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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 0-19672
American Superconductor Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-2959321
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
Two Technology Drive 01581
Westborough, Massachusetts (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: (508) 836-4200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On April 30, 1999, the aggregate market value of voting Common Stock held by
nonaffiliates of the Registrant was $187,441,763 based on the closing price of
the Common Stock on the Nasdaq National Market on April 30, 1999.
The number of shares of Common Stock outstanding as of April 30, 1999 was
15,379,818.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Part
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Definitive Proxy Statement with respect to the Annual Part III
Meeting of Stockholders for the fiscal year ended
March 31, 1999, to be filed with the Securities and
Exchange Commission by June 25, 1999.
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TABLE OF CONTENTS
Item Page
---- ----
Part I
1. Business.......................................................... 1
2. Properties........................................................ 15
3. Legal Proceedings................................................. 15
4. Submission of Matters to a Vote of Security Holders............... 15
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 17
6. Selected Financial Data........................................... 17
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 18
7A. Quantitative and Qualitative Disclosure About Market Risk ........ 18
8. Financial Statements and Supplementary Data....................... 18
9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 18
Part III
10. Directors and Executive Officers of the Registrant................ 18
11. Executive Compensation............................................ 18
12. Security Ownership of Certain Beneficial Owners and Management.... 18
13. Certain Relationships and Related Transactions.................... 18
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 18
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that relate to future events
or conditions, including without limitation, the statements under "Item 1.
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein regarding
industry prospects and the Company's prospective results of operations or
financial position, may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such forward-looking statements represent management's current
expectations and are inherently uncertain. The important factors discussed
below under the caption "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Future Operating Results," among others,
could cause actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere by management
from time to time.
Item 1. Business
American Superconductor Corporation (the "Company") is an industry leader in
developing, manufacturing and marketing products utilizing superconducting
materials for electric power applications. Electrical products that
incorporate superconducting wires can be more efficient, compact and cost
effective than those utilizing conventional copper wires. Products
incorporating superconducting materials are currently utilized in the medical,
electronics, power equipment and transportation industries.
Superconducting wires provide significant advantages over conventional
copper wires because superconducting wires conduct electricity with little or
no resistance and associated energy loss, and can transmit much larger amounts
of electricity than conventional wires of the same size. The Company's
development and commercialization efforts have been focused on electrical
products and equipment utilizing superconductors for use in the electric power
industry.
1
Superconductivity
A superconductor is a perfect conductor of electricity; it carries direct
current with 100% efficiency because no energy is dissipated by resistive
heating. Once induced in a superconducting loop, direct current can flow
undiminished forever. Superconductors can also conduct alternating current but
with some slight dissipation of energy.
Superconductors lose all resistance to the flow of direct electrical current
and nearly all resistance to the flow of alternating electrical current when
cooled below a critical temperature, which is different for each
superconducting material. Superconducting materials known today, including
both high temperature superconductor ("HTS") and low temperature
superconductor ("LTS") materials, need to be cooled to cryogenic temperatures
in order to exhibit the property of superconductivity.
[CHART APPEARS HERE]
This graph illustrates the complete loss of resistance to the flow of
electricity through wires of an LTS material (niobium-titanium alloy) and an
HTS material (bismuth-based, copper oxide ceramic) at the critical
temperature, Tc, which is different for each superconducting material. The
specific HTS material in this chart has no electrical resistance below 108K (-
265 degrees Fahrenheit), as opposed to the specific LTS material in this
chart, which has no electrical resistance below 10K (-441 degrees Fahrenheit).
2
A combination of three conditions must be met for a material to exhibit
superconducting behavior:
. The material must be cooled below a characteristic temperature, known as
its superconducting transition or critical temperature (Tc);
. The current passing through a given cross-section of the material must be
below a characteristic level known as the critical current density (Jc);
and
. The magnetic field to which the material is exposed must be below a
characteristic value known as the critical magnetic field (Hc).
These conditions are interdependent and define the environmental operating
conditions for the superconductor.
[CHART APPEARS HERE]
Not only must a superconducting material be cooled below its critical
temperature, Tc, to lose all resistance to the flow of electricity, but also the
amount of current flowing through a given cross sectional area of
superconducting wire must not exceed a critical amount, the critical current
density, Jc, and the magnetic field to which the superconductor is exposed must
not be above a critical level, Hc. The key focus of the Company's HTS
development program is to increase the critical current density of its wires
through research advancements and through optimization of its wire manufacturing
methodologies.
3
The initial discovery of superconductive materials was made in 1911. Before
1986, the critical temperatures for all known superconductors did not exceed
23 Kelvin (23K or -418 degrees Fahrenheit; 0K is absolute zero, or -459
degrees Fahrenheit). Before the discovery and development of HTS materials,
the use of superconductivity had not been practical for widespread commercial
applications, except for magnetic resonance imaging ("MRI") and
superconducting magnetic energy storage ("SMES") applications, principally
because commercially available superconductors (i.e., LTS materials) are made
superconductive only when these materials are cooled to near 0K. Although it
is technologically possible to cool LTS materials to a temperature at which
they become superconductive, broad commercialization of LTS materials has been
inhibited by the high cost associated with the cooling process. For example,
liquid helium, which can be used to cool materials to about 4K (-452 degrees
Fahrenheit), and which has been commonly used to cool LTS materials, is
expensive and relatively costly to maintain.
In 1986, a breakthrough in superconductivity occurred when two scientists,
Dr. K. Alex Muller and Dr. J. Georg Bednorz, at an IBM laboratory in Zurich,
Switzerland, identified a ceramic oxide compound which was shown to be
superconductive at 36K (-395 degrees Fahrenheit). This discovery earned them
the Nobel Prize for Physics in 1987, which is one of the four Nobel Prizes
that have been awarded for work on superconductivity. A series of related
ceramic oxide compounds which have higher critical temperatures were
subsequently discovered, including those being used by the Company.
Applications and Markets for Superconductors
Wire is an integral component of most products that transmit, transfer or
utilize electricity. Superconducting wires provide significant advantages over
conventional wires because superconducting wires conduct electricity with
little or no energy loss and because they can transmit much larger amounts of
electricity than conventional wires of the same size. These underlying
characteristics lead to the potential for more efficient, smaller and lighter
electrical products and equipment, such as motors, generators, power
transmission cables, and transformers. Deregulation of the electric power
industry, which is an increasing trend in the United States, Europe, Japan and
certain other countries, may enhance the potential market for superconducting
wires by providing opportunities in markets that were not previously open to
the Company.
Because the superconducting wire in a coil of this material exhibits no
resistance to the passage of electrical current, large amounts of electricity
can be stored in coils of superconducting wire, and because the wire coil has
no electrical resistance, the stored electricity can be removed from the coil
very rapidly. These features provide the basis for the Company's line of SMES
systems utilizing LTS electromagnets ("LT-SMES"). The Company's LT-SMES power
quality products are currently being sold or leased to industrial users of
power to prevent factory downtime and loss of "work in process" caused by
momentary dips in voltage that occur in power distribution networks. The
Company is also selling LT-SMES to electric utilities to solve problems of
voltage instability and low voltage in large-scale transmission networks.
LTS products are used in a number of applications, including MRI diagnostic
equipment, which currently represents the single largest commercial use of LTS
materials, commercial magnetic separation equipment, commercial SMES power
quality and reliability products, commercial laboratory electromagnets and
electromagnets used in particle accelerators. The Company's development
efforts with respect to LTS products are focused on commercial SMES products.
LTS products have been under development since the early 1960s, and LTS
technology is relatively mature as compared with HTS technology. However,
commercial acceptance of LTS products in power applications other than SMES
systems has been significantly limited by the cooling requirements of LTS
materials. LTS materials generally require costly cooling by liquid helium at
nearly the absolute zero temperature or cooling by cryocoolers at below 10K (-
441 degrees Fahrenheit).
In contrast, HTS wires maintain their superconductivity at higher
temperatures than LTS wires. They can be cooled with liquid nitrogen or
closed-cycle refrigerators at temperatures above 20K (-423 degrees
Fahrenheit), which are much less expensive and easier to utilize than liquid
helium. Closed-cycle refrigerators operate in much the same way as household
refrigerators, but because of their lower operating temperature they are
somewhat more complicated to build and maintain. Specially designed closed-
cycle refrigerators have been
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used by the Company to cool a variety of commercial and developmental HTS
electromagnets. It is presently anticipated that HTS power cables would be
cooled by maintaining liquid nitrogen within hollow cores of an HTS cable,
and/or by flowing liquid nitrogen around the power cables, much the same as
oil is now maintained within the cores of some conventional underground power
cables and used to cool power cables maintained within steel pipes under the
streets of cities.
The Company anticipates that HTS motors and generators would be cooled by
cryocoolers, without the presence of a liquid cryogen, such as liquid
nitrogen. However, it is anticipated that HTS transformers would be cooled by
submerging the HTS coils in liquid nitrogen, with the nitrogen maintained at
temperature by a closed cycle refrigerator. In this application, the liquid
nitrogen acts both as a coolant and as an electrical insulating medium, or
dielectric. Therefore, HTS products may replace or compete with LTS products
in certain applications in which LTS products are currently used and the
Company believes that the less demanding cooling requirements of HTS materials
will permit their use in a broad range of applications not currently available
to LTS products.
The Company is currently focusing on two markets for superconductor-based
products: the power quality and reliability market, for which the Company
currently manufactures and markets SMES systems and services; and the market
for power transmission cables, motors, generators and transformers, for which
the Company is currently developing HTS wires and related products.
Superconducting Magnetic Energy Storage (SMES)
The Company has focused initially on SMES systems as its product platform to
address the need for solutions for industrial power quality problems faced by
industrial users of power, and transmission network power reliability
problems, faced by electric utilities. Protection against power quality
problems such as momentary (typically less than two seconds) voltage sags can
provide significant economic value to large industrial users of power.
Industry sources estimate the cost of power quality problems to U.S. industry
alone exceeds $10 billion per year. Protection against power reliability
problems, such as voltage instability and low voltage, which are perennial
problems faced by many utilities around the world, can provide stabilization
of transmission networks and an increase in effective transmission capacity of
electrical networks.
In April 1997, the Company acquired Superconductivity, Inc. ("SI"), a
manufacturer of SMES power quality systems based on LTS electromagnets. The
Company believes that this acquisition provides it with a strong presence in
the power quality and reliability market, and will allow it to accelerate its
plan to penetrate this sector of the market. The Company is currently
expanding sales and marketing and manufacturing capacity for its existing
SMES-based products. The Company also plans to expand its current SMES product
line. The Company has incorporated its HTS current leads product into its LT-
SMES products in order to reduce systems manufacturing costs and to improve
the efficiency of operation of the LT-SMES products.
The Company offers two product lines: Power Quality SMES (PQ-SMES) and
Distributed-SMES (D-SMES). PQ-SMES are typically installed at manufacturing
sites to provide enhanced quality of electric power. The Company has sold ten
PQ-SMES units which are installed at customer sites in the United States,
Europe and South Africa. D-SMES systems, introduced in February 1999, consist
of multiple SMES units installed at substations throughout power transmission
networks to provide enhanced transmission network reliability and capacity.
The Company is developing multiple channels to market for its power quality
products, including, but not limited to, distributors, OEMs and direct sales.
The Company has a distribution agreement with Eskom, the largest utility in
Africa, to distribute the Company's power quality products exclusively in
South Africa. The Company also has distribution agreements with one European
and one North American utility.
5
The Company currently offers a service component of its power quality and
reliability business that includes the assessment of customer needs and
provides service contracts and extended warranties. The Company plans to
expand this portion of its power quality business.
HTS Electric Power Products
HTS electric power products under development around the world include power
transmission cables, motors, transformers, generators and SMES systems. The
Company's development efforts for this market segment are focused on HTS wires
and products made from these wires, such as electromagnetic motor coils
integrated with appropriate cryogenic cooling systems. The Company's revenues
in this business area currently come primarily from research and development
contracts, including government contracts, prototype sales and funds from
corporate partners Pirelli Cavi E Sistemi S.p.A. ("Pirelli"), Electricite de
France ("EDF") and ABB Power Transmission and Distribution Company SA ("ABB").
See "Business--Strategic Relationships, Research Arrangements and Government
Contracts."
The Company has produced and sold prototype HTS wires and electromagnetic
coils for use in several development and demonstration programs. Nevertheless,
significantly better strength, flexibility, and electrical performance need to
be achieved over longer wire lengths and at lower costs for the
commercialization of HTS wire and wire products to be successful. Despite the
advances being made, to date neither the Company nor, to the Company's
knowledge, any other company has produced HTS wires in commercial quantities
adequate for the electrical equipment market, and hurdles to commercialization
continue to exist.
The Company's strategy is to develop its HTS products through a combination
of internally funded and customer and government-sponsored programs, as well
as through other research programs, and to market these products through
strategic partners or directly through its sales and marketing organization.
In addition to its strategic alliances with Pirelli, EDF and ABB, the Company
has established research arrangements with several U.S. national laboratories
and with Industrial Research Limited of New Zealand, and is currently a party
to development contracts with several U.S. government agencies to build
prototype HTS electromagnetic coils. As the Company develops HTS electric
power applications and power quality and reliability systems and services, it
expects to continue to pursue strategic acquisitions to enhance its market
position, add value to its product line and strengthen its technology base. In
April 1997, the Company acquired SI in order to establish a presence in the
industrial power quality market; in July 1997, the Company acquired Applied
Engineering Technologies, Ltd. ("AET") in order to strengthen its core
capabilities in cryogenic engineering. The Company has sold several prototype
HTS products to private-sector companies, including HTS wires to ABB, Secheron
SA and Pirelli, HTS motor coils to Rockwell Automation, an HT-SMES system to
E.-U.-S. GmbH of Germany, and an HTS accelerator magnet system to Alphatech
International. It has also sold HTS coils to U.S. government laboratories,
including HTS generator coils to Wright-Patterson Air Force Base, and a high
field research magnet to the Naval Research Laboratory. The Company is selling
HTS current leads commercially to a variety of customers including MRI
manufacturers and particle accelerator laboratories.
If the Company is successful in developing its HTS technology for commercial
applications, the Company intends to bring the following product lines to
market in the next several years.
Wires for Power Transmission Cables. In cooperation with Pirelli, the
Company is developing HTS wires for underground HTS cables designed to provide
more efficient and economical ways for utilities to transmit power.
