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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: December 31, 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 (I.R.S. Employer
of organization or incorporation) Identification Number)
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 February 12, 2003
AMERICAN SUPERCONDUCTOR CORPORATION
INDEX
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Page No.
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 2002 and March 31, 2002 3
Consolidated Statements of Operations
for the three months ended
December 31, 2002 and 2001 and the 4
nine months ended December 31, 2002 and 2001
Consolidated Statements of Comprehensive Loss
for the three months ended
December 31, 2002 and 2001 and the 5
nine months ended December 31, 2002 and 2001
Consolidated Statements of Cash Flows
for the nine months ended
December 31, 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 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures and Certifications 31-33
Exhibit: 99.1 34
2
Part I. Financial Information
Item 1. Financial Statements
AMERICAN SUPERCONDUCTOR CORPORATION
Consolidated Balance Sheets
December 31, March 31,
2002 2002
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,570,602 $ 37,170,927
Accounts receivable 5,819,512 7,583,505
Inventory 13,729,715 13,212,831
Prepaid expenses and other current assets 1,078,423 708,079
------------------- ------------------
Total current assets 36,198,252 58,675,342
Property, plant and equipment:
Land 4,021,611 4,244,611
Construction in progress - building and equipment 17,230,566 79,685,813
Building 51,069,773 -
Equipment 44,823,697 24,939,124
Furniture and fixtures 3,944,497 3,833,016
Leasehold improvements 6,246,444 6,226,267
------------------- ------------------
127,336,588 118,928,831
Less: accumulated depreciation (26,042,746) (21,209,230)
------------------- ------------------
Property, plant and equipment, net 101,293,842 97,719,601
Long-term marketable securities 8,141,412 31,028,683
Long-term inventory 3,250,000 3,787,000
Goodwill 1,107,735 1,107,735
Other assets 5,489,239 5,476,563
------------------- ------------------
Total assets $155,480,480 $ 197,794,924
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,458,178 $ 20,784,931
Deferred revenue 273,480 1,056,806
------------------- ------------------
Total current liabilities 10,731,658 21,841,737
Long-term deferred revenue 3,250,000 3,787,000
Commitments
Stockholders' equity:
Common stock, $.01 par value
Authorized shares-50,000,000; issued and outstanding
21,184,170 and 20,497,514 at December 31, 2002 and
March 31, 2002, respectively 211,842 204,975
Additional paid-in capital 360,837,758 357,781,718
Deferred compensation (407,906) (318,199)
Deferred contract costs (12,869) (121,167)
Accumulated other comprehensive income 13,133 95,641
Accumulated deficit 219,143,136) (185,476,781)
------------------- ------------------
Total stockholders' equity 141,498,822 172,166,187
------------------- ------------------
Total liabilities and stockholders' equity $155,480,480 $ 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 Nine Months Ended
December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Contract revenue $ 116,163 $ 686,148 $ 405,540 $ 1,980,248
Product sales and prototype development contracts 2,635,330 2,846,994 9,685,481 6,468,402
------------ ------------ ------------ ------------
Total revenues 2,751,493 3,533,142 10,091,021 $ 8,448,650
Costs and expenses:
Costs of revenue-contract revenue 93,439 679,462 431,254 1,962,297
Costs of revenue-product sales and prototype
development contracts 5,945,594 3,543,088 16,046,294 7,921,223
Research and development 6,021,365 6,833,411 17,848,242 20,292,534
Selling, general and administrative 3,496,173 4,022,442 10,252,225 11,363,391
------------ ------------ ------------ ------------
Total costs and expenses 15,556,571 15,078,403 44,578,015 41,539,445
Operating loss (12,805,078) (11,545,261) (34,486,994) (33,090,795)
Interest income 193,364 684,427 819,585 3,857,499
Other income (expense), net (2,975) (23,089) 1,054 188,840
------------ ------------ ------------ ------------
Net loss $(12,614,689) $(10,883,923) $(33,666,355) $(29,044,456)
============ ============ ============ ============
Net loss per common share
Basic and Diluted $ (0.60) $ (0.53) $ (1.63) $ (1.42)
============ ============ ============ ============
Weighted average number of common shares outstanding
Basic and Diluted 21,000,191 20,454,652 20,702,858 20,387,626
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 2002 2001
---------------- --------------- ----------------- ----------------
Net loss $ (12,614,689) $ (10,883,923) $ (33,666,355) $ (29,044,456)
Other comprehensive income (loss)
Foreign currency translation 3,237 (768) 21,761 12,273
Unrealized gain (loss)
on investments (26,972) (248,403) (104,269) (425,017)
---------------- --------------- ----------------- ----------------
Other comprehensive income (loss) (23,735) (249,171) (82,508) (412,744)
Comprehensive loss $ (12,638,424) $ (11,133,094) $ (33,748,863) $ (29,457,200)
================ =============== ================= ================
The accompanying notes are an integral part of the consolidated financial
statements.
