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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 1998
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 OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
TWO TECHNOLOGY DRIVE,
WESTBOROUGH, MASSACHUSETTS 01581
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
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. [ ]
On April 30, 1998, the aggregate market value of voting Common Stock held
by nonaffiliates of the registrant was $199,641,072 based on the closing price
of the Common Stock on the Nasdaq National Market on April 30, 1998.
The number of shares of Common Stock outstanding as of April 30, 1998 was
15,272,874.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K PART
- -------- --------------
Definitive Proxy Statement with respect to the Annual Part III
Meeting of Stockholders for the fiscal year ended March
31, 1998, filed with the Securities and Exchange
Commission.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business.................................................... 2
2. Properties.................................................. 14
3. Legal Proceedings........................................... 14
4. Submission of Matters to a Vote of Security Holders......... 14
PART II
5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 16
6. Selected Financial Data..................................... 16
7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................... 16
8. Financial Statements and Supplementary Data................. 16
9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 17
PART III
10. Directors and Executive Officers of the Registrant.......... 17
11. Executive Compensation...................................... 17
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 17
13. Certain Relationships and Related Transactions.............. 17
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 17
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 do not relate to
historical matters, 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.
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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.
According to industry sources, it is estimated that in the year 2010, worldwide
products based on superconductors that are sold to the electric power industry
will generate approximately $12 billion of revenues.
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.
[Superconductivity Graph]
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, T(c), which
is different for each superconducting material. The specific HTS
material in this chart has no electrical resistance below 108K
(-265 degreesF), as opposed to the specific LTS material in this
chart, which has no electrical resistance below 10 K (-441
degreesF).
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A combination of three conditions must actually 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
(T(c));
- The current passing through a given cross-section of the material
must be below a characteristic level known as the critical current
density (J(c)); and
- The magnetic field to which the material is exposed must be below a
characteristic value known as the critical magnetic field (H(c)).
These conditions are interdependent, and define the environmental operating
conditions for the superconductor.
[Superconducting Graph]
Not only must a superconducting material be cooled below its
critical temperature, T(c), 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, J(c),
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.
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, who is currently under contract as a consultant to the
Company, 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
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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, which enables them to 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 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.
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 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 power quality 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 10 K (-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 20 K (-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 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 superconductivity
products: the industrial power quality market, for which the Company currently
manufactures and markets commercial industrial power quality systems and
services; and the market for other electric power products, for which the
Company is currently developing a number of HTS products.
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Industrial Power Quality Systems and Services
The Company has focused initially on SMES systems as its product platform
to address the need for solutions for industrial power quality problems, which
industry sources estimate cost U.S. industry alone more than $10 billion per
year in factory downtime. 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. SMES systems are designed to
protect industrial customers from the adverse effects of voltage sags by
releasing large quantities of power within a fraction of a cycle to normalize
the degraded incoming power supply. It is estimated that more than 80% of all
power quality events, including brownouts and blackouts, are less than two
seconds in duration. With large energy storage capacities and fast recharging
capabilities, SMES systems can provide a solution to momentary aberrations in
power quality.
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
industrial power quality 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 power
quality products. The Company also plans to expand its current SMES product line
and to introduce high temperature SMES ("HT-SMES") products within three to five
years. The Company is also incorporating 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 introduced two commercial SMES-based products in calendar year
1997. Both are designed to provide instantaneous boosts in voltage, either
within individual pieces of electrical equipment, such as motor drives, or to
power lines supplying industrial users of power, in both cases to prevent
factory downtime caused by momentary dips in voltage that occur in distribution
power networks. The Company also has units at customer sites that are designed
to prevent factory downtime and lost work in process caused by momentary
(typically less than one to two seconds) outages (a dip in voltage to zero),
which also occur on power distribution networks. The Company has sold or leased
nine SMES units, which are currently located at customer sites in the United
States and in South Africa.
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 currently offers a service component of its industrial power
quality business that assesses the power quality needs of industrial sites, and
provides extended warranties. The Company plans to expand this portion of its
industrial power quality business area.
HTS Electric Power Products
HTS electric power products under development 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 governmental 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 ("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
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to its strategic alliances with Pirelli, EDF and ABB, the Company has
established research arrangements with several US National Laboratories and with
Industrial Research Limited, 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 industrial
power quality 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 (7 Tesla) 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 presents less environmental risks than the oil used to cool copper
cables. The Company expects that the first significant demonstration of utility
networks utilizing HTS-based power transmission cables will occur in 2000 and
that the first sales of its HTS wire for such applications will occur in 2001.
Coils for Motors and Generators. The Company is designing, developing and
fabricating HTS rotor coils and cryocoolers for use in high-horsepower electric
motors with the potential for use in industrial and utility applications. HTS
motors utilizing these rotor coils 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. The Company
expects the 1,000 hp motor to be in initial laboratory tests in early 1999 and
to be installed in an industrial site during the second half of 1999. The
Company expects that the first sales of its HTS rotor coils and cryocoolers for
these motors for commercial applications will occur in 2001.