Underground power cables using HTS wires have the potential to carry two to
five times more power than cables of the same size made from copper wires. The
use of HTS wires would therefore result in more efficient transmission, more
effective use of existing rights of way, reduced environmental stress and
cost-effective replacement of worn-out infrastructure. This is very attractive
both to urban planners who need to retrofit aging infrastructures with
increased power capacity and to suburban engineers who find it increasingly
difficult to secure clearance for overhead transmission lines. At least two
underground copper cables are required to replace one equally rated overhead
transmission line, whereas a single HTS cable could replace one equally rated
overhead line. Moreover the liquid nitrogen used to cool underground HTS
cables is less expensive and
6
presents less environmental risks than the oil used to cool copper cables. The
Company expects that the first significant demonstration of an HTS power cable
in a utility network will occur in the second half of calendar year 2000.
Coils for Motors and Generators. The Company is designing, developing and
fabricating HTS wires, rotor coils and cryocoolers for use in high-horsepower
electric motors with the potential for use in industrial and utility
applications and for ship propulsion. Motors utilizing HTS wires and
components are expected to be half the weight and size of conventional motors
and would provide greater operating efficiency. Since industrial electric
motors consume most of the electricity used in a typical manufacturing
operation, increased efficiency should yield significant savings in power
costs. The Company and Reliance Electric Company, a Rockwell Automation
business, are developing 1,000 and 5,000 horsepower (hp) motors under a U.S.
Department of Energy Superconductivity Partnership Initiative. In March 1999,
the Company shipped HTS rotor coils to Reliance for fabrication of a 1,000 hp
HTS motor. This motor is expected to undergo extensive testing and evaluation
before being installed in an industrial site in 2000. The Company expects HTS
wire sales and additional research contracts from other companies and
government agencies for developing HTS motors in 2000.
Cables for Transformers. In cooperation with ABB, one of the largest
transformer suppliers in the world, and EDF, the Company is developing special
alternating current HTS transformer wire that can be used for fabrication of
HTS transformers. Utilities and industrial power customers use transformers to
increase and decrease voltage levels. HTS transformers are expected to offer a
number of improved features relative to conventional transformers as well as
entirely new functionality with important utility systems benefits. HTS
transformers are expected to be half the size and weight of conventional
transformers, which would increase existing substation capacity, reduce land
area needed for new substations, and greatly relieve transportation challenges
currently faced by electric utilities for conventional transformers. In
addition, HTS transformers would replace the dielectric oil that surrounds the
copper coils in today's power transformers with low-cost, environmentally-safe
liquid nitrogen, which would eliminate the spill risks associated with
dielectric oil. This is expected to lower associated insurance costs and allow
transformers to be installed closer to large load centers even within large
cities. The Company expects that the first delivery of its HTS transformer
cables for prototype applications will occur in 2000.
As part of its long range transformer wire program with ABB and EDF, the
Company is developing a special HTS wire which enables a fault current
limiting functionality in transformers and could enable stand-alone fault
current limiters ("FCLs"). FCLs instantaneously protect a power grid from
electric surges caused by lightning by switching from a low resistance
superconducting state to a high resistance state when the current exceeds the
critical current of the superconductor.
Ultimately, if successful in developing HTS technology for commercial power
transmission and distribution products and equipment, the Company intends to
introduce and market these HTS products primarily through strategic partners
and original equipment manufacturers ("OEMs"). However, there can be no
assurance that the Company will be successful in overcoming the technological
hurdles to the development of these products or that it will be able to
successfully market and sell any products developed.
HTS Development
Since its inception, the Company's main efforts have been directed towards
the development of HTS wire and its applications, primarily in the electric
power sector, including electric utilities and industrial users of electric
power. In late 1987, the Company developed its first length of current-
carrying HTS wire. In 1989, the Company added electromagnetic coils,
electromagnets and multistrand conductors to its development program, and in
December 1989, the Company sold its first prototype coil to a commercial
customer. Since commencing operations in 1987, the Company has been able to
significantly increase both the length and the current-carrying capacity of
its HTS wires as well as the magnetic field strength generated by its HTS
electromagnetic coils.
The Company has chosen to focus on HTS wires and HTS wire products (rather
than HTS electronics applications) because it believes that HTS wires and wire
products offer the largest potential commercial market
7
in the HTS field. The Company is not devoting any efforts to the discovery of
new HTS materials but continues to monitor new developments such as the
discovery of HTS oxide bronzes. The Company primarily focuses on processing
the most promising of the HTS materials available into wires and from these
wires, manufacturing components and subsystems, such as multistrand
conductors, electromagnetic coils and electromagnets. In some cases, higher
level integration is performed in collaboration with or by the Company's
customers and/or strategic partners. In other cases, the Company itself may
integrate these subsystems into full cryogenic and electrical systems, using
its cryogenic and power electronics expertise.
The Company has obtained patent licenses for a number of HTS materials. The
Company expects to be required to obtain additional licenses with respect to
these or other known HTS materials. In addition, as new HTS materials are
discovered, the Company expects that patent or other proprietary rights will
be asserted with respect to such materials, and that the Company may be
required to obtain licenses for the use of such materials. While the Company
is optimistic that it will be able to obtain such licenses, there can be no
assurance of this, and even if such licenses can be obtained, the costs of
obtaining such licenses may be substantial. See "Business--Patents, Trade
Secrets and Licenses--Patents and the Choice of HTS Materials" and "--Patents
and the Processing of HTS Materials." Furthermore, the Company's ability to
apply its wire processing and component and subsystem manufacturing processes
to newly discovered HTS materials will depend on the nature of the materials,
although the Company believes that its manufacturing processes are
sufficiently generic that they can be adapted to newly discovered HTS
materials.
Status of HTS Wire Development
During the last several years considerable progress in the development of
HTS wire has occurred, both at the Company and at other institutions and
companies worldwide. There remain, however, significant technical hurdles that
will need to be overcome before HTS wires can be produced in commercial
amounts for the full range of potential applications. For commercial
applications, the critical current density of long wire lengths will need to
be increased further from present levels to higher levels already demonstrated
on short-length research samples. In addition, the wire will need to be able
to be wound in a variety of shapes to create multistrand conductors,
electromagnetic coils and electromagnets without loss of the wire's critical
current density during winding. The wire also will need to be able to
withstand forces arising from the interplay of its own current with a
surrounding magnetic field. For alternating-current and fault-current limiting
magnet and coil applications, special conductor architectures will need to be
developed. In January 1998, the Company announced a significant program in
collaboration with ABB and EDF to attempt to develop such architectures.
The HTS wires used in the electromagnetic coils, electromagnets and
multistrand conductors will need to have operating critical current densities
in the superconducting filament of the wires (excluding any metal sheathing,
strengthening members, etc.) in the range of 30,000 to 100,000 Amperes per
square centimeter (A/cm/2/) for multifilamentary composite wires and over
500,000 A/cm/2/ for coated conductor wires (see below). Most applications will
require this current density to be maintained in the presence of magnetic
fields in the range of 0.1 to 5 Tesla (a typical LTS magnet in an MRI system
operates at about 0.5 to 1.5 Tesla; a kitchen magnet typically has a magnetic
field of less than 0.05 Tesla).
Research samples of HTS wires have already exhibited sufficient current
density in very high magnetic fields to enable applications to be developed.
The Company has reported that short lengths of multifilamentary composite HTS
wires (typically one centimeter) produced on a laboratory scale have filament
critical current densities of 100,000 A/cm/2/ in a magnetic field of up to 3
Tesla at 20 K (-423 degrees Fahrenheit), and short coated conductor samples
exceed the target 500,000 A/cm/2/ level. The challenge is to produce cost
effective wires with these electrical properties by high-volume manufacturing
processes in long lengths (typically greater than 3,000 meters) and with the
flexibility, strength and durability required to fabricate and utilize
multistrand conductors, electromagnetic coils and electromagnets in end-use
applications.
The Company has made considerable progress in achieving these combined
goals; it routinely manufactures wire in greater than five-hundred-foot
lengths with over 12,000 A/cm/2/ at 77K over the full cross-sectional area of
the composite wire, with the actual current density in the superconducting
filaments reaching three times this
8
level. This represents an advance by a factor of two in performance of the
Company's wires in the last two years. An earlier generation of the Company's
wires was incorporated into a number of demonstration products. In 1996,
Pirelli built and demonstrated a 50 meter cable conductor that carried 3,300
Amperes of direct current. Successful completion of testing this cable by
Pirelli occurred in December 1998. The Company plans to deliver wires within
its current fiscal year to Pirelli for incorporation in a 120 meter HTS cable
circuit for demonstration in the city of Detroit. The Company believes this
demonstration will be underway by the end of fiscal year 2001. In 1996,
Rockwell Automation built and demonstrated a 286 horsepower HTS motor
utilizing rotor coils fabricated by the Company. In March 1999, the Company
completed manufacture and delivery of coils to Rockwell Automation for
incorporation in the first planned 1,000 hp HTS motor demonstration.
The Company's wire was also incorporated into an HTS transformer prototype
built by ABB, which was installed in the headquarters building of the electric
utility of Geneva, Switzerland and operated from March 1997 to December 1997.
However, considerable progress is still required to meet the commercial needs
of electric power and high-field magnet customers. The Company believes that
several years of further development will be necessary before HTS wires and
wire products are available for significant commercial end-use applications,
although HTS wires of sufficient performance are now available for the
Company's commercial current leads.
In addition to the technical hurdles described above, there are energy
losses when alternating current is employed in a superconductor (as opposed to
the zero loss that occurs when the superconductor carries direct current), and
it has been established in LTS wires that these losses can be reduced in a
multifilamentary configuration. While the Company has produced prototype
multifilamentary composite wires, the superconducting and mechanical
properties of such wires will need to be improved significantly before they
can be used for commercial alternating current magnet applications. The
Company has been engaged in a research and development program, with partial
funding of this program coming from both EDF and ABB, to develop wires
specifically for these applications. However, there can be no assurance that
the Company will succeed in developing this technology for commercial use. The
Company has applied for patents on its developments in this area. However, the
Company may be required to obtain patent licenses from third parties in order
to utilize certain aspects of this technology. While the Company is optimistic
that it will be able to obtain such licenses, there can be no assurance of
this, and if such licenses can be obtained, the license fees may be
substantial. See "Business--Patents, Trade Secrets and Licenses."
The Company's HTS Coil, Magnet, Conductor, Cryointegration and Power
Electronics Development
Simultaneously with its development of HTS wires, the Company is engaged in
the development of electromagnetic coils, electromagnets and alternating
current cables using these wires, and the integration of these products with
related cooling systems (known as "cryointegration"). Electromagnetic coils
are wire-wound structures such as those used in the rotors or stators of
electric motors; electromagnets are coils used to produce a magnetic field,
such as that required for MRI. Alternating current cables are bundles of HTS
wires woven together to form a long conducting body, such as that needed for
alternating current applications such as power transformers.
The Company's HTS prototype coils, electromagnets and conductors are made
from multifilamentary wires. This form of wire, which is more flexible and
durable than single filament wires that contain the same amount of
superconductor, can permit winding with no further high temperature heat
treatment being required (referred to as the "react and wind" method). The
Company believes that this approach permits more versatile application of its
wires to a variety of prototypes, although the alternative method, the "wind
and react" technique, may be appropriate in certain circumstances. The "wind
and react" technique, which can also use multifilamentary wires, means that an
additional heat treatment is required after winding a coil, electromagnet or
cable.
The Company has demonstrated increasingly advanced prototypes of
electromagnetic coils and multistrand conductors, including an electromagnet
that produces a magnetic field of 7.25 Tesla at 21K (-422 degrees Fahrenheit)
when cooled by a mechanical cryocooler, which magnetic field exceeds
significantly the maximum field (2 Tesla) obtainable from iron. The principal
hurdle to increased commercial use of this technology is to
9
lower the cost of the system. The Company believes that this can be achieved
through the development of more efficient manufacturing systems for its coils,
cryogenics and systems integration, and through the further reduction in the
cost of HTS wire. Longer term, the Company believes that the introduction of
HTS "coated conductor" wire will lead to more significant cost reductions. See
"--HTS Wire Production Processes."
The Company has also developed and is selling current leads that incorporate
the Company's multifilamentary wires, and which, as compared to normal metal
current leads, reduce the heat leak into, and the heat generated in, cryogenic
systems operating at temperatures below 77K (-321 degrees Fahrenheit).
The Company is also developing improvements to its SMES-based industrial
power quality and transmission reliability products and is enhancing and
expanding its SMES product line. It has decreased the cost of these products
by introducing HTS current leads to simplify the cryogenic system, by
improving the cryostat, by upgrading the magnet design, and is working to
continue improvements in all these areas. It is also seeking to expand the
functionality of these products by developing new power electronics to provide
higher voltage capability and dc-to-ac conversion, and to reduce the costs of
the power electronics components of the SMES products. There can be no
assurance that the Company will succeed in further reducing the costs of SMES
systems sufficiently to create a significantly larger market.
HTS Wire Production Processes
The Company produces HTS wires by a variety of techniques. The principal
technique involves deformation processing, which is in some respects closely
analogous to the technique used in the existing metal wire industry. In this
approach a metal tube, typically silver, is packed with a precursor powder and
sealed to form a "billet." The billet is then deformed into a wire shape by a
variety of classical deformation processing techniques: extrusion, wire-
drawing, multifilamentary bundling and rolling. Finally, the wire is heat-
treated to transform the precursor powder inside the wire into a high-
temperature superconductor. The resulting multifilamentary composite
structure, consisting of many fine superconducting filaments imbedded in a
metal matrix, is considered by the Company to be a preferred method of
achieving flexibility and durability in its wires and wire products. This
composite structure is the subject of a patent owned by MIT, based on an
invention by Dr. Gregory Yurek, Chairman of the Board, President and Chief
Executive Officer and a founder of the Company and at the time a professor at
MIT, and Dr. John Vander Sande, a professor at MIT and a director of the
Company, which patent is licensed to the Company on an exclusive basis until
2010 in return for license fees and shares of the Company's Common Stock. See
"Business--Patents, Trade Secrets and Licenses."
The Company has pursued two basic approaches to the deformation processing
of silver-sheathed, powder-in-tube, multifilamentary composite wires. They
differ principally in the type of powder that is packed into the silver
billet. One, referred to as the oxide-powder-in-tube or "OPIT" process,
involves the use of oxide powders. The Company is presently focused primarily
on the OPIT process and has established a manufacturing line using this
method. The manufacturing line has produced sufficient lengths of wire with
sufficient performance to enable the Company to use the wire in commercial
current lead products as well as in prototype electromagnetic coils and
multistrand conductors and to permit other companies to demonstrate prototype
HTS transformers, power cables and motors using the Company's HTS wires or
coils.
In the alternative technique for making multifilamentary wires, referred to
as the metallic precursor or "MP" process, metallic (rather than oxide)
powders are packed into the silver billet. While the Company is not
manufacturing HTS wire by this methodology at the present time, it continues
to use the technology in certain of its wire development programs.