5
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
December 31,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $ (33,666,355) $ (29,044,456)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization 5,648,377 3,803,135
Deferred compensation expense 103,733 79,550
Deferred warrant costs 148,263 206,178
Stock compensation expense 7,189 17,580
Changes in operating asset and liability accounts:
Accounts receivable 1,763,993 4,756,380
Inventory - current and long-term 169,456 (4,241,327)
Prepaid expenses and other current assets (348,583) (389,918)
Accounts payable and accrued expenses (10,326,753) 1,630,709
Deferred revenue - current and long-term (1,320,326) 247,756
--------------- --------------
Net cash used by operating activities (37,821,006) (22,934,413)
Cash flows from investing activities:
Purchase of property and equipment (6,644,076) (50,344,596)
Purchase of long-term marketable securities (770,000) -
Sale of long-term marketable securities 23,553,002 37,890,477
Increase in other assets (627,537) (1,308,840)
--------------- --------------
Net cash (used in) provided by investing activities 15,511,389 (13,762,959)
Cash flows from financing activities:
Net proceeds from issuance of common stock 709,292 1,369,277
--------------- --------------
Net cash provided by financing activities 709,292 1,369,277
Net decrease in cash and cash equivalents (21,600,325) (35,328,095)
Cash and cash equivalents at beginning of period 37,170,927 89,063,299
--------------- --------------
Cash and cash equivalents at end of period $ 15,570,602 $ 53,735,204
=============== ==============
Supplemental schedule of cash flow information:
Noncash issuance of common stock $ 456,422 $ 97,130
Noncash purchase of NST Inventory (See Footnote 2.) 149,340 -
Noncash purchase of NST Property Plant & Equipment 1,763,680 -
Noncash purchase of NST patent assets 200,000 -
---------------
Noncash issuance of common stock - NKT Holding $ 2,113,020 -
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 $116,163 and $686,148 for the three
months ended December 31, 2002 and 2001, respectively. For the nine months
ended December 31, 2002 and 2001, contract revenue was $405,540 and
$1,980,248, respectively. In addition, the Company recorded prototype
development contract revenues on U.S. Navy contracts of $1,540,552 and
$1,425,300, which are included under "Revenues - Product sales and
prototype development contracts", in the three months ended December 31,
2002, and 2001, respectively. For the nine months ended December 31, 2002
and 2001, prototype development contract revenue on U.S. Navy contracts was
$5,856,893 and $3,264,038, 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 Nine Months Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Research and development expenses $1,996,274 $2,832,160 $6,526,009 $5,745,319
Selling, general and administrative expenses $ 297,473 $ 573,655 $ 949,009 $1,461,525
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 December 31, 2002 and 2001 and the financial position at
December 31, 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.