Cables for Transformers. In cooperation with ABB, one of the largest
transformer suppliers in the world, and EDF, the Company is developing
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 which 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 sales of its HTS transformer wires or
cables for commercial applications will occur in 2002.
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In addition to the products described above, the Company plans to develop
fault current limiters, which would instantaneously protect a power grid from
electric surges caused by lightning, short circuits and other common
fluctuations. If this product development is successful, the Company may
manufacture and sell fault current limiter systems. The Company expects that the
first sales of this product for commercial applications will occur in 2002.
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 in the HTS field. The
Company is not devoting any efforts to the discovery of new HTS materials. 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 integrates these subsystems into a full
cryogenic and electrical system, 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 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 develop such architectures.
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The HTS wires used in the electromagnetic coils, electromagnets and
multistrand conductors will need to have 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)) in the magnetic field required for the application.
Most applications will require 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 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). The challenge is to produce cost effective wires with these
electrical properties by high-volume manufacturing processes in long lengths
(typically greater than 10,000 feet) 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 10,000 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 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, and Rockwell Automation
built and demonstrated a 286 horsepower HTS motor utilizing rotor coils
fabricated by the Company. 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 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
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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. Both techniques are being
utilized by the Company.
The Company has demonstrated increasingly advanced prototypes of
electromagnetic coils and multistrand conductors, including an electromagnet
that produces a magnetic field of 7 Tesla at 27K (-411 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 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 products and enhancing and expanding its SMES product line. It is
working to decrease the cost of these products by introducing HTS current leads
to simplify the cryogenic system, by improving the cryostat and by upgrading the
magnet design. 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
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, a
director and a founder 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.
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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."
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. Initially developed
by Fujikura Ltd., the Company believes that this process has been significantly
improved by Los Alamos National Laboratory.
Another variant of coated conductor, called deformation texturing of
substrates, has been developed by Toshiba Corporation and significantly improved
by Oak Ridge National Laboratory (whose trademark for their version of this
process is "RABiTS"). 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 Electric Power
Research Institute, Inc. ("EPRI"), Los Alamos 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, 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, 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., 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
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 and HTS markets develop,
other large industrial companies may enter these fields and compete with the
Company.
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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, the Company has recorded
as revenue $13.3 million from 1990 to March 31, 1998 and Pirelli has agreed to
pay the Company an aggregate of $2.7 million over the next two years as
"development fees;" however, this agreement may be terminated upon 90 days
notice in certain circumstances. As of April 30, 1998, 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 comprised of
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 the 100,000 shares EDF purchased in
the April 1998 public offering, represented, as of April 30, 1998, approximately
7.2% of the Company's outstanding Common Stock. EDF has agreed to pay the
Company an aggregate of $5.0 million (of which $1.8 million has been recorded as
revenue as of March 31, 1998) over the next four years 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 has agreed to pay the Company an aggregate of
$5.0 million (of which $2.3 million has been recorded as revenue as of March 31,
1998) over the next four years as "development fees;" however, this agreement
may be terminated upon 90 days notice by either party.
The Company has also established a number of collaborative research
relationships with various organizations such as Industrial Research, Ltd., 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, the Naval Research Laboratory 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 and exceeding the 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. Since April 1, 1993, the Company has received more
than $33 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 applications, held by
third parties, relate to the Company's current products or to products under
development,
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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. The Company believes
that certain 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.
The Company jointly owns or has obtained licenses with respect to patents
covering certain HTS materials through its collaborations with MIT and
Superlink. 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.
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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. Some of these applications have been issued as patents in the U.S.
and abroad while others are pending. The Company also has acquired options 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, HTS Application, and Power Quality
and SMES Patents
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 several patent applications on cryocooled power
electronics. The Company holds several issued patents and pending applications
on power quality systems as a result of the acquisition of SI.
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.
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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, 1998, the Company employed a total of 213 persons, 24 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 1998 were
approximately $8,641,000 compared to $8,477,000 in fiscal 1997. 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 $17,048,000 in fiscal 1998 compared to $14,678,000 in
fiscal 1997.
ITEM 2. PROPERTIES.
The Company's operations are located in approximately 102,000 square feet
of space in Westborough, Massachusetts, approximately 60,000 square feet of
space in Middleton, Wisconsin and approximately 3,700 square feet of space in
Woburn, Massachusetts. 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. The Company occupies the Woburn
facility under a lease which expires on January 30, 1999.
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, 1998.
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............................ 51 President, Chief Executive Officer and
Chairman of the Board of Directors
Stanley D. Piekos........................... 50 Vice President, Corporate Development, Chief
Financial Officer, Treasurer and Secretary
Alexis P. Malozemoff........................ 54 Senior Vice President and Chief Technical
Officer
Roland E. Lefebvre.......................... 47 Executive Vice President and Chief Operating
Officer
Ross S. Gibson.............................. 39 Vice President, Human Resources
John B. Howe................................ 41 Vice President, Electric Industry Affairs
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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. 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.