Precise control of initial composition, heat-treatment temperatures and
their interplay with the deformation are required to obtain the best
superconducting performance of the wire material. The Company has protected
many aspects of its processes with patents. However, the Company expects to be
required to obtain patent licenses from third parties in order to utilize
certain aspects of these processes. While the Company is optimistic that it
will be able to obtain such licenses, there can be no assurance of this, and
even if such licenses can be obtained, the license fees may be substantial.
See "Business--Patents, Trade Secrets and Licenses."
10
Within the past few years, very high levels of current carrying performance
have been reported in small laboratory samples of HTS coated conductors, which
comprise a thick film of HTS material deposited on a flexible substrate,
typically with an intermediate buffer layer. One variation of this process is
called IBAD, or ion beam assisted deposition. In this process, thick films of
HTS material are deposited on an aligned buffer layer (the IBAD layer) which
is placed on a flexible substrate. This process improves the alignment of the
HTS thick films and consequently their electrical performance.
Another variant of coated conductor is called deformation texturing of
substrates. The Company has studied both processes and believes that these
processes have the potential to be future processes for manufacturing HTS wire
with high current carrying capacity and lower cost than composite deformation-
processed wire. The Company is pursuing the development of these processes
with an active internal program in collaboration with EPRI, Los Alamos
National Laboratory, Oak Ridge National Laboratory, MIT and other
organizations. However, only short coated conductor wire samples have been
fabricated at high-performance levels, and there can be no assurance that the
Company will succeed in developing this technology for commercial use. The
Company has applied for patent protection on many aspects of its preferred
coated conductor process. However, the Company may be required to obtain
patent licenses from third parties in order to utilize the process. While the
Company is optimistic that it will be able to obtain such licenses, there can
be no assurance of this, and even if such licenses can be obtained, the
license fees may be substantial. See "Business--Patents, Trade Secrets and
Licenses."
Competition
The Company does not know of any companies currently selling LT-SMES
products that compete with the SMES products offered by the Company. However,
at least one company, Intermagnetics General Corporation ("IGC"), is
developing SMES systems for power quality applications, and the Company
believes there is a government-sponsored program in Japan to develop SMES
systems for power quality applications. The Company's SMES products also
compete against dynamic voltage restorers produced by companies such as
Westinghouse, flywheels under development by various companies around the
world, static VAR compensators, and battery-based, uninterruptible power
supply systems, which are widely manufactured and used around the world.
There are a number of companies in the United States, Europe and Japan
engaged in attempts to bring to market high performance, technologically
advanced, cost effective HTS products. However, to the Company's knowledge, no
significant commercial amounts of HTS wire or other HTS products have been
produced or sold to date. For HTS applications, the Company's principal
competitors presently include several Japanese companies, such as Sumitomo
Electric Industries, Ltd. ("SEI"), Hitachi, Ltd., Furukawa Electric Co., Ltd.,
and Fujikura Ltd.; several European companies, such as Siemens A.G. in
Germany, Nordic Superconductor Technologies in Denmark, Alcatel in France, and
B.I.C.C. and Oxford Instruments in England; and several companies in the U.S.,
such as IGC and 3M. Each of these companies is directing significant efforts
to develop flexible, long-length HTS wires. SEI, Hitachi, Oxford and IGC are
also developing HTS magnets and systems.
Many of the Company's competitors have substantially greater financial
resources, research and development, manufacturing and marketing capabilities
than the Company. In addition, as the power quality, power reliability and HTS
markets develop, other large industrial companies may enter these fields and
compete with the Company.
Strategic Relationships, Research Arrangements and Government Contracts
The Company is party to a number of strategic relationships, research
arrangements and government contracts. Its most significant strategic
corporate agreements are with Pirelli, EDF and ABB.
The Pirelli alliance, originally established in February 1990, is designed
to combine Pirelli's cable technology, manufacturing and marketing expertise
with the Company's proprietary wire-manufacturing technologies for the purpose
of developing and producing HTS wires for cables used to transmit both
electric power and control signals. Under the Pirelli alliance, which
incorporates a long-term commercialization
11
agreement, the Company has recorded as revenue $15.3 million from 1990 to
March 31, 1999 and Pirelli has agreed to pay the Company an aggregate of $0.8
million over the next six months as "development fees". As of April 30, 1999,
Pirelli owned less than 1% of the Company's Common Stock.
The EDF relationship, established in April 1997, involves the exchange of
information relating to developments in HTS technology and related fields and
trends in the electricity industry, and the review of technical, industrial
and commercial topics by the parties through an advisory board comprising
representatives from both the Company and EDF. The EDF relationship also
includes a development program, in conjunction with ABB, on HTS wire for
transformers. Under the EDF alliance, the Company received $10.0 million in
1997 from EDF as an equity contribution in exchange for 1.0 million shares of
the Company's Common Stock, which, together with 100,000 shares EDF purchased
in the April 1998 public offering, represented, as of April 30, 1999,
approximately 7.2% of the Company's outstanding Common Stock. EDF agreed to
pay the Company an aggregate of $5.0 million (of which $3.4 million has been
recorded as revenue as of March 31, 1999) between 1997 and 2001 as
"development fees;" however, this agreement may be terminated upon 90 days
notice by either party.
The ABB relationship is designed to combine ABB's transformer technology,
manufacturing and marketing expertise with the Company's proprietary wire-
forming technologies for the purpose of developing and producing HTS wires and
cables for transformers. ABB agreed to pay the Company an aggregate of $5.0
million (of which $3.3 million has been recorded as revenue as of March 31,
1999) between 1997 and 2001 as "development fees;" however, this agreement may
be terminated upon 90 days notice by either party.
In January 1999, ABB received a Superconductivity Partnership Initiative
award from the U.S. Department of Energy to install a 10 MVA transformer in a
U.S. electric utility network. The Company received a sub-contract from ABB
for the scale-up and production of HTS wire for the transformer.
The Company has also established a number of collaborative research
relationships with various organizations such as Industrial Research, Ltd. in
New Zealand, four U.S. Department of Energy laboratories, University of
Wisconsin Applied Superconductivity Center, MIT and EPRI. Finally, the Company
is party to a number of government contracts, with entities such as Wright-
Patterson Air Force Base and the U.S. Department of Energy through its
Superconductivity Partnership Initiative, relating to the development and
supply of prototype products.
The Company believes strategic relationships, research arrangements and
government contracts provide it with several important benefits. First, they
assist the Company in meeting technical benchmarks. Second, they provide the
Company with development and marketing rights to important technologies.
Third, various parties to these arrangements provide the Company with critical
funding as the Company's research and development efforts progress toward
commercialization. In the five-year period since April 1, 1994, the Company
has received approximately $40 million of funding under research and
development contracts. Finally, and perhaps most importantly, several of these
relationships, particularly those with Pirelli and ABB, provide a potential
direct market for the Company's HTS wires.
Patents, Trade Secrets and Licenses
The HTS Patent Background
Since the discovery of high temperature superconductors in 1986, the HTS
industry has been characterized by rapid technical advances, which in turn
have resulted in a large number of patents relating to superconductivity being
applied for and granted worldwide. The claims in different granted patents
often overlap, and similar patents in different countries may have different
claims or be owned by different entities. As a result, the patent situation in
the field of HTS technology and products is unusually complex.
Most major potential HTS manufacturers, including the Company and its
competitors, own or may obtain patents which may interfere with each other. A
number of United States and foreign patents and patent
12
applications, held by third parties, relate to the Company's current products
or to products under development, or to the technology now or later to be
utilized by the Company in the development or production of certain present
and future products. Additional patents relating to the Company's technology,
processes or applications may be issued to third parties in the future. The
Company will need to acquire licenses to, or to successfully contest the scope
or validity of, patents owned by third parties.
The Company believes that companies holding patent portfolios which may
complement portfolios held by others in the industry are more likely to be
willing to enter into cross-licensing arrangements with such other patent
owners than with companies that do not have such patent positions.
Accordingly, the Company is pursuing an active strategy of building its own
portfolio in the HTS area and licensing key patents from others. The Company
believes that the patents it has licensed from others covering basic materials
processing methods, and composites of HTS ceramics and noble metals, will
improve the strength of its patent portfolio and therefore its position in
these future licensing negotiations. See "Business--Patents, Trade Secrets and
Licenses--Patents and Wire Architecture."
However, many patents and patent applications are held by companies with
which the Company may not compete, and such companies may not be interested in
cross-licensing. Moreover, it is possible that the Company could be required
to obtain licenses under a number of different patents and from a number of
different patent holders in connection with various aspects of its present and
planned business operations. Although the Company is optimistic that it will
be able to obtain any necessary licenses on commercially reasonable terms,
there can be no assurance that all necessary licenses will be available on
commercially reasonable terms, or at all.
The cost of any such licenses is not known, but the Company is likely to be
required to obtain multiple licenses and, to the extent that licenses can be
obtained the cost is expected, in aggregate, to be substantial. The failure to
obtain all necessary licenses upon reasonable terms could significantly reduce
the scope of the Company's business, limit its profit margins, and otherwise
have a material adverse effect on the Company's operations.
The likelihood of successfully contesting the scope or validity of any such
patents is also uncertain; and, in any event, the Company could incur
substantial costs in challenging the patents of other companies. Moreover, the
Company could incur substantial litigation costs in defending the scope and
validity of its own patents.
To understand the Company's approach to patents in light of these
circumstances, it is useful to analyze HTS patents in relation to the issues
the Company needs to consider in the process of designing and manufacturing
HTS products; the choice of material used to make an HTS product; the choice
of the processing method to be applied to that material; and the choice of
components or subsystems to be fabricated and the fabrication methods used.
Patents and the Choice of HTS Materials
Presently, the materials from which HTS products are made are copper oxides,
or "cuprates." The Company does not anticipate that anyone will receive a
broad basic patent on cuprates, but there can be no assurance in this regard.
There are a number of HTS materials within the cuprate family. A number of
patents have been issued with regard to certain specific HTS materials within
the cuprate family and the Company believes that a number of other patent
applications for various HTS materials within the cuprate family, some with
broad claims, are pending.
At any given time, the Company will have a preference for utilizing one or a
few specific HTS materials in the production of its products for commercial
application, and any HTS material used by the Company is likely to be covered
by one or more patents issued to other parties. Because of the number and
scope of patents pending or issued in various parts of the world, the Company
may be required to obtain multiple licenses to use any particular material.
13
The Company jointly owns or has obtained licenses with respect to patents
covering certain HTS materials through its collaborations with MIT and
Superlink and through a non-exclusive license with Lucent Technologies.
However, the Company expects that additional materials licenses may be
required. There is no assurance that the Company will be able to obtain on
commercially reasonable terms all the licenses that may be needed for the
Company to use preferred HTS materials, and even if the Company is able to
obtain such licenses, the license fees may be substantial.
Patents and the Processing of HTS Materials
The Company is concentrating on two main methods for processing the
materials it currently intends to use: the OPIT method, and the "coated
conductor" technology. See "Business--HTS Wire Production Processes." The
Company's strategy is to obtain a proprietary position in each of these
processes through a combination of patents, licensing and proprietary know-
how. If alternative processes become more promising in the future, the Company
will also seek to develop a proprietary position in these alternative
processes.
The Company has filed a number of patent applications which are applicable
to one or more of the MP method, the OPIT method, and coated conductor
technology and has acquired a nonexclusive license on the OPIT method from
Lucent Technologies. Some of these applications have been issued as patents in
the United States and abroad while others are pending. The Company also has
acquired rights to exclusively license additional intellectual property in the
coated conductor area through its collaborations with EPRI and MIT.
Effective March 31, 1998, the Company signed an agreement with Lucent
Technologies, Inc. ("Lucent"), granting the Company a royalty-bearing, non-
exclusive worldwide license for superconductor wire under Lucent's portfolio
of high temperature superconductor patents and patent applications. The
license runs from March 31, 1998 until the expiration of the last-to-expire
patent in the portfolio.
Additional U.S. and foreign patents have been issued to third parties with
claims directed to HTS processing methods which, if valid, may cover one or
more of the MP, the OPIT or the coated conductor technologies used by the
Company. Several U.S. and foreign patents have been issued with claims which,
if valid, may cover various aspects of the coated conductor process. In
addition, the Company has learned that a number of additional U.S. and foreign
patent applications have been filed which contain similar claims. To the
extent any of these issued patents are valid and cover any processing methods
used by the Company, or if any of the pending applications result in a valid
patent with claims covering the Company's methods, the Company would be
required to obtain licenses under any applicable patents. There is no
assurance that the Company will be able to obtain such licenses, and even if
such licenses can be obtained, the license fees may be substantial.
Patents and Wire Architecture
The Company has an exclusive license from MIT under an issued U.S. patent
that covers composites (including multifilamentary wires) of HTS ceramics and
noble metals such as silver.
A number of other companies have also filed, and in some instances, have
been issued patents on various aspects of wire architecture. To the extent any
of these issued patents are valid and cover the wire architectures used by the
Company, or to the extent any of the pending applications result in a valid
patent with claims covering the Company's methods, the Company would be
required to obtain licenses under any applicable patents. There is no
assurance that the Company will be able to obtain such licenses, and even if
such licenses can be obtained, the license fees may be substantial.
HTS Component and Subsystem Fabrication Patents; HTS Application Patents;
Power Quality, Power Reliability and SMES
The Company has been issued several patents and filed several additional
patent applications regarding the design and fabrication of electromagnetic
coils and electromagnets, the integration of these products with an
appropriate coolant or cryocooler and the application of these products to
certain specific end uses, as well as
14
several patent applications on cryocooled power electronics. The Company holds
several issued patents and pending applications on power quality and
reliability systems.
Since the HTS and cryocooled power systems fields are relatively new,
significant applications can and are being patented by others. A number of
other companies have also filed, and in some instances have been issued,
patents on various applications of HTS wire, cryocooled power electronics and
component and subsystem fabrication methods. To the extent any existing or
future third party patents are pertinent to these aspects of the Company's
operations, the Company would be required to obtain licenses under the
applicable patents. There is no assurance that the Company will be able to
obtain such licenses, and even if such licenses can be obtained, the license
fees may be substantial.
Trade Secrets
Some of the technology used in, and that may be important to, the Company's
operations and products is not covered by any patent or patent application
owned by or licensed to the Company. However, the Company takes steps to
maintain the confidentiality of this technology by requiring all employees and
all consultants to sign confidentiality agreements and limiting access to
confidential information. However, no assurance can be given that these
measures will prevent the unauthorized disclosure or use of such information.
Further, there is no assurance that others, including the Company's
competitors, will not independently develop the same or comparable technology.
