire manufacturing capacity at the Devens
Commerce Center in Devens, Massachusetts. We used a large portion of the net
proceeds from our March 2000 stock offering to fund the construction and
purchase equipment for the new HTS wire manufacturing facility in Devens. While
we expect to complete this project within our estimates, the actual costs for
equipment may be in excess of our expectations. In addition, we may experience
start-up difficulties or other problems once the facility becomes fully
operational. Finally, if increased demand for our products does not materialize,
we will not generate sufficient revenue to offset the cost of establishing and
operating the facility.
We have no experience manufacturing our HTS products in commercial quantities.
To be financially successful, we will have to manufacture our products in
commercial quantities at acceptable costs while also preserving the quality
levels we have achieved in manufacturing these products in limited quantities.
This presents a number of technological and engineering challenges for us. We
cannot make assurances that we will be successful in
25
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
developing product designs and manufacturing processes that permit us to
manufacture our HTS products in commercial quantities at commercially acceptable
costs while preserving quality. In addition, we may incur significant start-up
costs and unforeseen expenses in our product design and manufacturing efforts.
We have historically focused on research and development activities and have
limited experience in marketing and selling our products.
We have been primarily focused on research and development of our
superconductor products. Consequently, our management team has limited
experience directing our commercialization efforts, which are essential to our
future success. To date, we have only limited experience marketing and selling
our products, and there are very few people anywhere who have significant
experience marketing or selling superconductor products. Once our products are
ready for commercial use, we will have to develop a marketing and sales
organization that will effectively demonstrate the advantages of our products
over both more traditional products and competing superconductor products or
other technologies. We may not be successful in our efforts to market this new
and unfamiliar technology, and we may not be able to establish an effective
sales and distribution organization.
We may decide to enter into arrangements with third parties for the
marketing or distribution of our products, including arrangements in which our
products, such as HTS wire, are included as a component of a larger product,
such as a motor. For example, we have a marketing and sales alliance with GE
Industrial Systems giving GE the exclusive right to offer our Distributed-SMES
(D-SMES) and D-VAR product lines in the United States to utilities and the right
to sell industrial Power Quality-SMES (PQ-SMES) systems to certain of GE's
global industrial accounts. By entering into marketing and sales alliances, the
financial benefits to us of commercializing our products are dependent on the
efforts of others. We may not be able to enter into marketing or distribution
arrangements with third parties on financially acceptable terms, and third
parties may not be successful in selling our products or applications
incorporating our products.
Our products face intense competition both from superconductor products
developed by others and from traditional, non-superconductor products and
alternative technologies.
As we begin to market and sell our superconductor products, we will face
intense competition both from competitors in the superconductor field and from
vendors of traditional products and new technologies. There are many companies
in the United States, Europe, Japan and China engaged in the development of HTS
products, including Sumitomo Electric Industries, 3M, Intermagnetics General,
Vacuumschmelze, Fujikura, Furukawa Electric, and Innova. The superconductor
industry is characterized by rapidly changing and advancing technology. Our
future success will depend in large part upon our ability to keep pace with
advancing HTS and LTS technology and developing industry standards. Our SMES
products and integrated power
26
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
electronic products, such as D-VAR(TM), compete with a variety of
non-superconductor products such as dynamic voltage restorers ("DVRs"), static
VAR compensators ("SVCs"), static compensators ("STATCOMS"), flywheels, power
electronic converters and battery-based power supply systems. Competition for
our PowerModules(TM) includes products from Ecostar, Inverpower, Satcon,
Semikron and Trace. The HTS motor and generator products that we are developing
face competition from copper wire-based motors and generators, and from
permanent magnet motors that are being developed. Research efforts and
technological advances made by others in the superconductor field or in other
areas with applications to the power quality and reliability markets may render
our development efforts obsolete. Many of our competitors have substantially
greater financial resources, research and development, manufacturing and
marketing capabilities than we have. In addition, as the HTS wire, HTS electric
motors and generators, and power electronic systems markets develop, other large
industrial companies may enter those fields and compete with us.
Third parties have or may acquire patents that cover the high temperature
superconductor materials we use or may use in the future to manufacture our
products.
We expect that some or all of the HTS materials and technologies we use in
designing and manufacturing our products are or will become covered by patents
issued to other parties, including our competitors. If that is the case, we will
need either to acquire licenses to these patents or to successfully contest the
validity of these patents. The owners of these patents may refuse to grant
licenses to us, or may be willing to do so only on terms that we find
commercially unreasonable. If we are unable to obtain these licenses, we may
have to contest the validity or scope of those patents to avoid infringement
claims by the owners of these patents. It is possible that we will not be
successful in contesting the validity or scope of a patent, or that we will not
prevail in a patent infringement claim brought against us. Even if we are
successful in such a proceeding, we could incur substantial costs and diversion
of management resources in prosecuting or defending such a proceeding.