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. 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.
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. 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.
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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 closing 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, 1997:
First quarter............................................. 14 3/4 12 3/8
Second quarter............................................ 15 3/4 11 5/8
Third quarter............................................. 15 1/8 10 3/8
Fourth quarter............................................ 11 3/4 7 7/8
FISCAL YEAR ENDED MARCH 31, 1998:
First quarter............................................. 12 1/4 8 1/4
Second quarter............................................ 13 3/8 8 5/8
Third quarter............................................. 14 1/8 8 3/8
Fourth quarter............................................ 15 8 1/2
The number of shareholders of record on June 8, 1998 was 430.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below reflect the
combined results of operations and financial position of the Company and SI
restated for all periods presented pursuant to the pooling of interests method
of accounting. The financial data for the fiscal year ended March 31, 1998 have
been derived from the Company's consolidated financial statements that have been
audited by Coopers & Lybrand L.L.P, independent accountants. The financial data
for each of the four 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 Coopers & Lybrand L.L.P., 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 three fiscal years in the period ended
March 31, 1997 has been audited by Coopers & Lybrand L.L.P. 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,
------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................... 15,129 10,551 10,764 8,593 4,942
Net loss.................................... (12,378) (13,377) (9,698) (7,036) (7,717)
Net loss per share.......................... (1.06) (1.27) (0.94) (0.69) (0.86)
Total assets................................ 19,551 26,581 35,856 44,887 50,037
Working capital............................. 5,059 318 5,101 2,341 7,666
Cash, cash equivalents and long-term
marketable securities..................... 8,009 16,031 26,519 33,653 41,774
Stockholders' equity........................ 12,859 16,501 29,780 38,416 45,349
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.
Not applicable.
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.
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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, 1998 (the "1998 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 1998 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 1998 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 1998 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
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.
The Company filed a report on Form 8-K on March 24, 1998 to file restated
Financial Data Schedules for all periods affected by the restatement of the
Company's financial statements following the adoption of Financial Accounting
Standard ("FAS") No. 128 relating to earnings per share and the acquisition of
Superconductivity, Inc., accounted for as a pooling of interests. No other
reports on Form 8-K were filed during the last quarter of the Company's fiscal
year ended March 31, 1998.
(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.
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APPENDIX A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
American Superconductor Corporation (the "Company") was founded in 1987 to
develop for commercialization high temperature superconducting ("HTS") wires and
wire products. On April 8, 1997, the Company acquired Superconductivity, Inc.
("SI"), which is now being operated as the Power Quality Solutions 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 position, operating results and cash
flows of the Company and SI as if they had been combined for all periods
presented. For purposes of the discussion of the results of operations of the
Company for the fiscal years ended March 31, 1997 and 1996, the term "Former
ASC" is used to refer to the Company prior to the SI acquisition. 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, 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 Company's joint development program with Electricite de
France ("EDF") and ABB Power Transmission and Distribution Company ("ABB") to
develop high temperature superconductor ("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 SI, 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 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
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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 research and development ("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.
Selling, general and administrative ("SG&A") expenses were $4,910,000 in
fiscal 1998 as compared to $4,291,000 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. The SG&A amounts offset by cost share funding were
$858,000 and $828,000 in fiscal years 1998 and 1997, respectively. In addition
to these expenses, 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.
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 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.
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, 1997 AND MARCH 31, 1996
Revenues
Total revenues decreased to $10,551,000 in fiscal 1997 from $10,764,000 in
fiscal 1996. The Former ASC's revenues from research and development contracts,
prototype development contracts and the sale of prototypes increased to
$7,175,000 in fiscal 1997 from $7,131,000 in fiscal 1996. This increase was due
primarily to work performed on a research and development contract with Asea
Brown Boveri (ABB) and
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increases in funding on various U. S. Government grants and prototype
development contracts. This increase was largely offset by a drop in prototype
sales associated with a major cable prototype on which the Former ASC concluded
shipping HTS wire in the year ended March 31, 1996, and by the discontinuation
(effective December 31, 1996) of the joint research and development program on
metallic precursor wire technology with Inco Alloys International, Inc., which
had been providing $1.1 million in annual funding.
At SI, revenues in fiscal 1997 were $3,376,000 compared to $3,633,000 in
fiscal 1996. This decrease in revenues is due to the completion of a long-term
cost-plus-fixed-fee government contract in September 1996, which was in progress
during all of fiscal 1996. SI began an additional long-term government contract
in October 1996; however, revenue under this firm fixed-price contract was not
recognized until fiscal 1998. The decrease in SI's contract revenue (from a
total of $2,762,000 in 1996 to $1,570,000 in 1997) was partially offset by SI's
first sale of a commercial unit, which generated $993,000 in revenue in fiscal
1997.