Employees
As of March 31, 1999, the Company employed a total of 231 persons, 25 of
whom have Ph.D's in material science, physics or related fields. No Company
employees are represented by a labor union. The Company believes that its
employee relations are good.
Research and Development
The Company's research and development expenses in fiscal 1999 were
approximately $10,409,000. Adjusted research and development expenses, which
consist of company-funded research and development expenses plus research and
development expenses related to externally-funded development contracts
included in costs of revenue and research and development expenses offset by
cost-sharing funding under government contracts, were $18,751,000 in fiscal
1999.
Item 2. Properties.
The Company's operations are located in approximately 102,000 square feet of
space in Westborough, Massachusetts and approximately 60,000 square feet of
space in Middleton, Wisconsin. The Company occupies the Westborough facility
under a lease which expires on May 31, 2003 and has an option to extend the
lease for an additional five-year term. The Company occupies the Middleton
facilities under two leases which expire on December 31, 2003.
Item 3. Legal Proceedings.
Neither the Company nor any subsidiary is involved in any material legal
proceedings other than routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security-Holders.
No matters were submitted to a vote of the Company's security-holders during
the fourth quarter of the fiscal year ended March 31, 1999.
15
Executive Officers of the Company
The following table sets forth the names, ages and offices of all executive
officers of the Company:
Name Age Office
- ---- --- ------
Gregory J. Yurek...... 52 President, Chief Executive Officer and Chairman
of the Board of Directors
Roland E. Lefebvre.... 49 Executive Vice President and Chief Operating Officer
Alexis P. Malozemoff.. 55 Senior Vice President and Chief Technical Officer
Stanley D. Piekos..... 51 Vice President, Corporate Development,
Chief Financial Officer, Treasurer and Secretary
Ross S. Gibson........ 40 Vice President, Human Resources
John B. Howe.......... 42 Vice President, Electric Industry Affairs
Thomas M. Rosa........ 46 Chief Accounting Officer, Corporate Controller
and Assistant Secretary
Dr. Yurek co-founded the Company and has been a director since July 1987,
President since March 1989, Chief Executive Officer since December 1989 and
Chairman of the Board since October 1991. Dr. Yurek also served as Vice
President and Chief Technical Officer from August 1988 until March 1989 and as
Chief Operating Officer from March 1989 until December 1989. Prior to joining
the Company, Dr. Yurek was a Professor of Materials Science and Engineering at
MIT for 13 years.
Mr. Lefebvre joined the Company in May 1996 as Vice President, Sales and
Marketing and was elected Executive Vice President and Chief Operating Officer
in May 1998. Prior to joining the Company, Mr. Lefebvre spent 23 years at
General Electric Company in a variety of positions, most recently as General
Manager, National Account Sales.
Dr. Malozemoff joined the Company as Vice President, Research and
Development in January 1991 and was elected Chief Technical Officer in January
1993 and Senior Vice President in May 1998. Prior to joining the Company, Dr.
Malozemoff spent 19 years at IBM in a variety of research and management
positions, most recently as IBM Research Coordinator for High Temperature
Superconductivity.
Mr. Piekos joined the Company in February 1998 as Chief Financial Officer,
Vice President, Corporate Development, Treasurer and Secretary. From June 1994
until February 1998, Mr. Piekos served as Vice President and Chief Financial
Officer of Brooks Automation, Inc., a supplier of robotics and controls to the
semiconductor production equipment industry. For the nine years prior to June
1994, Mr. Piekos was employed by Helix Technology Corporation, a manufacturer
of cryogenic equipment, most recently as Vice President and Chief Financial
Officer. During his first fifteen years in business, Mr. Piekos held a variety
of positions in financial management and marketing with W.R. Grace & Co., a
global manufacturer of specialty chemicals and industrial equipment.
Mr. Gibson joined the Company as Vice President, Human Resources in July
1997. From April 1992 until June 1997, Mr. Gibson served in a variety of
positions at Cambridge Neuroscience, Inc., most recently as Vice President,
Human Resources and Administration and Chief Administrative Officer. Mr.
Gibson has also held positions at Lifeline Systems, Lotus Development and
General Motors.
Mr. Howe joined the Company in November 1997 as Director, Electric Industry
Affairs and was elected Vice President, Electric Industry Affairs in May 1998.
From November 1995 until September 1997, Mr. Howe was Chairman of the
Massachusetts Department of Public Utilities. For the five and one-half years
prior to November 1995, Mr. Howe served in various positions, most recently as
Vice President, Regulatory and Government Affairs, for U.S. Generating
Company.
Mr. Rosa joined the Company in October 1992 as Corporate Controller and was
elected Chief Accounting Officer in July 1998. Prior to joining the Company,
Mr. Rosa spent 10 years in a variety of financial management positions at
Prime Computer, Wang Laboratories and Lockheed Sanders, most recently as
Division Controller at Prime Computer.
16
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "AMSC" since 1991. The following table sets forth the high
and low price per share of the Company's Common Stock as reported on the
Nasdaq National Market for the two most recent fiscal years:
Common Stock
Price
-------------
High Low
------ ------
Fiscal year ended March 31, 1998:
First quarter................................................ 12 1/4 8 1/4
Second quarter............................................... 13 3/8 8 1/2
Third quarter................................................ 14 3/4 8 1/4
Fourth quarter............................................... 15 1/8 8 1/2
Fiscal year ended March 31, 1999:
First quarter................................................ 18 1/4 11 1/2
Second quarter............................................... 13 5/8 6 3/8
Third quarter................................................ 12 1/8 6 1/4
Fourth quarter............................................... 14 5/8 8 3/8
The number of shareholders of record on June 16, 1999 was 450.
Item 6. Selected Financial Data.
The selected consolidated financial data presented below for the fiscal
years ended March 31, 1999 and 1998 have been derived from the Company's
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants. The financial data for
each of the three fiscal years in the period ended March 31, 1997 have been
derived from the combination of the Company's consolidated financial
statements that have been audited by PricewaterhouseCoopers LLP, independent
accountants, and the SI financial statements that have been audited by other
independent accountants. In addition, the combination of the separate audited
financial statements of the Company and SI for the two fiscal years in the
period ended March 31, 1997 has been audited by PricewaterhouseCoopers LLP.
This financial data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and the other financial information
appearing elsewhere in this Annual Report on Form 10-K.
Year ended March 31,
-----------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ ------
(In thousands, except per share data)
Revenues........................... 11,257 15,129 10,551 10,764 8,593
Net loss........................... (15,326) (12,378) (13,377) (9,698) (7,036)
Net loss per share................. (1.01) (1.06) (1.27) (0.94) (0.69)
Total assets....................... 48,130 19,551 26,581 35,856 44,887
Working capital.................... 30,459 5,059 318 5,101 2,341
Cash, cash equivalents and long-
term marketable securities........ 31,572 8,009 16,031 26,519 33,653
Stockholders' equity............... 43,958 12,859 16,501 29,780 38,416
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required by this Item is attached as Appendix A hereto and
is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in short-term
marketable securities and long-term debt, is not material.
Item 8. Financial Statements and Supplementary Data.
All financial statements required to be filed hereunder are filed as
Appendix B hereto, are listed under Item 14(a), and are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to this item is contained in part under the caption "Executive
Officers of the Company" in Part I of this Annual Report on Form 10-K, and in
part in the Company's Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended March 31, 1999 (the "1999 Proxy Statement") in the
sections "Election of Directors--Nominees," and "Other Matters--Section 16
Beneficial Ownership Reporting Compliance," which sections are incorporated
herein by reference.
Item 11. Executive Compensation.
The response to this item is contained in the 1999 Proxy Statement in the
sections "Election of Directors--Directors' Compensation," "--Executive
Compensation," and "--Employment Agreements with Senior Executives," which
sections are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to this item is contained in the 1999 Proxy Statement in the
section "Beneficial Ownership of Common Stock," which section is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
The response to this item is contained in the 1999 Proxy Statement in the
section "Election of Directors--Certain Business Relationships," which section
is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as Appendix B hereto and are included as
part of this Annual Report on Form 10-K:
Financial Statements:
Report of Independent Accountants
18
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
The Company is not filing any financial statement schedules as part of this
Annual Report on Form 10-K because they are not applicable or the required
information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the Company's
fiscal year ended March 31, 1999.
(c) The list of Exhibits filed as a part of this Annual Report on Form 10-K is
set forth on the Exhibit Index immediately preceding such Exhibits, and is
incorporated herein by reference.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Gregory J. Yurek
By: _________________________________
Gregory J. Yurek
Chairman of the Board, President
and
Chief Executive Officer
Date: June 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gregory J. Yurek Director, Chairman of the June 25, 1999
______________________________________ Board, President and
Gregory J. Yurek Chief Executive Officer
(Principal Executive
Officer)
/s/ Stanley Piekos Chief Financial Officer June 25, 1999
______________________________________ and Treasurer (Principal
Stanley Piekos Financial Officer)
/s/ Thomas Rosa Chief Accounting Officer June 25, 1999
______________________________________ and Corporate Controller
Thomas Rosa (Principal Accounting
Officer)
/s/ Albert J. Baciocco, Jr. Director June 25, 1999
______________________________________
Albert J. Baciocco, Jr.
/s/ Frank Borman Director June 25, 1999
______________________________________
Frank Borman
/s/ Peter O. Crisp Director June 25, 1999
______________________________________
Peter O. Crisp
/s/ Richard Drouin Director June 25, 1999
______________________________________
Richard Drouin
/s/ Gerard J. Menjon Director June 24, 1999
______________________________________
Gerard J. Menjon
/s/ Andrew G.C. Sage, II Director June 25, 1999
______________________________________
Andrew G.C. Sage, II
/s/ John B. Vander Sande Director June 22, 1999
______________________________________
John B. Vander Sande
20
Appendix A
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
American Superconductor Corporation (the "Company") was founded in 1987. The
Company is focused on developing and commercializing high temperature
superconducting ("HTS") wires and wire products. In the area of power quality
and reliability, the Company is focused on marketing and selling commercial
low temperature superconducting ("LTS") magnetic energy storage ("SMES")
devices.
On April 8, 1997, the Company acquired Superconductivity, Inc. ("SI"), which
is now being operated as the SMES business unit of the Company, in a
transaction accounted for under the pooling of interests method of accounting.
Accordingly, the Company's consolidated financial statements reflect the
combined financial operating results and cash flows of the Company and SI as
if they had been combined for all periods presented. On July 31, 1997, the
Company acquired Applied Engineering Technologies, Ltd. ("AET") in a
transaction accounted for under the pooling of interests method of accounting.
Due to the immaterial effect on the Company's consolidated financial
statements, prior periods have not been adjusted to reflect the effect of this
transaction on the financial position, operating results and cash flows of the
Company.
RESULTS OF OPERATIONS
Fiscal Years Ended March 31, 1999 and March 31, 1998
Revenues
Total revenues decreased to $11,257,000 in fiscal 1999 from $15,129,000 in
fiscal 1998. Revenues from the Company's SMES business unit declined
$2,053,000 to $1,510,000 in fiscal 1999 from $3,563,000 in fiscal 1998. This
was due to a decrease in SMES shipments in fiscal 1999 which the Company
believes is attributable to the longer than expected sales cycle associated
with industrial power quality SMES sales, and lower Rental/other revenues. HTS
business unit revenues decreased to $9,748,000 in fiscal 1999 from $11,566,000
in fiscal 1998. This decrease was primarily due to lower prototype development
contract revenues.
In addition to reported revenues, the Company also received funding of
$1,953,000 in fiscal 1999 under government cost-sharing agreements as compared
to $1,771,000 in fiscal 1998. The Company anticipates that a portion of its
funding in the future will continue to come from cost-sharing agreements as
the Company continues 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 revenue.
Operating expenses
The Company's total operating expenses in fiscal 1999 were $28,508,000
compared to $27,884,000 in fiscal 1998. Costs of revenue, which include costs
of research and development contracts and costs of product sales and prototype
development contracts, decreased to $12,021,000 in fiscal 1999 compared to
$14,333,000 in fiscal 1998. This decrease reflects a reduction in SMES
shipments and the decrease in prototype development revenues. Cost of revenue
in fiscal 1999 was also affected by unfavorable manufacturing variances
related to the lower SMES production.
Adjusted research and development ("R&D") expenses, which include amounts
classified as costs of revenue and amounts offset by cost sharing funding,
increased to $18,751,000 in fiscal 1999 from $17,048,000 in fiscal 1998. This
increase was due to the continued scale-up of the Company's internal research
and development activities including the hiring of additional personnel, the
purchases of materials and equipment and the payment of patent licensing fees.
A portion of the R&D expenditures related to externally funded
A-1
development contracts has been classified as costs of revenue (rather than as
R&D expenses). These R&D expenditures that were included as costs of revenue
during fiscal 1999 and fiscal 1998 were $7,335,000 and $7,494,000,
respectively. Additionally, R&D expenses that were offset by cost sharing
funding were $1,007,000 and $913,000 in fiscal 1999 and 1998, respectively.
Net R&D expenses (exclusive of amounts classified as costs of revenue and
amounts offset by cost sharing funding) increased to $10,409,000 in fiscal
1999 from $8,641,000 the prior year.
Adjusted selling, general and administrative ("SG&A") expenses, which
include amounts classified as costs of revenue and amounts offset by cost
sharing funding, were $9,765,000 in fiscal 1999 as compared to $9,162,000 in
fiscal 1998. These increases were primarily due to the hiring of additional
personnel and related expenses incurred to support corporate development and
marketing activities and future planned growth. 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). SG&A
expenditures included as costs of revenue during fiscal 1999 and fiscal 1998
were $2,741,000 and $3,394,000, respectively. The SG&A amounts offset by cost
share funding were $946,000 and $858,000 in fiscal years 1999 and 1998,
respectively. Net SG&A expenditures (exclusive of amounts classified as costs
of revenue and amounts offset by cost sharing funding) increased to $6,078,000
in fiscal 1999 from $4,910,000 the prior year.
Non-operating expenses
Interest income increased to $1,921,000 in fiscal 1999, as compared to
$782,000 in fiscal 1998. This increase primarily reflects the higher cash
balances available for investment as a result of the Company's public offering
of 3,504,121 shares of common stock on April 22, 1998. The Company received
net proceeds (after the underwriters discount but before deducting offering
expenses) of $46,114,000 from this offering.
Interest expense decreased to $9,800 in fiscal 1999 compared to $239,000 in
fiscal 1998. This decrease reflects the retirement of long-term debt following
the offering.
The Company expects to continue to incur operating losses for the next few
years, as it continues to devote significant financial resources to its
research and development activities and commercialization efforts.