There are numerous patents issued in the field of superconductor materials and
our patents may not provide meaningful protection for our technology.
We own or have licensing rights under many patents and pending patent
applications. However, the patents that we own or license may not provide us
with meaningful protection of our technologies, and may not prevent our
competitors from using similar technologies, for a variety of reasons, such as:
. the patent applications that we or our licensors file may not result
in patents being issued;
. any patents issued may be challenged by third parties; and
27
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2002
. others may independently develop similar technologies not protected by
our patents or design around the patented aspects of any technologies
we develop.
Moreover, we could incur substantial litigation costs in defending the
validity of our own patents. We also rely on trade secrets and proprietary
know-how to protect our intellectual property. However, our non-disclosure
agreements and other safeguards may not provide meaningful protection for our
trade secrets and other proprietary information.
Our success is dependent upon attracting and retaining qualified personnel.
Our success will depend in large part upon our ability to attract and
retain highly qualified research and development, management, manufacturing,
marketing and sales personnel. Hiring those persons may be especially difficult
due to the specialized nature of our business.
We are particularly dependent upon the services of Dr. Gregory J. Yurek,
our co-founder and our Chairman of the Board, President and Chief Executive
Officer, and Dr. Alexis P. Malozemoff, our Chief Technical Officer. The loss of
the services of either of those individuals could significantly damage our
business and prospects.
28
AMERICAN SUPERCONDUCTOR CORPORATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk through financial instruments, such as investments
in marketable securities, is not material.
Item 4. Controls and Procedures
a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-Q,
the Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
29
AMERICAN SUPERCONDUCTOR CORPORATION
PART II
OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on July
26, 2002, the following proposals were adopted by the vote
specified below.
- -----------------------------------------------------------------------------------------------------------------
Withheld Authority
To
Proposal Votes For Vote For Nominee
- -----------------------------------------------------------------------------------------------------------------
1. Election of Directors
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Gregory J. Yurek 16,349,842 800,977
- -----------------------------------------------------------------------------------------------------------------
Albert J Baciocco, Jr. 16,286,294 864,525
- -----------------------------------------------------------------------------------------------------------------
Frank Borman 16,348,992 801,827
- -----------------------------------------------------------------------------------------------------------------
Clayton M. Christensen 16,349,992 800,827
- -----------------------------------------------------------------------------------------------------------------
Peter O. Crisp 16,349,992 800,827
- -----------------------------------------------------------------------------------------------------------------
Richard Drouin 16,349,992 800,827
- -----------------------------------------------------------------------------------------------------------------
Gerard Menjon 16,286,294 864,525
- -----------------------------------------------------------------------------------------------------------------
Andrew G.C. Sage, II 16,286,294 864,525
- -----------------------------------------------------------------------------------------------------------------
John B. Vander Sande 16,286,194 864,625
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Broker
Votes For Votes Against Abstentions Non-Votes
- -----------------------------------------------------------------------------------------------------------------
2. Approval of amendments to
Amended and Restated 1997
Director Plan: 15,593,810 1,369,604 187,405 None
- ------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Broker
Votes For Votes Against Abstentions Non-Votes
- -----------------------------------------------------------------------------------------------------------------
3. Ratification of independent
auditors: 16,839,092 259,843 51,884 None
- -----------------------------------------------------------------------------------------------------------------
30
AMERICAN SUPERCONDUCTOR CORPORATION
PART II
OTHER INFORMATION (Continued)
Please see the Company's Proxy Statement filed with the SEC on June 25, 2002 in
connection with this Annual Meeting for a description of the matters voted upon.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibit No.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN SUPERCONDUCTOR CORPORATION
November 13, 2002 /s/ Gregory J. Yurek
- ------------------------- ----------------------------------------
Date Gregory J. Yurek
Chairman of the Board, President and
Chief Executive Officer
November 13, 2002 /s/ Thomas M. Rosa
- ------------------------- ----------------------------------------
Date Thomas M. Rosa
Chief Accounting Officer, Corporate
Controller and Assistant Secretary
32
CERTIFICATIONS
I, Gregory J. Yurek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Superconductor Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Gregory J. Yurek
----------------------------
Dated: November 13, 2002 Gregory J. Yurek
Chief Executive Officer
33
CERTIFICATIONS
I, Stanley D. Piekos, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
Superconductor Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Stanley D. Piekos
----------------------------
Dated: November 13, 2002 Stanley D. Piekos
Chief Financial Officer
34