On October 31, 2002, the Company acquired from NKT Holding A/S
substantially all of the assets of Nordic Superconductor Technologies A/S
(NST), a subsidiary of NKT Holding, in exchange for 546,000 shares of the
Company's common stock valued at $2,113,020. NKT Holding has agreed to hold
these shares for at least two years. NST had developed and marketed HTS
wire to customers in Europe, Asia, and North America. The Company did not
assume any debt or other liabilities in the transaction. No NST employees
were retained by the Company. The net cash impact to the Company of this
acquisition was essentially zero. The assets acquired were fixed assets
valued at $1,763,680, patents valued at $200,000, and inventory valued at
$149,340. These asset purchases are excluded from the "Changes in operating
asset and liability accounts" and "Cash flows from investing activities"
sections in the Consolidated Statements of Cash Flows for the period ended
December 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.
8
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Net Loss Per Common Share:
Basic Earnings Per Share ("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 December 31, 2002
and 2001, common equivalent shares of 4,970,255 and 3,379,770 were not
included in the calculation of diluted EPS as their effect was
antidilutive. For the nine months ended December 31, 2002 and 2001, common
equivalent shares of 4,857,036 and 2,187,545 were not included for the
calculation of diluted EPS as their effect was antidilutive.
4. Accounts Receivable:
Accounts receivable at December 31, 2002 and March 31, 2002 consisted of
the following:
December 31, 2002 March 31, 2002
----------------- --------------
Accounts Receivable (billed) $ 2,108,001 $ 3,076,361
Accounts Receivable (unbilled) $ 3,831,899 $ 4,549,144
Less: Allowance for Doubtful Accounts (120,388) (42,000)
----------------- -------------
Net Accounts Receivable 5,819,512 7,583,505
================= =============
5. Inventories:
Inventories at December 31, 2002 and March 31, 2002 consisted of the
following:
December 31, 2002 March 31, 2002
----------------- --------------
Raw materials $ 2,741,040 $ 1,545,327
Work-in-progress 9,421,267 10,046,359
Finished goods 1,567,408 1,621,145
----------------- --------------
$ 13,729,715 $ 13,212,831
================= ==============
9
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Long-term Inventory and Deferred Revenue:
Long-term inventory of $3,250,000 represents SMES units that were delivered
in fiscal 2001 to one of our customers, Wisconsin Public Service
Corporation ("WPS") for a total payment of $3,787,000, less $537,000
recorded as revenue in the quarter ended December 31, 2002. As the sale of
these units is subject to certain return and buyback provisions which
expire from 2002 to 2009, the Company is deferring recognition of the
revenue related to the remaining $3,250,00 in sales until the applicable
buyback provisions lapse. Long-term deferred revenue of $3,250,000
represents the $3,787,000 cash payment received from WPS related to this
transaction, less $537,000 recorded as revenue in the third quarter of
fiscal 2003.
The buyback provisions, which are subject to a minimum 6-month written
notice requirement, began to lapse in the quarter ended December 31, 2002,
until which time WPS had 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 recorded $537,000 of revenue and an equal amount of cost of
revenue in the quarter ended December 31, 2002, as the buyback price
transitioned from $3,787,000 to $3,250,000. The Company also recorded a
$537,000 reduction in long-term inventory and long-term deferred revenue.
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 government cost-sharing agreements of
$171,068 and $120,349 for the three months ended December 31, 2002 and
2001, respectively. For the nine months ended December 31, 2002 and 2001,
government cost sharing funding was $428,036 and $439,591, respectively.
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.
8. Restructuring and other charges:
In the fourth quarter of fiscal 2002 (ended March 31, 2002), the Company
announced two events which resulted in a combined fiscal 2002 charge of
$13.9 million.
10
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
The restructuring charges and other charges recorded in the fourth quarter
of fiscal 2002 and their corresponding December 31, 2002 status are
summarized below:
Total
Restructuring & Cash Other Balance as of
other charges Payments Adjustments December 31, 2002
------------- -------- ----------- ------------------
Workforce Reduction $ 1,548,897 $ 1,476,024 --- $ 72,873
Consolidation of facilities,
fixed asset write-offs,
& other charges 4,117,161 416,501 2,881,004 819,656
Inventory Write-down 3,464,275 --- 2,207,237 1,257,038
Allowance for Doubtful
Accounts 727,028 --- 727,028 ---
Pirelli License 4,009,890 2,289,390 1,720,500 ---
------------- ----------- ----------- -----------
$ 13,867,251 $ 4,181,915 $ 7,535,769 $ 2,149,567
The Company currently anticipates payments for the restructuring activities
and other charges to be completed within fiscal 2003 (ending March 31,
2003), except for certain long-term contractual obligations such as
facility lease payments through the third quarter of fiscal 2004. Of the
remaining balance of $2,149,567, $843,792 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, generators, synchronous
condensers and specialty magnets.