In addition to reported revenues, the Former ASC also received funding of
$1,706,000 in fiscal 1997 under government cost-sharing agreements as compared
to $985,000 in fiscal 1996. This increased cost-sharing funding was primarily
due to the award of a $20.5 million Phase II Superconductivity Partnership
Initiative (SPI) contract on commercial-scale HTS motors by the Department of
Energy to the Company and Reliance Electric Company (a Rockwell Automation
business).
Operating expenses
The Company's total operating expenses in fiscal 1997 were $23,345,000
compared to $21,796,000 in fiscal 1996. At the Former ASC, operating expenses
increased to $18,035,000 in fiscal 1997 from $15,992,000 in fiscal 1996. Costs
of revenue increased to $7,508,000 in fiscal 1997 compared to $7,331,000 in
fiscal 1996 at the Former ASC. 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,
partially offset by lower costs of revenue associated with the decreased sales
of prototypes.
At SI, operating expenses decreased to $5,310,000 in fiscal 1997 from
$5,804,000 in fiscal 1996. SI's cost of revenue decreased to $3,070,000 in
fiscal 1997 from $4,222,000 in fiscal 1996. Included in cost of revenue are
write-down provisions of $445,000 and $1,175,000 in fiscal 1997 and fiscal 1996,
respectively. These provisions were required to adjust the carrying values of
certain items of inventory and equipment to their market values.
R&D expenses increased to $8,477,000 in fiscal 1997 from $5,704,000 the
prior year. The Former ASC's R&D expenses were $7,709,000 in fiscal 1997
compared to $5,341,000 in fiscal 1996. This increase was due to the continued
scale-up of the Former ASC's internal research and development activities
including the hiring of additional personnel and purchases of materials and
equipment. In addition to these expenses, a portion of the Former ASC's 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 1997 and
fiscal 1996 were $5,322,000 and $5,256,000, respectively. Additionally, R&D
expenses that were offset by cost share funding were $879,000 and $584,000 in
fiscal years 1997 and 1996, respectively. At SI, R&D expenses increased from
$363,000 in fiscal 1996 to $769,000 in fiscal 1997 because a higher proportion
of R&D expenses were classified as cost of revenue as a result of the higher
funding by the government cost-plus-fixed-fee contract in fiscal 1996 because of
the completion of the contract during fiscal 1997.
SG&A expenses were $4,291,000 in fiscal 1997 as compared to $4,538,000 in
fiscal 1996. At the Former ASC, SG&A expenses decreased to $2,818,000 in fiscal
1997 from $3,319,000 in fiscal 1996. This was primarily the result of certain
SG&A expenditures that were offset by the increased funding received under cost
sharing agreements. The SG&A amounts offset by cost share funding at the Former
ASC were $828,000 and $378,000 in fiscal years 1997 and 1996, respectively. SI's
SG&A expenses increased from $1,219,000 in fiscal 1996 to $1,472,000 in fiscal
1997. This increase was principally due to an increase in selling expenses,
primarily relating to the hiring of additional sales and marketing personnel to
support the South African market and SI's expanding line of commercial products.
In addition to these expenses, a portion of the Former ASC's SG&A expenditures
related to externally funded development contracts has been classified as costs
of
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revenue (rather than as SG&A expenses). SG&A expenditures included as costs of
revenue during fiscal 1997 and fiscal 1996 were $2,186,000 and $2,075,000,
respectively.
Non-operating expenses
Interest income decreased to $1,177,000 in fiscal 1997, as compared to
$1,585,000 in fiscal 1996. 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 and
to purchase capital equipment. Interest expense increased from $215,000 in
fiscal 1996 to $356,000 in fiscal 1997 primarily due to SI's $1,200,000
convertible debenture financing. 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 fiscal 1997
SI incurred professional fees relating to a terminated merger negotiation
amounting to $670,000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash, cash equivalents and long-term
marketable securities totaling $8,009,000 compared to cash, cash equivalents and
long-term marketable securities totaling $16,031,000 at March 31, 1997. In
fiscal 1998, $14,930,000 was used to fund the Company's operations.
Approximately $4,400,000 was used pay the investment banking and legal fees
associated with the Company's April 8, 1997 acquisition of SI and the retirement
of various SI liabilities. Additional uses of cash were for the purchase of
capital equipment, primarily for research and development and manufacturing.
This decrease in cash was partially offset by a $10,000,000 equity investment by
a subsidiary of Electricite de France in April, 1997. On April 22, 1998 the
Company completed a secondary public offering of 3,504,121 shares of common
stock and received net proceeds (before deducting offering expenses) of
$46,114,000.
The Company has potential funding commitments of approximately $14,589,000
to be received after March 31, 1998 from strategic partners and government
agencies (all of which is due within the next three years). However, a total of
$5,914,000 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 at least the next three 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.
The Company has analyzed the computer systems and related applications of
the Company and its subsidiaries to assess the expected impact of the Year 2000
date recognition issue on these systems and applications. Certain systems will
need to be updated in order to be prepared for the Year 2000 issue, and the
Company anticipates this process will be completed by the end of fiscal 1999.