The Company expects to be a party to agreements which, from time to time,
may result in costs incurred exceeding expected revenues under such contracts.
The Company 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.
Fiscal Years Ended March 31, 1998 and March 31, 1997
Revenues
Total revenues increased 43% to $15,129,000 in fiscal 1998 from $10,551,000
in fiscal 1997. This increase was due primarily to higher contract revenue
associated with the ABB/EDF joint development program to develop HTS wire for
power transformers. The agreements with ABB and EDF were signed in fiscal
1998, and contributed $3,075,000 in contract revenue in fiscal 1998, compared
to $700,000 in contract revenue and $300,000 in product sale revenue from ABB
in fiscal 1997.
In addition, contract revenue was also positively affected by a $700,000
contract with the Electric Power Research Institute ("EPRI") and by an
increase in work performed on seven Phase II Small Business Innovation
Research (SBIR) grants, five of which were awarded during fiscal 1998, from
the Department of Energy, Department of Defense, and National Science
Foundation. At the SMES business unit, fiscal 1998 product sales increased
$1,518,000 compared to fiscal 1997, which was largely offset by a decrease in
contract revenue of $1,426,000. Revenue was also positively affected by the
recognition of $565,000 in product sales by AET, which was acquired on July
31, 1997, four months into the Company's fiscal year. Fiscal 1997 contract
revenue
A-2
included $825,000 relating to a research and development agreement with Inco
Alloys International, which was discontinued on December 31, 1996.
In addition to reported revenues, the Company also received funding of
$1,771,000 in fiscal 1998 under government cost-sharing agreements as compared
to $1,706,000 in fiscal 1997. The Company anticipates that a portion of its
funding in the future will continue to come from cost-sharing agreements as
the Company continues 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 revenue.
Operating expenses
The Company's total operating expenses in fiscal 1998 were $27,884,000
compared to $23,345,000 in fiscal 1997. Costs of revenue, which include costs
of research and development contracts and costs of product sales and prototype
development contracts, increased to $14,333,000 in fiscal 1998 compared to
$10,577,000 in fiscal 1997. This increase reflects expenditures to support the
increase in contract and prototype development revenues, including the hiring
of additional personnel and purchases of materials and equipment. Included in
cost of revenue is a write-down provision of $445,000 in fiscal 1997. This
provision was required to adjust the carrying values of certain items of
inventory to their fair values.
Adjusted R&D expenses, which include amounts classified as costs of revenue
and amounts offset by cost sharing funding, increased to $17,048,000 in fiscal
1998 from $14,678,000 in fiscal 1997. This increase was due to the continued
scale-up of the Company's internal research and development activities
including the hiring of additional personnel, the purchases of materials and
equipment and the payment of patent licensing fees. 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 R&D
expenditures that were included as costs of revenue during fiscal 1998 and
fiscal 1997 were $7,494,000 and $5,322,000, respectively. Additionally, R&D
expenses that were offset by cost sharing funding were $913,000 and $879,000
in fiscal 1998 and 1997, respectively. Net R&D expenses (exclusive of amounts
classified as costs of revenue and amounts offset by cost sharing funding)
increased to $8,641,000 in fiscal 1998 from $8,477,000 the prior year.
Adjusted SG&A expenses were $9,162,000 in fiscal 1998 as compared to
$7,305,000 in fiscal 1997. These increases were primarily due to additional
recruiting, legal, consulting, and marketing expenses incurred to support the
overall increase in the Company's revenues and research and development
activities, as well as increases in executive bonuses and other compensation.
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). SG&A expenditures included as costs of revenue during fiscal 1998
and fiscal 1997 were $3,394,000 and $2,186,000, respectively. The SG&A amounts
offset by cost share funding were $858,000 and $828,000 in fiscal years 1998
and 1997, respectively. Net SG&A expenses (exclusive of amounts classified as
costs of revenue and amounts offset by cost sharing funding) were $4,910,000
in fiscal 1998 as compared to $4,291,000 in fiscal 1997.
Non-operating expenses
Interest income decreased to $782,000 in fiscal 1998, as compared to
$1,177,000 in fiscal 1997. This decrease primarily reflects lower cash, cash
equivalents and long-term marketable securities balances available for
investment as a result of cash being used to fund the Company's operations,
pay liabilities and transaction costs related to the two mergers, and to
purchase capital equipment. Interest expense decreased from $356,000 in fiscal
1997 to $239,000 in fiscal 1998 primarily due to the payoff of notes payable
and the reduction in long term debt. Other expense, net is comprised primarily
of miscellaneous taxes net of gains on the disposition of excess capital
equipment.
Merger related fees of $710,000 in fiscal 1997 related to the costs incurred
through March 31, 1997 in connection with the Company's acquisition of SI, and
consisted primarily of financial advisory and legal fees. In
A-3
fiscal 1998, the Company incurred an additional $155,000 in transaction fees
resulting from professional fees relating to both the SI ($76,000) and the AET
($79,000) acquisitions. In fiscal 1997 SI incurred professional fees relating
to a terminated merger negotiation amounting to $670,000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash, cash equivalents and long-term
marketable securities totaling $31,572,000 compared to cash, cash equivalents
and long-term marketable securities totaling $8,009,000 at March 31, 1998.
This increase was primarily due to the public offering of 3,504,121 shares of
common stock on April 22, 1998. The Company received net proceeds (after the
underwriters discount but before deducting offering expenses) of $46,114,000
as a result of this offering. In fiscal 1999, $15,098,000 was used to fund the
Company's operations. Approximately $3,142,000 was used for the retirement of
long-term debt. Additionally, $3,614,000 of cash was used for the purchase of
capital equipment, primarily for research and development and manufacturing.
The Company has potential funding commitments of approximately $10,326,000
to be received after March 31, 1999 from strategic partners and government
agencies (all of which is due within the next three years). However, a total
of $5,276,000 of these commitments (representing commitments under government
contracts) is subject to cancellation.
The Company's policy is to invest available funds in short-term,
intermediate-term, and long-term investment grade marketable securities,
including but not limited to government obligations, repurchase agreements,
certificates of deposit and money market funds.
The Company believes that several years of further development will be
necessary before HTS wires and related products are available in significant
quantities for commercial power applications. The Company believes, based on
its current business plan, that its current cash and marketable securities
should be sufficient to fund the Company's operations for the next two years.
However, the Company may need additional funds sooner than anticipated if the
Company's performance deviates significantly from its current business plan or
there are significant changes in competitive or other market factors. 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 the Company.
To date, inflation has not had a material impact on the Company's financial
results.
YEAR 2000 ISSUES
The Company is currently addressing a universal problem commonly referred to
as "Year 2000 Compliance," which relates to the ability of computer programs
and systems to properly recognize and process date sensitive information
before and after January 1, 2000. Many computer programs and systems recognize
dates using two-digit year data (rather than four-digit data), and therefore
may be unable to determine the correct century for the year. Failure to
properly recognize and process date information may cause such programs and
systems to fail to operate or to operate with erroneous results.
The Company has analyzed and continues to analyze its internal information
technology ("IT") systems ("IT systems") to identify any computer programs
that are not Year 2000 compliant and implement any changes required to make
such systems Year 2000 compliant. The Company believes that its critical IT
systems currently are capable of functioning without substantial Year 2000
compliance problems. The Company has identified only a few non-critical, but
important, IT systems that must be replaced due to Year 2000 concerns, and the
Company already has plans to replace these IT systems with Year 2000 compliant
systems providing increased functionality. The Company believes such IT
systems will be Year 2000 capable in a time frame that will avoid any material
adverse effect on the Company. Also, the Company does not believe that the
expenditures related to replacing or upgrading any of its IT systems to make
them Year 2000 compliant will have a material adverse
A-4
effect on the operating results or financial condition of the Company. The
Company has evaluated its critical equipment and critical systems that contain
embedded software and the Company believes that all of its critical Non-IT
systems are capable of functioning without substantial Year 2000 compliance
problems.
A substantial portion of the current products being developed, manufactured
and/or sold by the Company (e.g. HTS wire and related products) contain no
computer programs and as such pose no significant Year 2000 compliance
concerns. The Power Quality Division's SMES units currently being manufactured
contain computer programs that may be susceptible to Year 2000 compliance
problems. The Company is in the process of upgrading and testing these
computer programs to insure Year 2000 compliance, and believes that all
changes will be in place in the second calendar quarter of 1999 on both
currently manufactured equipment and units that have been previously sold.
However, the Company's products are often used by its customers in systems
that contain third party products. Therefore, even though the Company's
current products may be Year 2000 compliant, the failure of such third party
products to be Year 2000 compliant, or to properly interface with the
Company's current products, may result in a system failure.
The Company is investigating each of its significant vendors, suppliers,
financial service organizations, service providers and customers to confirm
that the Company's operations will not be materially adversely affected by the
failure of any such third party to have Year 2000 compliant computer programs.
This is being undertaken by a process that includes questionnaires,
interviews, on-site visits and other available means. The Company expects to
complete this process by the end of the second calendar quarter of 1999.
Regardless of the responses that the Company receives from such third parties,
the Company is establishing contingency plans to reduce the Company's exposure
resulting from the non-compliance of third parties. First, the Company plans
to build inventories of critical and/or important components prior to January
1, 2000, and thereby decrease the Company's dependence on suppliers that are
not Year 2000 compliant. Second, the Company plans to review delivery
schedules with its major customers, commencing in the third calendar quarter
of 1999. Such review should enable customers to accept ordered products after
January 1, 2000, even if their internal computer systems are not operating
properly.
The Company estimates that, through March 31, 1999, it has spent less than
$50,000 to remediate Year 2000 issues in its IT systems, and the Company
estimates that it will spend less than an additional $100,000 to remediate
Year 2000 issues in its IT systems. Additionally, the Company accelerated into
fiscal 1999 the planned replacement of its E-mail software, and is currently
implementing the planned replacement of its financial systems software to
avoid potential Year 2000 problems. For the development and deployment of SMES
system computer programs to remedy Year 2000 problems, the Company has spent,
through March 31, 1999, approximately $15,000 and estimates it will spend an
additional $10,000 to complete such program development and deployment. All of
such expenditures are included in the budgets of the various departments of
the Company tasked with various aspects of the Year 2000 project. No IT
projects have been deferred due to the Company's Year 2000 efforts.
Finally, the Company is in the process of developing contingency plans to be
implemented as part of its efforts to identify and correct any Year 2000
compliance problems. Such plans are expected to be completed by the end of the
third calendar quarter of 1999.
The Company does not currently believe that any of the foregoing will have a
material adverse effect on its financial condition or its results of
operations. However, the process of evaluating the Company's products and
third party products and systems is ongoing. Although not expected, failures
of critical suppliers, critical customers, critical IT systems, critical non-
IT systems, or products sold by the Company (including any delay in the
deployment of SMES computer program upgrades) could have a material adverse
effect on the Company's financial condition or results of operations. Year
2000 Compliance has many issues and aspects, not all of which the Company is
able to accurately forecast or predict. There is no way to assure that Year
2000 Compliance will not have adverse effects on the Company, some of which
could be material. Many of the Company's statements related to Year 2000 are
forward-looking statements and actual results could differ materially from
those anticipated above.
A-5
FUTURE OPERATING RESULTS
The Company does not provide forecasts of its future financial performance.
However, various statements included herein, as well as other statements made
from time to time by Company representatives, which relate to future matters
(including but not limited to statements concerning the future commercial
success of the Company) 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 the
Company's 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.
Development Stage of the Company; Technological Challenges. To date, the
Company has been principally engaged in research and development activities.
Some of the Company's products are in the early stages of commercialization
and testing, while others are still under development. The Company believes
that several years of further development will be necessary before its HTS
wires and wire products will be available for significant commercial end-use
applications, and that significant additional development work is necessary to
improve the commercial feasibility and acceptance of its SMES products. There
are a number of technological challenges that the Company must successfully
address to complete any of its commercialization and development efforts.
There can be no assurance that the Company will be able to meet such
technological challenges and commercialize any such products or that these
products, if timely developed and commercialized, will be technically or
commercially successful.
Uncertainty Regarding Development of Market. To date, there has been no
widespread commercial use of HTS products. Although LTS products are currently
used in a number of commercial applications, commercial acceptance of LTS
products has been significantly limited by the cooling requirements of LTS
materials and other factors. There can be no assurance that the technological
hurdles currently limiting commercial use of HTS and LTS products will ever be
overcome, or that the market demands currently anticipated by the Company for
its HTS and LTS products will develop.
History of Losses and Uncertainty of Financial Results. The Company has
incurred net losses in each year since its inception. The Company expects to
continue to incur operating losses for at least the next few years and there
can be no assurance that the Company will ever achieve a profitable level of
operations.
Uncertainties Regarding Proprietary Rights. The Company expects that some or
all of the HTS materials used in the manufacture of its products, and certain
aspects of the technologies used by the Company in processing HTS materials,
are or will become covered by patents issued to other parties (who may include
competitors of the Company). Accordingly, the Company will need to acquire
licenses to, or successfully contest the validity of, such patents in order to
avoid patent infringement claims being brought against it. The Company is
optimistic that such licenses will be available. However, there can be no
assurance that such licenses will be available, or that, if available, they
will be available on commercially reasonable terms. Any litigation by the
Company to contest the validity or scope of such patents is likely to involve
significant expense and may not be successful.
Competition and Technological Change. The superconductivity industry is
characterized by rapidly changing and advancing technology. For HTS
applications, the Company's principal competitors presently include several
major Japanese companies, such as Sumitomo Electric Industries, Ltd., Hitachi,
ltd. and Furukawa Electric Co. Ltd.; several European companies, such as
Siemens A.G. in Germany and B.I.C.C. and Oxford Instruments in England; and
several companies in the U.S. such as Intermagnetics General Corporation and
3M. In the market for industrial power quality systems and services, the
Company competes with vendors of a number of non-superconductivity products as
well as developers of SMES systems. The future success of the Company will
depend in large part upon its ability to keep pace with advancing HTS and LTS
technology and developing industry standards. There can be no assurance that
the Company's development efforts will not be rendered obsolete by research
efforts and technological advances made by others. In addition, the
development
A-6
of new technologies could render HTS and LTS products obsolete. Many of the
Company's competitors have substantially greater financial resources, research
and development, manufacturing and marketing capabilities than the Company. In
addition, as the HTS and power quality markets develop, other large industrial
companies may enter these fields and compete with the Company.
Future Capital Needs. The Company believes, based upon its current business
plan, that its current cash and marketable securities should be sufficient to
fund the Company's operations as planned for the next two years. However, the
Company may need additional funds sooner than anticipated if the Company's
performance deviates significantly from its current business plan or if there
are significant changes in competitive or other market factors. There can be
no assurance that such funds, whether from equity or debt financing,
development contracts or other sources, will be available, or available on
terms acceptable to the Company.