11
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Electric Motors and Generators business segment is developing and
commercializing electric motors, generators, and synchronous condensers
based on HTS wire. Its primary focus, for motors and generators, is on ship
propulsion. This business introduced a new product, SuperVAR(TM), in
January 2003.
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 and for wind farm applications.
The operating results for the three business segments are as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues
--------
HTS Wire $ 480,759 $ 2,014,978 $ 1,072,746 $ 3,985,491
Electric Motors and Generators 1,090,552 1,425,300 4,230,696 3,264,038
Power Electronic Systems 1,180,182 92,864 4,787,579 1,199,121
---------- ----------- ----------- -----------
Total $2,751,493 $ 3,533,142 $10,091,021 $ 8,448,650
========== =========== =========== ===========
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Operating Loss
--------------
HTS Wire $ (7,603,612) $ (5,021,884) $(21,288,898) $(15,139,187)
Electric Motors and Generators (2,244,990) (1,930,903) (5,957,990) (5,892,536)
Power Electronic Systems (2,638,975) (4,101,327) (6,127,768) (10,562,684)
Unallocated Corporate Expenses (317,501) (491,147) (1,112,338) (1,496,388)
------------ ------------ ------------ ------------
Total $(12,805,078) $(11,545,261) $(34,486,994) $(33,090,795)
============ ============ ============ ============
The assets for the three business segments (plus Corporate Cash) are as
follows:
December 31, 2002 March 31, 2002
----------------- --------------
HTS Wire $ 106,316,716 $ 102,010,166
Electric Motors and Generators 4,382,157 6,424,532
Power Electronic Systems 21,069,593 21,160,616
Corporate cash and marketable securities 23,712,014 68,199,610
------------- --------------
Total $ 155,480,480 $ 197,794,924
============= ==============
12
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Financial Accounting Standards Board ("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 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.
13
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation -- Transition
and Disclosure ("SFAS 148"). SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The transition and annual disclosure provisions are
effective for fiscal years ending after December 15, 2002. The new interim
disclosure provisions are effective for the first interim period beginning
after December 15, 2002. The Company has not yet determined the impact of
adopting SFAS 148.
14
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 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/or power
electronic converters into fully-integrated products, such as HTS ship
propulsion motors, and dynamic reactive compensation systems, 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. 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.
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
15
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
remain after products are delivered, revenue is recognized only after such
obligations are fulfilled.
Long-term inventory and deferred revenue. Long-term inventory of $3,250,000
represents SMES units that were delivered in fiscal 2001 to one of our
customers, Wisconsin Public Service Corporation ("WPS") for a total payment of
$3,787,000, less $537,000 recorded as revenue in the quarter ended December 31,
2002. As the sale of these units is subject to certain return and buyback
provisions which expire from 2002 to 2009, we are deferring recognition of the
revenue related to the remaining $3,250,000 in sales until the applicable
buyback provisions lapse. Long-term deferred revenue of $3,250,000 represents
the $3,787,000 cash payment received from WPS related to this transaction, less
$537,000 recorded as revenue in the third quarter of fiscal 2003. The buyback
provisions, which are subject to a minimum 6-month written notice requirement,
began to lapse in the quarter ended December 31, 2002, until which time WPS had
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 recorded
$537,000 of revenue and an equal amount of cost of revenue in the quarter ended
December 31, 2002, as the buyback price transitioned from $3,787,000 to
$3,250,000. We also recorded a $537,000 reduction in long-term inventory and
long-term deferred revenue. 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;
. Significant negative industry or economic trends; and
. Significant advances in our technologies that require changes in our
manufacturing process
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
16
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
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. At this point, we believe we are adequately reserved for any potential
excess inventory or inventory obsolescence. Approximately $9.1 million or 66% of
our inventory as of December 31, 2002, was in our Power Electronics Systems
business, which announced the addition of a new product, D-VAR, during the first
quarter of fiscal year 2003. The D-VAR unit does not contain a superconducting
magnetic energy storage device like our other integrated power electronic
solutions. We presently have approximately $3 million of inventory related to
superconducting magnetic energy storage devices which we will monitor closely
for estimated realizable value as we assess future sales demand in this business
unit.