The Company does not anticipate that the costs associated with this updating or
the Year 2000 issue will have a material adverse effect on the financial
condition or results of operations of the Company.
Transaction gains and losses from foreign currency transactions have not
been material to date. To date, inflation has not had a material impact on the
Company's financial results.
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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 are not statements of
historical facts (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 LT-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. Based on commercial
practices in other industries, 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. 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
A-5
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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 at least the next
three 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.
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APPENDIX B
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Superconductor Corporation:
We have audited the consolidated balance sheets of American Superconductor
Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based upon our audits. We did not audit
the financial statements of Superconductivity, Inc., a wholly-owned subsidiary,
as of December 31, 1996 and for the years ended December 31, 1996 and 1995,
which statements reflect total assets constituting 11% of consolidated total
assets as of March 31, 1997 and net revenues constituting 32% and 34% of
consolidated net revenues for the years ended March 31, 1997 and 1996,
respectively. Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to data included in
the consolidated financial statements for such entities, is based solely on the
reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits 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 audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of American Superconductor
Corporation as of March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
May 8, 1998
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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 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
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Superconductivity, Inc.
We have audited the balance sheets of Superconductivity, Inc. (a
development stage company, the Company) as of December 31, 1995 and 1994, and
the related statements of operations, shareholders' equity (deficit) and cash
flows for the years then ended and the period from March 22, 1988 (inception) to
December 31, 1995 (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 audits.
We conducted our audits 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 amount 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 audits provide 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 Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended and the period from March 22, 1988 (inception) to December 31,
1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Madison, Wisconsin
February 29, 1996
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AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31,
---------------------------
1998 1997
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,842,142 $ 584,804
Accounts receivable....................................... 2,991,635 3,070,573
Notes receivable.......................................... -- 383,607
Inventory................................................. 3,229,973 2,940,656
Prepaid expenses and other current assets................. 545,428 345,344
------------ -----------
Total current assets.............................. 8,609,178 7,324,984
Property and equipment:
Equipment................................................. 12,502,756 10,137,721
Furniture and fixtures.................................... 946,630 733,794
Leasehold improvements.................................... 1,980,090 1,732,215
------------ -----------
15,429,476 12,603,730
Less: accumulated depreciation.............................. (11,006,576) (8,835,754)
------------ -----------
Property and equipment, net................................. 4,422,900 3,767,976
Long-term marketable securities............................. 6,167,030 15,446,106
Net investment in sales-type lease.......................... 345,940 --
Other assets................................................ 6,167 42,028
------------ -----------
Total assets...................................... $ 19,551,215 $26,581,094
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-line of credit............................... -- $ 530,000
Accounts payable and accrued expenses..................... $ 3,333,462 4,283,612
Deferred revenue.......................................... 187,285 1,519,678
Current portion of long-term debt......................... 29,609 673,428
------------ -----------
Total current liabilities......................... 3,550,356 7,006,718
Long-term debt (less current portion)....................... 3,141,793 3,073,663
Commitments (Note 10)
Stockholders' equity:
Common stock, $.01 par value Authorized
shares -- 20,000,000; issued and outstanding
shares -- 11,756,793 in 1998 and 10,505,118 in 1997.... 117,568 105,051
Additional paid-in capital............................. 87,961,911 76,388,679
Deferred compensation..................................... -- (25,480)
Deferred contract costs -- warrants....................... (1,328,446) (557,265)
Unrealized gain (loss) on investments..................... 32,706 (143,661)
Cumulative translation adjustment......................... (32,798) (9,892)
Accumulated deficit....................................... (73,891,875) (59,256,719)
------------ -----------
Total stockholders' equity........................ 12,859,066 16,500,713
------------ -----------
Total liabilities and stockholders' equity........ $ 19,551,215 $26,581,094
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
B-4
29
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
Revenues:
Contract revenue................................ $ 9,273,901 $ 6,867,444 $ 7,526,306
Product sales and prototype development
contracts.................................... 5,013,008 2,936,567 2,366,351