Lack of Manufacturing and Marketing Experience. For the Company to be
financially successful, it must manufacture the products developed by it in
commercial quantities at acceptable costs and on a timely basis. The
production of commercial quantities at acceptable costs presents a number of
technological and engineering challenges for the Company, and significant
start-up costs and unforeseen expenses may be incurred in connection with
efforts to manufacture commercial quantities of the Company's products. In
addition, the Company will be required to develop a marketing and sales force
that will effectively demonstrate the advantages of its products over more
traditional products, as well as competitive superconductive products. The
Company's marketing and selling experience to date is limited. There can be no
assurance that the Company will be able to make the transition to commercial
production successfully or that the Company will be successful in its
marketing efforts, that it will be able to establish adequate sales and
distribution capabilities, that it will be able to enter into marketing
agreements or relationships with third parties on financially acceptable
terms, or that any third parties with whom it enters into such arrangements
will be successful in marketing the Company's products.
Dependence on Strategic Relationships. The Company's business strategy
includes entering into strategic relationships with corporate partners.
Although the Company has strategic relationships with Pirelli, EDF and ABB,
there can be no assurance that the Company will be able to maintain these
relationships or that these relationships will be technologically or
commercially successful. In addition, there can be no assurance that the
Company will be able to negotiate additional strategic relationships or that
any such relationships, if established, will be technologically or
commercially successful.
Dependence on Key Personnel. The Company's success will depend in large part
upon its ability to attract and retain highly qualified research and
development, management, manufacturing, marketing and sales personnel. Due to
the specialized nature of the Company's business, it may be difficult to
locate and hire qualified personnel. The Company is particularly dependent
upon the services of Dr. Gregory J. Yurek, a founder and its Chairman of the
Board, President and Chief Executive Officer, and Dr. Alexis P. Malozemoff,
its Chief Technical Officer. The loss of the services of either of these
individuals, or the failure of the Company to attract and retain other key
personnel, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Acquisitions Strategy. The Company's strategy includes
acquiring companies to enhance its market position, add value to its product
lines and strengthen its technology base. The Company made two acquisitions in
1997. There can be no assurance that the Company will make any additional
acquisitions in the future. Any acquisitions present a number of new
challenges for the Company's management, including the entry into new lines of
business, the integration of new products, technologies and personnel into the
Company's existing business organization, the management and operation of
geographically dispersed operations, and the adaptation of the Company's
information systems and management structure to a larger organization. There
can be no assurance that the Company will be successful in addressing these
challenges, or that acquisitions will produce the benefits anticipated by the
Company.
A-7
Appendix B
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Superconductor Corporation:
In our opinion, the accompanying consolidated balance sheets as of March 31,
1999 and 1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1999 present fairly, in all material respects, the
consolidated financial position of American Superconductor Corporation (the
"Company") at March 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the three years in the period ended March
31, 1999, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of Superconductivity,
Inc., a wholly-owned subsidiary, for the 12 months ended December 31, 1996,
which statements reflect net revenues constituting 32% of consolidated net
revenue for the year ended March 31, 1997. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for
Superconductivity, Inc., is based solely on the report of the other auditors.
We conducted our audit of these statements in accordance with generally
accepted auditing standards, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP /s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
May 11, 1999
B-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Superconductivity, Inc.
Middleton, Wisconsin
We have audited the accompanying balance sheet of Superconductivity, Inc.,
as of December 31, 1996, and the related statements of operations,
shareholders' equity (deficit), and cash flows for the year then ended (not
presented separately herein). These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of Superconductivity, Inc., as of December 31, 1995, and for the
year then ended, were audited by other auditors whose report dated February
29, 1996, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Superconductivity,
Inc., as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles. We have not audited the financial statements of Superconductivity,
Inc., for any period subsequent to December 31, 1996.
/s/ Smith & Gesteland, LLP
Madison, Wisconsin
February 7, 1997
B-2
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 24,969,142 $ 1,842,142
Accounts receivable.............................. 4,099,211 2,991,635
Inventory........................................ 5,024,552 3,229,973
Prepaid expenses and other current assets........ 538,485 545,428
------------ ------------
Total current assets........................... 34,631,390 8,609,178
Property and equipment:
Equipment........................................ 15,159,313 12,502,756
Furniture and fixtures........................... 1,243,894 946,630
Leasehold improvements........................... 2,657,188 1,980,090
------------ ------------
19,060,395 15,429,476
Less: accumulated depreciation..................... (12,945,765) (11,006,576)
------------ ------------
Property and equipment, net........................ 6,114,630 4,422,900
Long-term marketable securities.................... 6,602,829 6,167,030
Net investment in sales-type lease................. 287,110 345,940
Other assets....................................... 494,344 6,167
------------ ------------
Total assets................................... $ 48,130,303 $ 19,551,215
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............ $ 4,171,948 $ 3,333,462
Deferred revenue................................. -- 187,285
Current portion of long-term debt................ -- 29,609
------------ ------------
Total current liabilities...................... 4,171,948 3,550,356
Long-term debt (less current portion).............. -- 3,141,793
Commitments (Note 10)
Stockholders' equity:
Common stock, $.01 par value
Authorized shares-50,000,000; issued and
outstanding shares-15,378,656 in 1999 and
11,756,793 in 1998............................. 153,787 117,568
Additional paid-in capital...................... 134,030,618 87,961,911
Deferred warrant costs........................... (1,018,391) (1,328,446)
Accumulated other comprehensive income (loss).... 10,392 (92)
Accumulated deficit.............................. (89,218,051) (73,891,875)
------------ ------------
Total stockholders' equity......................... 43,958,355 12,859,066
------------ ------------
Total liabilities and stockholders' equity......... $ 48,130,303 $ 19,551,215
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
B-3
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Contract revenue................... $ 9,238,013 $ 9,273,901 $ 6,867,444
Product sales and prototype
development contracts............. 1,888,426 5,013,008 2,936,567
Rental/other revenue............... 130,863 841,903 746,546
------------ ------------ ------------
Total revenues................... 11,257,302 15,128,812 10,550,557
Costs and expenses:
Costs of revenue................... 12,020,623 14,332,712 10,577,376
Research and development........... 10,409,414 8,641,102 8,477,365
Selling, general and
administrative.................... 6,078,243 4,910,102 4,290,500
------------ ------------ ------------
Total costs and expenses......... 28,508,280 27,883,916 23,345,241
Merger related fees.................. -- (154,744) (710,105)
Interest income...................... 1,921,373 781,599 1,177,386
Interest expense..................... (9,827) (238,625) (356,366)
Fees--terminated transaction......... -- -- (669,627)
Other income (expense), net.......... 13,256 (11,314) (23,777)
------------ ------------ ------------
Net loss............................. $(15,326,176) $(12,378,188) $(13,377,173)
============ ============ ============
Net loss per common share
Basic.............................. $ (1.01) $ (1.06) $ (1.27)
============ ============ ============
Diluted............................ $ (1.01) $ (1.06) $ (1.27)
============ ============ ============
Weighted average number of common
shares outstanding
Basic.............................. 15,131,679 11,658,034 10,497,643
============ ============ ============
Diluted............................ 15,131,679 11,658,034 10,497,643
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
B-4
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net loss............................ $(15,326,176) $(12,378,188) $(13,377,173)
Adjustments to reconcile net loss to
net cash used by operations:
Merger with AET.................... -- (90,569) --
Forgiveness of notes receivable.... -- 349,368 206,744
Depreciation and amortization...... 1,939,189 2,113,617 1,983,531
Write down of inventory and
equipment......................... -- -- 444,538
Loss (gain) on disposals of
property and equipment............ -- 24,569 (9,697)
Deferred compensation expense...... -- 25,480 25,480
Deferred warrant costs............. 328,263 260,679 79,613
Stock compensation expense......... 204,511 90,842 --
Interest accrued on convertible
debentures........................ -- -- 230,746
Changes in operating asset and
liability accounts:
Accounts receivable............... (1,107,576) (462,031) (1,343,043)
Inventory......................... (1,794,579) 159,289 (973,571)
Prepaid expenses and other current
assets........................... 6,943 (205,631) (73,592)
Accounts payable and accrued
expenses......................... 838,486 (1,877,010) --
Note payable-line of credit....... -- (875,000) 2,082,137
Deferred revenue.................. (187,285) (1,974,510) 625,978
------------ ------------ ------------
Net cash used by operating
activities...................... (15,098,224) (14,839,095) (10,098,309)
Cash flows from investing activities:
Notes receivable................... -- (18,951) (82,815)
Repayment of notes receivable...... -- 53,190 100,000
Purchase of property and
equipment......................... (3,613,900) (2,889,245) (1,451,142)
Purchase of long-term marketable
securities........................ (442,334) (3,000,000) --
Sale of long-term marketable
securities........................ -- 12,455,443 6,730,101
Net investment in sales-type
lease............................. 58,830 (345,940) --
Decrease (increase) in other
assets............................ (488,177) 35,861 (37,130)
------------ ------------ ------------
Net cash (used in) provided by
investing activities............ (4,485,581) 6,290,358 5,259,014
Cash flows from financing activities:
Payments on notes payable.......... (29,609) (643,819) (131,049)
Proceeds from notes payable........ -- -- 5,000
Payments on long-term debt......... (3,141,793) 4,693 --
Proceeds from 10% convertible
debentures........................ -- -- 1,200,000
Net proceeds from issuance of
common stock...................... 45,882,207 10,453,045 89,097
------------ ------------ ------------
Net cash provided by financing
activities...................... 42,710,805 9,813,919 1,163,048
Net increase (decrease) in cash and
cash equivalents.................... 23,127,000 1,265,182 (3,676,247)
Cash and cash equivalents at
beginning of year................... 1,842,142 584,804 4,261,051
Effect of SI's excluded results...... -- (7,844) --
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 24,969,142 $ 1,842,142 $ 584,804
============ ============ ============
Supplemental schedule of cash flow
information:
Cash paid for interest............. $ 119,789 $ 135,906 $ 125,620
Noncash issuance of common stock... $ 204,511 $ 165,954 --
The accompanying notes are an integral part of the consolidated financial
statements.
B-5
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
------------------- Additional Deferred Other Total
Number Par Paid-in Deferred Warrant Comprehensive Accumulated Stockholders'
of Shares Value Capital Compensation Costs Income(Loss) Deficit Equity
---------- -------- ------------ ------------ ----------- ------------- ------------ -------------
Balance at March 31,
1996............... 10,422,996 104,230 75,663,526 (50,960) (57,368) (45,879,546) 29,779,882
Exercise of stock
options........... 82,122 821 88,275 89,096
Amortization of
deferred
compensation...... 25,480 25,480
Deferred warrant
costs............. 636,878 (636,878) --
Amortization of
deferred warrant
costs............. 79,613 79,613
Unrealized loss on
investments....... (81,691) (81,691)
Translation
adjustment........ (14,494) (14,494)
Net loss........... (13,377,173) (13,377,173)
---------- -------- ------------ ------- ----------- -------- ------------ ------------
Balance at March 31,
1997............... 10,505,118 105,051 76,388,679 (25,480) (557,265) (153,553) (59,256,719) $ 16,500,713
Exercise of stock
options........... 166,794 1,668 511,385 513,053
Investment by EDF.. 1,000,000 10,000 9,929,994 9,939,994
Merger with AET.... 68,306 683 9,317 (100,569) (90,569)
Stock compensation
expense........... 9,075 91 90,751 90,842
Amortization of
deferred
compensation...... 25,480 25,480
Deferred warrant
costs............. 953,638 (953,638) 0
Amortization of
deferred warrant
costs............. 3,035 182,457 185,492
Exercise of
warrants.......... 7,500 75 75,112 75,187
Unrealized gain on
investments....... 176,367 176,367
Cumulative
translation
adjustment........ (22,906) (22,906)
Effect of SI's
excluded results.. (2,156,399) (2,156,399)
Net loss........... (12,378,188) (12,378,188)
---------- -------- ------------ ------- ----------- -------- ------------ ------------
Balance at March 31,
1998............... 11,756,793 $117,568 $ 87,961,911 $ -- $(1,328,446) $ (92) $(73,891,875) $ 12,859,066
Exercise of stock
options........... 99,976 1,000 266,250 267,250
Secondary public
offering of common
stock............. 3,504,121 35,041 45,579,916 45,614,957
Stock compensation
expense........... 17,766 178 204,333 204,511
Amortization of
deferred warrant
costs............. 18,208 310,055 328,263
Unrealized loss on
investments....... (6,535) (6,535)
Cumulative
translation
adjustment........ 17,019 17,019
Net loss........... (15,326,176) (15,326,176)
---------- -------- ------------ ------- ----------- -------- ------------ ------------
Balance at March 31,
1999............... 15,378,656 $153,787 $134,030,618 $ -- $(1,018,391) $ 10,392 $(89,218,051) $ 43,958,355
========== ======== ============ ======= =========== ======== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
B-6
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
1. Nature of the Business
American Superconductor Corporation (the "Company"), which was formed on
April 9, 1987, develops and commercializes high temperature superconducting
("HTS") wire, wire products and systems, including current leads, multistrand
conductors, electromagnetic coils, and electromagnets and subsystems
comprising electromagnetics integrated with appropriate cooling systems. The
focus of the Company's development and commercialization efforts is on
electrical equipment for use by electric utilities and industrial users of
electrical power. For large-scale applications, the Company's development
efforts are focused on power transmission cables, motors, transformers,
generators and fault current limiters. In the area of power quality, the
Company is focused on marketing and selling commercial low temperature
superconducting magnetic energy storage ("SMES") devices, on development and
commercialization of new SMES products, and on development of power electronic
subsystems and engineering services for the power quality marketplace. The
Company operates in two business segments.
The Company has devoted a significant part of its efforts to research and
development. The Company has recorded contract revenue related to research and
development contracts of $9,238,013, $9,273,901 and $6,867,444 for the fiscal
years ended March 31, 1999, 1998 and 1997, respectively. As discussed in Note
11, a significant portion of this contract revenue relates to development
contracts with two companies, Pirelli Cavi E Sistemi S.p.A. ("Pirelli") and
Electricite de France (EDF), who (through affiliated companies) are
stockholders of the Company. Included in costs of revenue are research and
development expenses of approximately $7,335,000, $7,494,000 and $5,322,000
for the fiscal years ended March 31, 1999, 1998, and 1997, respectively.
Selling, general and administrative expenses also included as costs of revenue
for the fiscal years ended March 31, 1999, 1998 and 1997, were approximately
$2,741,000, $3,394,000 and $2,186,000, respectively.