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 in a business combination
substantially all of the assets of Integrated Electronics, LLC ("IE"), as well
as IE's employees and facility lease. 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. We review goodwill at least annually or when
events and changes in circumstances indicate the need for such a detailed
impairment loss analysis, as prescribed by SFAS 142. To date, we have determined
that goodwill is not impaired, but we could in the future determine that
goodwill is impaired, which would result in a charge to earnings.
17
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
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 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 December 31, 2002 were $2,751,000,
a 22% decrease compared to the $3,533,000 of revenue recorded for the same
period a year earlier. For the nine months ended December 31, 2002, revenues
were $10,091,000, a 19% increase over the $8,449,000 of revenue recorded in the
comparable period of the prior year.
The decrease in revenue of $782,000 for the quarter ended December 31, 2002,
compared to the prior-year quarter, was the result of lower revenues in the HTS
Wire business unit, where revenues declined by $1,534,000 from the third quarter
of fiscal 2002 ($2,015,000) to the third quarter of fiscal 2003 ($481,000). This
decrease was caused by lower contract revenues ($570,000), mainly with Pirelli
Energy Cables and Systems, and by a decline in wire shipments and other product
sales ($964,000). Pirelli provided us with $500,000 of research and development
funding in the quarter ended December 31, 2001, and no funding in the quarter
ended December 31, 2002, 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. HTS product sales also declined in the quarter ended December 31, 2002,
compared to the same prior-year period, due to delays in the receipt of certain
wire orders. However, several such wire orders are now in hand, which has
improved the revenue outlook for the HTS Wire business unit in the fourth
quarter of fiscal 2003.
Prototype development contract revenues for the Electric Motors and Generators
business unit also declined by $335,000 in the quarter ended December 31, 2002
($1,090,000), compared to the prior-year quarter ($1,425,000), due to a decrease
in work performed on the Navy 5-megawatt HTS ship propulsion motor program.
18
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
These revenue declines in HTS Wire and Electric Motors and Generators business
units were partially offset by a $1,087,000 increase in the Power Electronic
Systems business unit, where revenues increased to $1,180,000 in the quarter
ended December 31, 2002 compared to $93,000 in the prior-year period. Included
in revenues for the Power Electronic Systems business unit were $450,000 of
prototype development contract revenues on the Power Electronic Building Blocks
(PEBB) program and $537,000 of revenue recognized on the WPS transaction, which
is explained in more detail in the "Long-term inventory and deferred revenue"
section of Critical Accounting Policies earlier in Management's Discussion and
Analysis.
For the nine-month period ended December 31, 2002, our consolidated revenues
increased by $1,642,000 compared to the first nine months of the prior year.
Revenues increased by $3,589,000 in the Power Electronics Systems business unit
to $4,788,000 in the nine-month period ended December 31, 2002 from $1,199,000
in the same prior-year period, primarily as a result of higher prototype
development contract revenues ($1,626,000) and higher product sales ($1,962,000)
as a result of two system shipments occurring in the first nine months of fiscal
2003 compared to one in the first nine months of fiscal 2002, as well as the WPS
revenue recognized in the most recent quarter. We expect sales of power
electronics systems will increase over the remainder of the fiscal year.