Rental/other revenue............................ 841,903 746,546 871,769
------------ ------------ -----------
Total revenues.......................... 15,128,812 10,550,557 10,764,426
Costs and expenses:
Costs of revenue................................ 14,332,712 10,577,376 11,553,016
Research and development........................ 8,641,102 8,477,365 5,704,494
Selling, general and administrative............. 4,910,102 4,290,500 4,538,167
------------ ------------ -----------
Total costs and expenses................ 27,883,916 23,345,241 21,795,677
Merger related fees............................... (154,744) (710,105)
Interest income................................... 781,599 1,177,386 1,585,168
Interest expense.................................. (238,625) (356,366) (214,671)
Fees -- terminated transaction.................... -- (669,627) --
Other income (expense), net....................... (11,314) (23,777) (37,529)
------------ ------------ -----------
Net loss.......................................... $(12,378,188) $(13,377,173) $(9,698,283)
============ ============ ===========
Net loss per common share
Basic............................................. $ (1.06) $ (1.27) $ (0.94)
============ ============ ===========
Diluted......................................... $ (1.06) $ (1.27) $ (0.94)
============ ============ ===========
Weighted average number of common shares
outstanding
Basic............................................. 11,658,034 10,497,643 10,351,993
============ ============ ===========
Diluted......................................... 11,658,034 10,497,643 10,351,993
============ ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
B-5
30
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
------------ ------------ -----------
Cash flows from operating activities:
Net loss........................................ $(12,378,188) $(13,377,173) $(9,698,283)
Adjustments to reconcile net loss to net cash
used by operations:
Merger with AET............................ (90,569)
Forgiveness of notes receivable............ 349,368 206,744 104,778
Depreciation and amortization.............. 2,113,617 1,983,531 2,106,569
Write down of inventory and equipment...... -- 444,538 1,175,142
Loss (gain) on disposals of property and... 24,569 (9,697) --
equipment Deferred compensation expense.... 25,480 25,480 29,960
Deferred contract costs-warrant............ 260,679 79,613 --
Interest accrued on convertible
debentures.............................. -- 230,746 100,383
Changes in operating asset and liability
accounts:
Accounts receivable..................... (462,031) (1,343,043) 994,748
Inventory............................... 159,289 (973,571) (1,073,049)
Prepaid expenses and other current
assets................................ (205,631) (73,592) (27,796)
Note payable-line of credit............. (875,000) -- --
Accounts payable and accrued expenses... (1,877,010) 2,082,137 (639,139)
Deferred revenue........................ (1,974,510) 625,978 678,700
------------ ------------ -----------
Net cash used by operating activities........... (14,929,937) (10,098,309) (6,247,987)
Cash flows from investing activities:
Notes receivable........................... (18,951) (82,815) (40,973)
Repayment of notes receivable.............. 53,190 100,000 --
Purchase of property and equipment......... (2,889,245) (1,451,142) (1,342,922)
Purchase of long-term marketable
securities.............................. (3,000,000) -- --
Sale of long-term marketable securities.... 12,455,443 6,730,101 9,924,608
Decrease (increase) in other assets........ 35,861 (37,130) 28,676
Net investment in sales-type lease......... (345,940) -- --
------------ ------------ -----------
Net cash provided by investing activities....... 6,290,358 5,259,014 8,569,389
Cash flows from financing activities:
Payments on notes payable.................. (643,819) (131,049) (422,352)
Proceeds from notes payable (net).......... -- 5,000 --
Payments on long-term debt................. 4,693 -- --
Proceeds from 10% convertible debentures... -- 1,200,000 --
Net proceeds from issuance of common
stock................................... 10,543,887 89,097 379,969
------------ ------------ -----------
Net cash provided by financing activities....... 9,904,761 1,163,048 (42,383)
Net increase (decrease) in cash and cash
equivalents..................................... 1,265,182 (3,676,247) 2,279,019
Cash and cash equivalents at beginning of year.... 584,804 4,261,051 1,982,032
Effect of SI's excluded results................... (7,844) -- --
------------ ------------ -----------
Cash and cash equivalents at end of year.......... $ 1,842,142 $ 584,804 $ 4,261,051
============ ============ ===========
Supplemental schedule of cash flow information:
Cash paid for interest.......................... $ 135,906 $ 125,620 $ 114,288
Noncash issuance of common stock................ $ 165,954 -- $ 150,000
The accompanying notes are an integral part of the consolidated financial
statements.
B-6
31
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK UNREALIZED
--------------------- ADDITIONAL DEFERRED GAIN/LOSS CUMULATIVE
NUMBER PAR PAID-IN DEFERRED CONTRACT ON TRANSLATION
OF SHARES VALUE CAPITAL COMPENSATION COSTS INVESTMENTS ADJUSTMENT
---------- -------- ----------- ------------ ----------- ------------ -----------
BALANCE AT MARCH 31, 1995....... 10,337,506 103,375 $75,134,412 $ (80,920) $(573,081) $ 13,193
Exercise of warrants............ 65,840 658 499,342
Exercise of stock options....... 19,660 197 29,772
Purchase of fractional shares... (10)
Amortization of deferred
compensation.................. 29,960
Unrealized gain on
investments................... $ 11,111
Translation adjustment.......... (8,591)
Net loss........................
---------- -------- ----------- ---------- ----------- --------- --------
BALANCE AT MARCH 31, 1996....... 10,422,996 104,230 75,663,526 (50,960) (61,970) 4,602
Exercise of stock options....... 82,122 821 88,275
Amortization of deferred
compensation.................. 25,480
Deferred contract
costs-warrant................. 636,878 (636,878)
Warrant expense................. 79,613
Unrealized loss on
investments................... (81,691)
Translation adjustment.......... (14,494)
Net loss........................