2. Summary of Significant Accounting Policies
A summary of the Company's significant accounting policies follows:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances are
eliminated. As described more fully in Note 3, on April 8, 1997, the Company
acquired Superconductivity, Inc. ("SI") through the merger of a wholly owned
subsidiary of the Company into SI. These consolidated financial statements
have been prepared following the pooling of interests method of accounting and
reflect the combined financial position, operating results and cash flows of
ASC and SI as if they had been combined for all periods presented. Prior to
the merger, SI's fiscal year end was December 31. Effective with the merger,
SI's fiscal year end was changed to March 31 to conform with ASC's fiscal year
end. The audited results of SI's operations for the twelve month period ended
December 31, 1996 are included in the Company's results of operations for the
fiscal year ended March 31, 1997. As a result, SI's results of operations for
the quarter ended March 31, 1997 are not included in the consolidated
statements of operations. Additionally, SI's cash flow activity for the three
months ended March 31, 1997 is listed as "Effect of SI's excluded results" on
the Consolidated Statement of Cash Flows to account for the difference in the
beginning cash and cash equivalents between December 31, 1996 and March 31,
1997. In the quarter ended March 31, 1997, SI recorded revenues of $262,295
and incurred a net loss of $2,156,399 which included merger expenses of
$1,457,054.
On July 31, 1997 the Company completed a transaction in which the Company
acquired all the outstanding stock of Applied Engineering Technologies, Ltd.
("AET"). The transaction has been accounted for under the pooling of interests
method of accounting. Due to the immaterial effect on the accompanying
consolidated
B-7
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
financial statements, the prior periods have not been adjusted to reflect the
effect on the combined financial position, operating results and cash flows of
the Company.
Certain prior year amounts have been reclassified to be consistent with
current year presentation.
Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist of government obligations, short-term certificates of deposit and
repurchase agreements.
Accounts Receivable
Due to scheduled billing requirements specified under certain contracts, a
portion of the Company's accounts receivable balance at March 31, 1999 and
1998 was unbilled. The unbilled portion included in the accounts receivable
balance was approximately $1,695,000 or 41% of total accounts receivable and
$1,611,000 or 54% of total accounts receivable at March 31, 1999 and 1998,
respectively. The Company expects the unbilled balance at March 31, 1999 to be
billed in the first quarter of next year.
Long-term Marketable Securities
Long-term marketable securities, with original maturities of more than 12
months when purchased, consist primarily of U.S. Treasury Notes and a U.S.
government agency security. These marketable securities are stated at
amortized cost plus accrued interest which approximates fair value. Interest
income is accrued as earned.
Inventories
Inventories are stated at the lower of cost (determined on a first-in first-
out basis) or market.
Property and Equipment
Equipment and Furniture and fixtures are recorded at cost and depreciated
using the straight-line method over their estimated useful lives, which range
from 3 to 7 years. Leasehold improvements are recorded at cost and amortized
over the shorter of the useful life of the improvement or the remaining term
of the lease. Expenditures for maintenance and repairs are expensed as
incurred. Upon retirement or other disposition of assets, the costs and
related accumulated depreciation are eliminated from the accounts and the
resulting gain or loss is reflected in income.
Other Assets
Other assets at March 31, 1999 and 1998 consisted of the following:
1999 1998
-------- --------
Licenses................................................ $590,747 $340,747
Patents................................................. 274,485 --
Deposits................................................ 15,734 6,167
-------- --------
880,966 346,914
Less: accumulated amortization.......................... 386,622 340,747
-------- --------
$494,344 $ 6,167
======== ========
B-8
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
Licenses and patents are amortized to expense on a straight-line basis over
periods not exceeding 7 years. The carrying value of intangible assets is
periodically reviewed by the Company and impairments are recognized when the
expected future operating cash flows derived from such intangible assets is
less than their carrying value.
Effective March 31, 1998, the Company signed an agreement with Lucent
Technologies, Inc. ("Lucent") granting the Company a royalty-bearing, non-
exclusive, worldwide license for superconductor wire under Lucent's portfolio
of high temperature superconductor patents and patent applications. The
license runs from March 31, 1998 until the expiration of the last-to-expire
patent in the portfolio.
Revenue Recognition
The Company has entered into contracts to perform research and development
(see Note 11). Revenues from these contracts and prototype development
contracts are recognized utilizing the percentage of completion method,
measured by the relationship of costs incurred to total contract costs. Costs
include direct engineering and development costs and applicable overhead. The
Company generally recognizes its revenue on product sales upon shipment, or,
for certain programs, on the percentage of completion method of accounting.
Customer deposits are recorded as deferred revenue until the related sales are
recognized. The Company rents equipment to customers on a monthly basis and
recognizes rental income as it is earned.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each fiscal year end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce net deferred tax assets to the amount expected to be
realized. No current or deferred income taxes have been provided because of
the net operating losses incurred by the Company since its inception.
Computation of Net Loss per Common Share
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" effective for the quarter ended December 31, 1997.
SFAS No. 128 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 and dilutive common equivalent shares outstanding
during the period. Common equivalent shares include the effect of the exercise
of stock options and warrants. For the years ended March 31, 1999, 1998 and
1997, common equivalent shares of 655,843, 736,249 and 688,589, respectively
were not included in the calculation of diluted EPS as they were considered
antidilutive. The Company has restated net loss per share for all periods
presented in the accompanying consolidated financial statements to reflect net
loss per share on both a basic and a diluted basis.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the local
currency. The assets and liabilities of this operation are translated into
U.S. dollars at the exchange rate in effect at the balance sheet date and
income
B-9
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
and expense items are translated at average rates for the period. Cumulative
translation adjustments are excluded from net loss and shown as a separate
component of stockholders' equity. Foreign currency transaction gains and
losses are included in the net loss and have not been material to date.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and would
impact future results of operations and cash flows.
The Company invests its cash and cash equivalents with high-credit, quality
financial institutions and invests primarily in investment grade-marketable
securities, including, but not limited to, government obligations, repurchase
agreements and money market funds.
The Company's accounts receivable are comprised mostly of amounts owed by
government agencies and some commercial companies. The Company does not
require collateral or other security to support customer receivables. The
Company believes any credit losses will not be material.
3. The Merger
In April 1997, the Company completed a transaction (the "Merger") with SI.
This transaction, in which the Company acquired all of the outstanding stock
of SI by means of a merger of a subsidiary of the Company into SI, was
accounted for as a pooling of interests. The merger was effected through the
exchange of 942,961 shares of the Company's common stock for all of the issued
and outstanding shares of SI, based on a merger exchange ratio of 0.3292
shares of the Company's common stock for each share of SI common stock.
All fees and expenses related to the merger were expensed as required under
the pooling of interests accounting method. Charges of $75,767 in fiscal 1998
and $710,105 in fiscal 1997 have been recorded in the consolidated statement
of operations reflecting merger expenses incurred in the respective period. SI
incurred merger expenses of $1,457,054 in the quarter ended March 31, 1997. As
noted in Note 2, SI's results of operations for the quarter ended March 31,
1997 are not included in the Company's consolidated statement of operations.
Merger expenses consist principally of financial advisory, legal and
accounting fees.
Combined and separate results of the Company and SI for the period preceding
the merger were as follows (in thousands):
ASC SI Combined
-------- ------- --------
Year ended March 31, 1997
Revenues................................... $ 7,175 $ 3,376 $ 10,551
Net loss................................... $(10,422) $(2,955) $(13,377)
B-10
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
4. Long-term Marketable Securities
Long-term marketable securities at March 31, 1999 and 1998 consisted of the
following:
U.S. government and government agency securities
1999 1998
---------- ----------
Aggregate Cost....................................... $6,576,658 $6,134,324
Fair Value........................................... $6,602,829 $6,167,030
Gross Unrealized Gain................................ $ 26,171 $ 32,706
The Company's long-term marketable securities are classified as available-
for-sale securities and, accordingly, are recorded at amortized cost plus
accrued interest which approximates fair value. The difference between cost
and fair value is included in stockholders' equity. All of these securities
mature in one to three years.
5. Inventories
Inventories at March 31, 1999 and 1998 consisted of the following:
1999 1998
---------- ----------
Raw materials........................................ $1,754,654 $ 743,016
Work-in-progress..................................... 1,843,323 2,388,705
Finished goods....................................... 1,426,575 98,252
---------- ----------
$5,024,552 $3,229,973
========== ==========
6. Accounts payable and accrued expenses
Accounts payable and accrued expenses at March 31, 1999 and 1998 consisted
of the following:
1999 1998
---------- ----------
Accounts payable.................................... $2,921,028 $1,935,528
Accrued executive bonus............................. 274,009 98,808
Accrued expenses.................................... 562,020 979,626
Accrued vacation.................................... 414,891 319,500
---------- ----------
$4,171,948 $3,333,462
========== ==========
7. Long-term Debt
Long-term debt at March 31, 1998 consisted of the following:
1998
----------
Subordinated notes, interest payable semiannually at 7%, due
April 1999.................................................... $3,141,793
Note payable to ABB Power T & D Company Inc., Interest payable
monthly at 7.5%, with principal due April 1998................ 29,609
----------
3,171,402
Less amount due within one year................................ 29,609
----------
$3,141,793
==========
B-11
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
The Company's subordinated notes were retired following the completion of
the public offering during April 1998 (See Note 9).
8. Income Taxes
The reconciliation between the statutory federal income tax rate and the
Company's effective income tax rate is shown below.
March 31
------------------
1999 1998 1997
---- ---- ----
Statutory federal income tax rate..................... (34)% (34)% (34)%
State income taxes, net federal benefit............... (6)% (6)% (6)%
Nondeductible expenses................................ 1 % 1 % 1 %
Research & development credit......................... (4)% (1)% (1)%
Valuation allowance................................... 43 % 40 % 40 %
--- --- ---
Effective income tax rate............................. 0 % 0 % 0 %
=== === ===
The principal components of the Company's deferred tax liabilities and
assets were the following:
March 31
--------------------------
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss
carryforward............. $ 32,815,000 $ 28,298,000
Research and development
and other credits........ 2,597,000 2,349,000
Depreciation and other.... 995,000 911,000
Valuation allowance....... (36,407,000) (31,558,000)
------------ ------------
Net..................... -- --
============ ============
At March 31, 1999 the Company had available for federal income tax purposes
net operating loss carryforwards of approximately $84,601,000, which expire in
years 2005 through 2018. This includes approximately $16,284,000 of SI
acquired net operating losses which begin to expire in 2003 and their
utilization by the Company will be subject to annual limitations. Research and
development and other credit carryforwards amounting to approximately
$2,597,000 are available to offset federal and state income taxes and expire
in years 2005 through 2018. Under current tax law, the utilization of net
operating loss carryforwards may be subject to annual limitations in the event
of certain changes in ownership.
9. Stockholders' Equity
In April 1997, the Company entered into a strategic alliance agreement with
an affiliate of EDF under which that affiliate purchased one million shares of
the Company's common stock at $10 per share.
The Offering
On April 22, 1998 the Company completed a public offering of 3,504,121
shares of its common stock and received net proceeds (before deducting
offering expenses) of $46,114,000, of which approximately $3,142,000 was used
to retire the Company's subordinated notes.
B-12
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
Stock-Based Compensation Plans
The Company has adopted the disclosure only option under Statement of
Financial Accounting Standards (SFAS) 123 "Accounting for Stock-Based
Compensation" as of March 31, 1997. Pro forma information regarding net income
and earnings per share is required by SFAS 123, and has been determined as if
the Company had accounted for its stock options under the fair value method of
that Statement. Consistent with the method of SFAS 123, the Company's net loss
and net loss per share would have increased to the pro forma amounts indicated
below:
For the fiscal years ended March 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Net loss (in thou-
sands)................. As reported $ (15,326) $ (12,378) $ (13,377)
Pro forma $ (17,960) $ (13,725) $ (14,095)
Loss per share.......... As reported $ (1.01) $ (1.06) $ (1.27)
Pro forma $ (1.19) $ (1.18) $ (1.34)
The pro forma amounts include the effects of all activity under the
Company's stock-based compensation plans since April 1, 1996. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for grants; a
weighted average risk free interest rate of 5.3%, 5.6% and 6.4% in fiscal
1999, fiscal 1998 and fiscal 1997, respectively; expected stock price
volatility of 60% for fiscal 1999, 50% for fiscal 1998 and 45% for fiscal
1997; no dividends; and a weighted average life of the options of 5 years. The
weighted average fair value of options granted during fiscal 1999, fiscal 1998
and fiscal 1997 was $7.36 per share, $5.74 per share and $5.02 per share,
respectively. The above amounts may not be indicative of future expense
because amounts are recognized over the vesting period and the Company expects
it will have additional grants and related activity under these plans in the
future.
The Company has six stock option plans including three Directors' Plans. The
stock option plans (the "Plans") include the 1987 Stock Plan (the "1987
Plan"), the 1993 Stock Option Plan (the "1993 Plan"), the 1996 Stock Incentive
Plan (the "1996 Plan"), the 1991 Director Stock Option Plan (the "1991
Director Plan"), the 1994 Director Stock Option Plan (the "1994 Director
Plan"), and the 1997 Director Stock Option Plan (the "1997 Director Plan").
The Plans are administered by the Compensation Committee of the Board of
Directors and permit the Company to sell or award common stock or to grant
stock options for the purchase of common stock.
The Plans provide for the issuance of incentive stock options and non-
qualified stock options to purchase the Company's common stock. In the case of
incentive stock options, the exercise price shall be equal to at least the
fair market value of the common stock, as determined by the Board of
Directors, on the date of grant. The 1991, 1994 and 1997 Director Plans are
stock option plans for members of the Board of Directors who are not also
employees of the Company ("outside directors"). The 1997 Director Plan
provides for the automatic grant of stock options for the purchase of common
stock by outside directors at an exercise price equal to fair market value at
the grant date. No further grants may be made under the 1987 Plan, the 1991
Director Plan or the 1994 Director Plan.
Options granted under the Plans generally become exercisable in equal annual
increments over a four or five year period and expire 10 years from the date
of grant or from two to three months after termination of employment.
B-13
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at March 31, 1999.