Revenues in the Electric Motors and Generators business unit also improved
significantly on a year-to-date basis, increasing by $967,000 to $4,231,000 in
the first nine months of fiscal 2003, compared to $3,264,000 in the same period
of the prior year. This was 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 $1,578,000 of backlog on the existing Navy motor
program as of December 31, 2002 and we expect additional contracts from the U.S.
Navy for HTS ship propulsion motors and/or generators during the rest of this
year and over the next three to four years.
These increases in revenues were partially offset by lower HTS Wire business
unit revenues, which declined to $1,073,000 for the nine-month period ended
December 31, 2002, compared to $3,985,000 in the nine months ended December 31,
2001. This $2,913,000 decrease was caused by lower contract revenues
($1,575,000), mainly with Pirelli Energy Cables and Systems, and by a decline in
wire shipments and other product sales ($1,338,000). Pirelli provided us with
$1,500,000 of research and development funding in the first nine months of
fiscal 2002, and no funding in the first nine months of fiscal 2003, as a result
of the discontinuance of its funding commitment in February 2002. HTS product
sales also declined for the first nine months of fiscal 2003 compared to the
same prior-year period, due to delays in the receipt of certain wire orders.
However, several such wire orders are now in hand, which has improved the
revenue outlook for the HTS Wire business unit in the fourth quarter of fiscal
2003.
19
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
For the three months ended December 31, 2002, we recorded approximately $171,000
in funding under two government cost-sharing agreements with the U.S. Air Force
and the Department of Commerce. Work on the Department of Commerce's Advanced
Technology Program (ATP) began in November 2002. For the three months ended
December 31, 2001, we recorded approximately $120,000 of funding under the U. S.
Air Force agreement. For the nine months ended December 31, 2002, funding under
government cost-sharing agreements was $428,000, compared to $440,000 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. 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 December 31, 2002 were
$15,557,000 compared to $15,078,000 for the same period last year. For the nine
months ended December 31, 2002, total costs and expenses were $44,578,000,
compared to $41,539,000 for the same period last year.
"Costs of revenue - product sales and prototype development contracts" increased
by $2,403,000 and $8,125,000 for the three and nine month periods ended December
31, 2002, respectively. This was primarily the result of 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.
Devens-related costs increased by $2,005,000 and $4,421,000 for the three and
nine month periods ended December 31, 2002, respectively, compared to prior
year. "Costs of revenue - product sales and prototype development contracts"
also increased for the nine-month period ended December 31, 2002, compared to
the same period last year, due to the higher level of prototype development
contract revenues with the U.S. Navy in both the Electric Motors and Generators
and Power Electronic Systems business units. Finally, these costs 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.
Adjusted research and development ("R&D") expenses, which include amounts
classified as costs of revenue and amounts offset by cost sharing funding,
decreased to $8,118,000 in the three months ended December 31, 2002 from
$9,727,000 for the same period last year. For the nine-month periods ended
December 31, 2002 and 2001, adjusted R&D expenses were $24,608,000 and
$26,265,000, respectively. These 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. These decreases in R&D spending were 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
20
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
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 $6,021,000
in the three months ended December 31, 2002 from $6,833,000 for the same period
last year. For the nine months ended December 31, 2002 and 2001, these amounts
were $17,848,000 and $20,293,000, respectively.
Our R&D expenditures are summarized as follows:
Three Months Ended December 31, Nine Months Ended December 31,
2002 2001 2002 2001
---- ---- ---- ----
R&D expenses per Consolidated Statements of
Operations ............................................. $ 6,021,000 $ 6,833,000 $17,848,000 $20,293,000
R&D expenditures classified as Costs of revenue ........ 1,996,000 2,832,000 6,526,000 5,745,000
R&D expenditures offset by cost sharing funding ........ 101,000 62,000 234,000 227,000
----------- ----------- ----------- ------------
Adjusted R&D expenses .................................. $ 8,118,000 $ 9,727,000 $24,608,000 $26,265,000
=========== =========== =========== ===========
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 $3,864,000 for the three months ended December 31, 2002,
compared to $4,654,000 for the same period last year. For the nine-month periods
ended December 31, 2002 and 2001, adjusted SG&A expenses were $11,396,000 and
$13,038,000, 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 and higher insurance premiums for liability and
Directors and Officers insurance. 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 offset by cost sharing funding)
decreased to $3,496,000 in the three months ended December 31, 2002 from
$4,022,000 for the same period last year. For the nine months ended December 31,
2002 and 2001, these amounts were $10,252,000 and $11,363,000, respectively.