---------- -------- ----------- ---------- ----------- --------- --------
BALANCE AT MARCH 31, 1997....... 10,505,118 105,051 76,388,679 (25,480) (557,265) (143,661) (9,892)
Exercise of stock options....... 166,794 1,668 511,385
Investment by EDF............... 1,000,000 10,000 9,929,994
Merger with AET................. 68,306 683 9,317
Stock compensation expense...... 9,075 91 90,751
Amortization of deferred
compensation.................. 25,480
Deferred contract
costs-warrant................. 953,638 (953,638)
Amortization of deferred
contract costs................ 3,035 182,457
Exercise of warrants............ 7,500 75 75,112
Unrealized gain on
investments................... 176,367
Cumulative translation
adjustment.................... (22,906)
Effect of SI's excluded
results.......................
Net loss........................
---------- -------- ----------- ---------- ----------- --------- --------
BALANCE AT MARCH 31, 1998....... 11,756,793 $117,568 $87,961,911 $ -- $(1,328,446) $ 32,706 $(32,798)
========== ======== =========== ========== =========== ========= ========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
BALANCE AT MARCH 31, 1995....... $(36,181,263) $38,415,716
Exercise of warrants............ 500,000
Exercise of stock options....... 29,969
Purchase of fractional shares...
Amortization of deferred
compensation.................. 29,960
Unrealized gain on
investments................... $ 11,111
Translation adjustment.......... (8,591)
Net loss........................ (9,698,283) (9,698,283)
------------ -----------
BALANCE AT MARCH 31, 1996....... (45,879,546) 29,779,882
Exercise of stock options....... 89,096
Amortization of deferred
compensation.................. 25,480
Deferred contract
costs-warrant................. --
Warrant expense................. 79,613
Unrealized loss on
investments................... (81,691)
Translation adjustment.......... (14,494)
Net loss........................ (13,377,173) (13,377,173)
------------ -----------
BALANCE AT MARCH 31, 1997....... (59,256,719) $16,500,713
Exercise of stock options....... 513,053
Investment by EDF............... 9,939,994
Merger with AET................. (100,569) (90,569)
Stock compensation expense...... 90,842
Amortization of deferred
compensation.................. 25,480
Deferred contract
costs-warrant................. --
Amortization of deferred
contract costs................ 185,492
Exercise of warrants............ 75,187
Unrealized gain on
investments................... 176,367
Cumulative translation
adjustment.................... (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....... $(73,891,875) $12,859,066
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
B-7
32
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
1. NATURE OF THE BUSINESS
American Superconductor Corporation (the "Company" or "ASC"), 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
one business segment.
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 $9,273,901, $6,867,444 and $7,526,306 for the fiscal
years ended March 31, 1998, 1997 and 1996, respectively. As discussed in Note
11, a significant portion of this contract revenue relates to development
contracts with three stockholders Pirelli Cavi E Sistemi S.p.A. ("Pirelli"),
Electricite de France (EDF), and Inco Alloys International, Inc. ("Inco").
Included in costs of revenue are research and development expenses of
approximately $7,494,000, $5,322,000 and $5,256,000 for the fiscal years ended
March 31, 1998, 1997, and 1996, respectively. Selling, general and
administrative expenses also included as costs of revenue for the fiscal years
ended March 31, 1998, 1997 and 1996, were approximately $3,394,000, $2,186,000
and $2,075,000, respectively.
As explained more fully in Note 3 to these financial statements, on
April 8, 1997, the Company acquired Superconductivity Inc. ("SI") through the
merger of a wholly owned subsidiary of the Company into SI. SI is a manufacturer
of low temperature superconductor products for the industrial power quality
market.
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. As described more fully in Note 3, on
April 8, 1997, ASC acquired 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 periods ended December 31, 1996
and 1995 are included in the Company's results of operations for the fiscal
years ended March 31, 1997 and 1996, respectively. SI's audited balance sheet at
December 31, 1996 is included in the Company's balance sheet at 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. 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. 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.
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
B-8
33
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
consolidated 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances have been
eliminated.
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, 1998 and 1997
was unbilled. The unbilled portion included in the accounts receivable balance
was approximately $1,611,000 or 54% of total accounts receivable and $1,090,000
or 35% of total accounts receivable at March 31, 1998 and 1997, respectively.
The Company expects the amounts 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
Property and equipment 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 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.
Revenue Recognition
The Company has entered into contracts to perform research and development
(see Note 11). Revenues from these 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 prototype revenue
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.
B-9
34
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
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 fiscal each 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 December 28, 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 net income per share 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.
For the years ended March 31, 1998, 1997 and 1996, common equivalent shares of
275,749, 338,089 and 454,195,respectively were not included for 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 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.
B-10
35
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
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 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 consolidated statement of operations. Merger expenses consist principally
of financial advisory, legal and accounting fees.