Outstanding Exercisable
----------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 3/31/99 Life Price at 3/31/99 Price
-------------- ----------- ----------- -------- ----------- --------
$ 0.76- 4.65 2,619 1.3 $ 1.38 2,619 $ 1.38
4.65- 9.30 399,391 4.4 8.01 316,591 7.84
9.30-13.94 2,051,770 8.0 11.42 576,940 11.23
13.94-18.58 396,516 5.0 16.84 352,567 16.95
18.58-22.67 385,230 5.1 21.25 314,340 21.22
--------- ---------
$ 0.76-22.67 3,235,526 1,563,057
========= =========
The following table summarizes the information concerning currently
outstanding and exercisable options:
Weighted average Number
Shares Exercise Price Exercisable
--------- ---------------- -----------
Outstanding at March 31, 1996.... 1,992,755 $14.21 652,885
--------- ------ ---------
Granted........................ 766,650 10.43
Exercised...................... (74,880) 1.11
Canceled....................... (138,860) 17.49
--------- ------ ---------
Outstanding at March 31, 1997.... 2,545,665 $13.28 896,895
--------- ------ ---------
Granted........................ 576,450 10.56
Exercised...................... (166,794) 1.81
Canceled....................... (330,831) 17.93
--------- ------ ---------
Outstanding at March 31, 1998.... 2,624,490 $12.63 1,215,883
--------- ------ ---------
Granted........................ 765,550 12.08
Exercised...................... (99,976) 2.67
Canceled....................... (54,538) 11.51
--------- ------ ---------
Outstanding at March 31, 1999.... 3,235,526 $12.82 1,563,057
========= ====== =========
Available for grant at March 31,
1999............................ 1,664,789
=========
Stock Purchase Warrants
The Company recorded an increase to additional paid-in capital and a
corresponding charge to deferred warrant costs of approximately $336,000 in
January 1998 related to the issuance of stock purchase warrants for 250,500
shares of common stock at an exercise price of $10.20 per share which become
exercisable over a five-year period following the date of grant. These
warrants were granted in consideration of ongoing financial services being
provided to the Company. Expense related to these warrants was approximately
$67,000 and $17,000 for the fiscal years ended March 31, 1999 and 1998,
respectively.
10. Commitments
The Company rents its headquarters in Westborough, Massachusetts under an
operating lease, which expires in May 2003. The Company also rents operating
facilities near Madison, Wisconsin under two leases which
B-14
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
expire on December 31, 2003. The Company has an option to extend these leases
for additional five-year periods. Under all leases the Company pays for real
estate taxes, certain insurance coverage and operating expenses.
In October 1992, the Company entered into a five-year collaborative
technology development agreement with Superlink Joint Venture ("Superlink").
In October 1997, the Company extended the technology development agreement
with Superlink for an additional six-year period through September 2003, with
payments totaling $220,000 due the first year and payments of $300,000 due
each year for the next five years. The Company has the right to terminate this
agreement under certain conditions.
Rent expense under the leases mentioned above and research and development
expenses related to the technology agreement with Superlink Joint Venture were
as follows:
1999 1998 1997
---------- -------- --------
Rent expense................................. $1,154,000 $531,546 $520,850
---------- -------- --------
Research and development expenses............ $ 220,000 $260,593 $135,480
---------- -------- --------
Minimum future lease and license fee commitments at March 31, 1999 were as
follows:
For the years ended March 31 Total
---------------------------- ---------
2000............................... 1,285,874
2001............................... 1,285,874
2002............................... 1,285,874
2003............................... 1,285,874
2004............................... 420,436
11. Research and Development Agreements
In fiscal 1998, the Company entered into four-year research and development
contracts with Asea Brown Boveri (ABB) and EDF, an affiliate of whom is a
stockholder of the Company, to develop HTS wire for power transformers. The
agreements, both of which expire on March 31, 2001 (subject to earlier
termination by either party), obligate ABB and EDF to each pay an aggregate of
$5 million to the Company. Through March 31, 1999, ABB had paid the Company
$3,300,000 and EDF had paid the Company $3,400,000. In March 1996, the Company
extended its development contract with Pirelli, a stockholder of the Company,
to jointly develop high temperature superconducting cable wires. The Company
recorded revenues under these contracts as follows:
1999 1998 1997
---------- ---------- ----------
Inco...................................... -- -- $ 825,000
Pirelli................................... $2,000,000 $2,500,000 2,500,000
ABB....................................... 1,025,000 1,275,000 1,000,000
EDF....................................... 1,600,000 1,800,000 --
---------- ---------- ----------
$4,625,000 $5,575,000 $4,325,000
========== ========== ==========
Future funding commitments under these contracts are $4,050,000 over the
next three years, $1,700,000 from ABB, $1,600,000 from EDF, and $750,000 from
Pirelli. At March 31, 1999, $375,000 due under the development contract with
Pirelli was included in Accounts Receivable.
In March 1996, the Company entered into a new strategic alliance with the
Electric Power Research Institute (EPRI) to develop and commercialize a
possible next-generation HTS wire. In March 1996, under the first phase
B-15
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
of the agreement, the Company granted a warrant for 100,000 shares of common
stock to EPRI, which becomes exercisable over a five-year period following the
date of grant. In March 1998, under the second phase of the agreement, the
Company granted to EPRI another warrant to purchase 110,000 shares of common
stock of the Company, which become exercisable over the next five years. The
Company will receive exclusive license rights to intellectual property from
EPRI. This agreement is subject to early termination if certain conditions are
not met. The Company recorded an increase to additional paid-in capital and a
corresponding charge to deferred contract costs of $618,000 and $637,000 in
fiscal 1998 and 1997, respectively, relating to these warrants. Warrant
expense related to these agreements was approximately $243,000, $166,000 and
$80,000 for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
12. Cost sharing arrangements
The Company has entered into several cost-sharing arrangements with various
agencies of the United States government. Funds paid to the Company under
these agreements are used to directly offset the Company's research and
development and selling, general and administrative expenses and to purchase
capital equipment. The Company recorded costs and funding under these
agreements of $4,325,000 and $1,953,000, respectively, for fiscal 1999, of
$3,139,000 and $1,771,000, respectively, for fiscal 1998 and $3,197,000 and
$1,706,000, respectively, for fiscal 1997. At March 31, 1999, total funding
received to date under these agreements was $10,583,000. Future funding
expected to be received under existing agreements is approximately $2,718,000
over the next three years subject to continued future funding allocations.
13. Related Party Transactions
In fiscal 1995 the Company made a series of loans to an officer of the
Company in the aggregate amount of $671,000 including accrued interest. The
Compensation Committee of the Board of Directors forgave $206,700 and $104,800
in fiscal years 1997 and 1996, respectively, of principal and accrued interest
of the loans. In addition, the officer repaid $100,000 of principal in
November 1996. The Company has recorded compensation expense of $349,400 in
fiscal 1998 as a result of the forgiveness of the remaining principal and
interest on the loan by the Compensation Committee on May 14, 1998.
14. Employee Benefit Plans
The Company has implemented two deferred compensation plans under Section
401(k) of the Internal Revenue Code. Any contributions by the Company are
discretionary. The company instituted a stock match program in July 1998 under
which the Company matched 25% of the first 4% of eligible contributions to the
plan. The Company recorded expense of $80,575 and a corresponding charge to
additional paid-in capital related to this program. No contributions were made
in fiscal 1998 or 1997. The Company does not have post-retirement or post-
employment benefit plans.
15. Write down of inventory and equipment
A provision was recorded for certain work-in-process inventory of $445,000
for the year ended March 31, 1997. This provision was recorded due to the
inventory not meeting required performance specifications. This provision was
included in costs of revenue for the year ended March 31, 1997.
16. Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income", which requires that an entity include in
total comprehensive income certain amounts which were previously recorded
directly to stockholders' equity.
B-16
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
The Company's comprehensive loss was as follows:
1999 1998 1997
------------ ------------ ------------
Net Loss......................... $(15,326,176) $(12,378,188) $(13,377,173)
Other comprehensive income
(loss).......................... 10,484 153,461 (96,185)
------------ ------------ ------------
Total comprehensive loss....... $(15,315,692) $(12,224,727) $(13,473,358)
============ ============ ============
Other comprehensive income (loss) represents changes in foreign currency
translation and unrealized gains and losses on investments.
17. Business Segment Information
The Company adopted Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"), as of March 31, 1999. Prior year information was restated in conformity
with this accounting standard. The Company has two reportable business
segments as defined by FAS 131--High Temperature Superconducting ("HTS")
business segment, and the Superconducting Magnetic Energy Storage ("SMES")
segment.
The HTS business segment develops and commercializes HTS wire, wire products
and systems. The focus of this segment's development effort is on power
transmission cables, motors, transformers, generators and fault current
limiters for large-scale applications.
The SMES business segment is focused on marketing and selling commercial low
temperature SMES devices, on development and commercialization of new SMES
products, and on development of power electronic subsystems and engineering
services for the power quality and reliability marketplace.
The operating segment results for the HTS and SMES business segments are as
follows:
Net Sales 1999 1998 1997
--------- ----------- ----------- -----------
HTS...................................... $ 9,747,580 $11,566,207 $ 7,174,487
SMES..................................... 1,509,722 3,562,605 3,376,070
----------- ----------- -----------
Total.................................. $11,257,302 $15,128,812 $10,550,557
=========== =========== ===========
Operating Income (loss) 1999 1998 1997
----------------------- ------------ ------------ ------------
HTS................................ $(12,004,738) $(10,085,217) $(10,860,218)
SMES............................... (5,246,240) (2,669,887) (1,934,466)
------------ ------------ ------------
Total............................ $(17,250,978) $(12,755,104) $(12,794,684)
============ ============ ============
The segment assets for the HTS and SMES business segments are as follows:
1999 1998
----------- -----------
HTS.................................................. $42,288,549 $15,729,294
SMES................................................. 5,841,754 3,821,921
----------- -----------
Total.............................................. $48,130,303 $19,551,215
=========== ===========
The accounting policies of the business segments are the same as those
described in Note 2.
B-17
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS--(Continued)
18. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative instrument's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
In June 1999, FASB issued an exposure draft to defer the effective date to
fiscal years beginning after June 15, 2000. A company may also implement the
Statement as of the beginning of any fiscal quarter after issuance. Statement
133 cannot be applied retroactively. Statement 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998).
The Company's management believes the impact on its financial statements of
adopting Statement 133 will be immaterial.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes criteria for determining which costs of developing or obtaining
internal-use computer software should be charged to expense and which should
be capitalized. The SOP is effective for fiscal years beginning after December
15, 1998, and establishes criteria for capitalizing certain internal use
software costs. The Company's management believes the impact on its financial
statements of adopting SOP 98-1 will be immaterial.
B-18
EXHIBIT INDEX
Exhibit No. Description Page No.
----------- ----------- --------
3.1** --Restated Certificate of Incorporation of the
Registrant
3.2* --By-laws of the Registrant, as amended to date
4.1* --Specimen Certificate for shares of Common Stock, $.01
par value, of the Registrant
$$10.1* --Employment Agreement dated as of December 4, 1991
between the Registrant and Gregory J. Yurek
$$10.2* --Employment Agreement dated as of December 4, 1991
between the Registrant and Alexis P. Malozemoff
10.3* --Form of Employee Nondisclosure and Developments
Agreement
$$10.4* --Employee Nondisclosure and Developments Agreement
dated as of December 26, 1990 between the Registrant
and Alexis P. Malozemoff
$$10.5* --Noncompetition Agreement dated as of July 10, 1987
between the Registrant and John Vander Sande
$10.6* --License Agreement between the Registrant and MIT
dated as of July 6, 1987
$10.7* --License Agreement between the Registrant and MIT
dated as of January 31, 1989
$10.8* --License Agreement dated as of August 1, 1991
$10.9* --License Agreement dated as of September 1, 1991
$10.10** --Second Amendment dated as of January 27, 1992 between
the Registrant and MIT amending the License Agreement
dated as of July 6, 1987 between the Registrant and
MIT
$10.11*** --Technology Development and Patent Licensing Agreement
dated October 7, 1992 among the Registrant and
Electricity Corporation of New Zealand Limited and
Industrial Research Limited
$$10.12*** --Employment Agreement dated as of December 31, 1992
between American Superconductor Europe GmbH and Dr.
Gero Papst
10.13*** --Lease dated March 9, 1993 between CGLIC on Behalf of
its Separate Account R, as Landlord, and the
Registrant
10.14+ --First Amendment to Lease between CGLIC, on Behalf of
its Separate Account R, as Landlord, and the
Registrant, as Tenant dated October 27, 1993
$$10.15*** --1993 Stock Option Plan
10.16++ --Agreement dated January 1, 1994 between Pirelli Cavi
S.p.A. and the Registrant
$10.17### --Agreement between Pirelli Cavi S.p.A. and American
Superconductor Corporation, dated October 1, 1995
10.18++ --Technology Development and Patent Licensing
Agreement, First Amendment dated August 7, 1993 among
the Registrant and Electricity Corporation of New
Zealand and Industrial Research Limited
10.19+++ --Subcontract Agreement effective as of September 30,
1993 by and between the Registrant and Reliance
Electric Company
$10.20# --Fourth Amendment, dated May 15, 1995, to the
Exclusive License Agreement between the Registrant and
MIT dated July 6, 1987
1
Exhibit No. Description Page No.
----------- ----------- --------
$$10.21## --1996 Stock Incentive Plan
$10.22### --Management Agreement between Electric Power Research
Institute, Inc. and American Superconductor Corporation,
effective January 1, 1996
$10.23### --Technology License Agreement between Electric Power Research
Institute, Inc. and American Superconductor Corporation,
effective January 1, 1996
$10.24### --Warrant granted to Electric Power Research Institute, Inc.
by American Superconductor Corporation, dated March 26, 1996.
10.25@ --Strategic Alliance Agreement by and among the Registrant and
CHARTH (Compagnie Holding D'Applications Et De Realisations
Thermiques Et Hydrauliques), dated as of April 1, 1997
$$10.26@@ --1997 Director Stock Option Plan
$10.27@@ --Patent License Agreement between Lucent Technologies Inc.
and the Registrant, dated as of March 31, 1998.
$10.28@@ --Agreement dated April 1, 1997 by and among Electricite de
France and the Registrant
$10.29@@ --Agreement effective April 1, 1997 by and between ABB
Transmission & Distribution Technology Ltd. and the
Registrant
21.1 --Subsidiaries
23.1 --Consent of PriceWaterhouseCoopers LLP.
23.2 --Consent of Smith & Gesteland LLP
27.1 --Financial Data Schedule
- --------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-43647).
** Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 29, 1992.
*** Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 29, 1993.
+ Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1993 filed with the
Commission on January 26, 1994.
++ Incorporated by reference to Exhibits to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q/A for the quarter ended
December 31, 1993 filed with the Commission on March 28, 1994.
+++ Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 29, 1994.
# Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 29, 1995.
## Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 28, 1996.
### Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K/A filed with the Commission on March 10, 1997.
@ Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 30, 1997.
@@ Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 26, 1998.
$ Confidential treatment previously requested and granted with respect to
certain portions, which portions were omitted and filed separately with the
Commission.
$$ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-K.
2