Our SG&A expenditures are summarized as follows:
Three Months Ended December 31, Nine Months Ended December 31,
2002 2001 2002 2001
---- ---- ---- ----
SG&A expenses per Consolidated
Statements of Operations ........................ $3,496,000 $4,022,000 $10,252,000 $11,363,000
SG&A expenditures classified as
Costs of revenue ................................ 298,000 574,000 949,000 1,462,000
SG&A expenditures offset by cost
sharing funding ................................. 70,000 58,000 195,000 213,000
----------- ----------- ----------- -----------
Adjusted SG&A expenses .......................... $ 3,864,000 $ 4,654,000 $11,396,000 $13,038,000
=========== =========== =========== ===========
21
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
We believe that adjusted R&D expenses and adjusted SG&A expenses, which are
non-GAAP (generally accepted accounting principles) financial measures, provide
useful information about our aggregate R&D and SG&A spending.
Interest income was $193,000 in the quarter ended December 31, 2002, compared to
$684,000 for the same period in the prior year. For the nine months ended
December 31, 2002 and 2001, these amounts were $820,000 and $3,857,000,
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 nine months
ended December 31, 2002 was $1,000, compared to $189,000 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.
Liquidity and Capital Resources
At December 31, 2002, we had cash, cash equivalents and long-term marketable
securities of $23,712,000 compared to $68,200,000 at March 31, 2002. The
principal uses of cash during the nine months ended December 31, 2002 were
$37,821,000 for the funding of our operations (including $10,327,000 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 $6,644,000 for the acquisition of equipment, primarily for
our HTS manufacturing facility in Devens, Massachusetts.
22
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
Cash, cash equivalents, and long-term marketable securities declined by
$11,319,000 in the three months ended December 31, 2002 from $35,031,000 to
$23,712,000. Cash was used to fund net losses of $10,252,000 (excluding
depreciation and other non-cash items of $2,363,000) and to fund higher
operating capital of $401,000 and new capital expenditures of $545,000. Cash use
in the third quarter of fiscal 2003 increased by $738,000 or 7% from the
previous quarter ended September 30, 2002, primarily as a result of the
increased loss, as shown in the following table:
- --------------------------------------------------------------------------------------------------
Cash (Use)/generation 3 months ended 3 months ended 9 months ended
December 31, 2002 September 30, 2002 December 31, 2002
- --------------------------------------------------------------------------------------------------
Net loss excluding non-cash items $(10,252,000) $ (8,282,000) $(27,759,000)
- --------------------------------------------------------------------------------------------------
Operating capital funding:
- --------------------------------------------------------------------------------------------------
Receivables $ 1,482,000 $ 376,000 $ 1,764,000
- --------------------------------------------------------------------------------------------------
Inventory $ 116,000 $ (14,000) $ 170,000
- --------------------------------------------------------------------------------------------------
Payables/accrued liabilities $ (1,294,000) $ (1,450,000) $(10,327,000)
- --------------------------------------------------------------------------------------------------
Deferred revenue/Other $ (705,000) $ (140,000) $ (1,669,000)
operating capital
- --------------------------------------------------------------------------------------------------
Subtotal- increase in $ (401,000) $ (1,228,000) $(10,062,000)
operating capital
- --------------------------------------------------------------------------------------------------
Net Cash Used by $(10,653,000) $ (9,510,000) $(37,821,000)
Operating Activities
- --------------------------------------------------------------------------------------------------
Capital Expenditures $ (545,000) $ (1,311,000) $ (6,644,000)
- --------------------------------------------------------------------------------------------------
Other Assets/Liabilities $ (121,000) $ 240,000 $ (23,000)
- --------------------------------------------------------------------------------------------------
Total Cash (Use) $(11,319,000) $(10,581,000) $(44,488,000)
- --------------------------------------------------------------------------------------------------
For the quarter and nine months ended December 31, 2002, operating capital was
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, accounts receivable declined by $1,482,000.
We expect to reduce our rate of cash usage over the next three months via a
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. We expect that our cash use for
fiscal 2004 will be decreased further by a January 2003 realignment action that
redeployed some technical staff and eliminated 21 positions, or approximately 7%
of our workforce, mostly in the HTS Wire business unit. We estimate a small
net reduction in expenses in the fourth quarter of fiscal 2003, but
approximately $1,600,000 of cost savings in fiscal 2004 as a result of this
reduction in force.
23
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
Due to scheduled billing requirements specified under certain contracts, a
portion of our accounts receivable balance is unbilled. As of December 31, 2002,
$3,832,000, or approximately 66%, of our receivable balance of $5,820,000, 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 three months as work is completed on these contracts.
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 $6,940,000 to be received after December 31, 2002
from government and commercial customers, compared to $11,020,000 at March 31,
2002. However, these current funding commitments, including $5,655,000 on U.S.
government contracts, are subject to certain cancellation provisions. Of the
current commitment amount of $6,940,000, approximately 79% is potentially
collectable within the next 12 months. This potential future funding commitments
amount excludes several new contracts and purchase orders from the National
Institutes of Health, Tennessee Valley Authority (TVA), Rayburn Country Electric
Cooperative, and others announced by us in January and February of 2003.
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
2004. However, recognizing that we may need additional funds sooner than
anticipated to fund current operations and to accelerate our investment in our
second generation wire development program, we are currently examining options
for raising additional capital to strengthen our cash position. 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.
New Accounting Pronouncements
See Note 10 of the Notes to the Interim Consolidated Financial Statements for a
discussion of new accounting pronouncements.
24
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
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, we expect to continue to incur losses in
the future, and we may need additional funding 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 nine months of fiscal 2003
was $17,598,000, $21,676,000, $56,985,000, and $33,666,000 respectively. Our
accumulated deficit as of December 31, 2002 was $219,143,000. 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
2004. However, recognizing that we may need additional funds sooner than
anticipated to fund current operations and to accelerate our investment in our
second generation wire development program, we are currently examining options
for raising additional capital to strengthen our cash position. 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.
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 technological challenges that we
must successfully address to complete our development and commercialization
efforts. 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.
25
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
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 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 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(TM) product lines in the United States to utilities and the
right to sell
26
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
industrial Power Quality-Industrial Voltage Restorers (PQ-IVR) to certain of
GE's global industrial accounts. We also have a distribution agreement with
Bridex Technologies Pte, Ltd., a power system solution integrator and technology
company in Singapore, whereby Bridex markets and sells our integrated power
electronic systems within Asia Pacific markets. 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 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
27
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2002
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
. 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
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) On December 31, 2002 the Company filed a Current Report
on Form 8-K which reported, under Item 5 (Other Events and
Required FD Disclosure), that on October 31, 2002, Clayton
Christensen resigned as a member of the Board of Directors
of American Superconductor Corporation. Mr. Christensen's
resignation was not a result of any disagreement with the
Company.
Exhibit No.
99.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
30
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
February 13, 2003 /s/ Gregory J. Yurek
- ------------------------------------ ------------------------------------
Date Gregory J. Yurek
Chairman of the Board, President and
Chief Executive Officer
February 13, 2003 /s/ Thomas M. Rosa
- ------------------------------------ ------------------------------------
Date Thomas M. Rosa
Chief Accounting Officer, Corporate
Controller and Assistant Secretary
31
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: February 13, 2003 Gregory J. Yurek
Chief Executive Officer
32
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: February 13, 2003 Stanley D. Piekos
Chief Financial Officer
33