Combined and separate results of ASC and SI for the periods 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)
Year ended March 31, 1996
Revenues.................................. $ 7,131 $ 3,633 $ 10,764
Net loss.................................. $ (7,320) $(2,378) $ (9,698)
4. LONG-TERM MARKETABLE SECURITIES
Long-term marketable securities at March 31, 1998 consisted of the
following:
GROSS UNREALIZED
AGGREGATE COST FAIR VALUE GAIN
-------------- ---------- ----------------
U.S. government and U.S government
agency securities............... $6,134,324 $6,167,030 $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, 1998 and 1997 consisted of the following:
1998 1997
---------- ----------
Raw materials....................................... $ 743,016 $ 546,776
Work-in-progress.................................... 2,388,705 2,164,179
Finished goods...................................... 98,252 229,701
---------- ----------
$3,229,973 $2,940,656
========== ==========
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at March 31, 1998 and 1997 consisted
of the following:
1998 1997
---------- ----------
Accounts payable.................................. $2,619,865 $2,919,739
Accrued professional fees......................... 27,543 585,522
Accrued expenses.................................. 366,554 563,051
Accrued vacation.................................. 319,500 215,300
---------- ----------
$3,333,462 $4,283,612
B-11
36
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt at March 31, 1998 and 1997 consisted of the following:
1998 1997
---------- ----------
Subordinated convertible debentures, principal of
$2,537,492 plus accrued interest at 10%, aggregating
$536,171 at March 31, 1997, due January 1998............ -- $3,073,663
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.................................................... 29,609 673,428
---------- ----------
3,171,402 3,747,091
Less amount due within one year........................... 29,609 673,428
---------- ----------
$3,141,793 $3,073,663
========== ==========
In conjunction with the Merger, the 10% subordinated convertible debentures
were exchanged for the 7% subordinated notes of the Company, due April 8, 1999,
with interest payable semiannually. At the option of the Company, principal and
interest may also be paid in shares of the Company's common stock of equivalent
value.
Subsequent to fiscal 1998 year-end, on April 22, 1998, the Company
completed a public offering of 3,504,121 shares of its common stock and received
net proceeds of $46,114,000 (before deducting offering expenses), approximately
$3,142,000 of which was then used to retire the 7% subordinated notes.
8. INCOME TAXES
The principal components of the Company's deferred tax liabilities and
assets were the following:
MARCH 31,
----------------------------
1998 1997
------------ ------------
Deferred tax assets:
Net operating loss carryforward....................... $ 28,298,000 $ 22,932,000
Research and development and other credits............ 2,349,000 2,035,000
Depreciation and other................................ 911,000 1,918,000
Valuation allowance................................... (31,558,000) (26,885,000)
------------ ------------
Net..................................................... -- --
------------ ------------
At March 31, 1998 the Company had available for federal income tax purposes
net operating loss carryforwards of approximately $54,460,000, which commence
expiring in years 2005 through 2013. SI also had net operating loss
carryforwards amounting to approximately $16,284,000, the tax effect of which is
included in the above schedule. These loss carryforwards begin expiring in 2003
and their utilization by the Company will be subject to annual limitations.
Research and development and other credit carryforwards amounting to
approximately $2,349,000 are available to offset federal and state income taxes
and expire in years 2005 through 2013. Under current tax law, the utilization of
net operating loss carryforwards may be subject to annual limitations in the
event of future significant changes in ownership.
9. STOCKHOLDERS' EQUITY
In April 1997, the Company entered into a strategic alliance agreement with
an affiliate of EDF under which EDF purchased one million shares of the
Company's common stock at $10 per share.
B-12
37
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,
-------------------------------------
1998 1997 1996
---------- ---------- ---------
Net loss (in thousands)....... As reported $(12,378) $(13,377) $(9,698)
Pro forma $(13,725) $(14,095) $(9,871)
Loss per share................ As reported $ (1.06) $ (1.27) $ (0.94)
Pro forma $ (1.18) $ (1.34) $ (0.96)
The pro forma amounts include the effects of all activity under the
Company's stock-based compensation plans since April 1, 1995. 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 5.6%, 6.4% and 5.5% in fiscal 1998, fiscal
1997 and fiscal 1996 respectively; expected stock price volatility of 50%, for
fiscal 1998 and 45% for fiscal 1997 and fiscal 1996; no dividends; and a
weighted average life of the options of 5 years. The weighted average fair value
of options granted during fiscal 1998, fiscal 1997 and fiscal 1996 was $5.74 per
share, $5.02 per share and $6.42 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
38
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at March 31, 1998.
OUTSTANDING
-------------------------- EXERCISABLE
WEIGHTED -----------------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 3/31/98 LIFE PRICE AT 3/31/98 PRICE
- -------------- ----------- ----------- -------- ----------- --------
$ 0.27 - 4.65.............. 79,015 2.3 $0.75 79,015 $0.75
4.65 - 9.30.............. 414,636 5.4 8.00 302,521 7.76
9.30 - 13.94.............. 1,346,490 8.4 11.03 326,190 11.35
13.94 - 18.58.............. 398,099 6.2 16.85 270,707 17.00
18.58 - 23.23.............. 386,250 6.1 21.25 237,450 21.22
--------- ---------
$ 0.27 - 23.23.............. 2,624,490 1,215,883
========= =========
The following table summarizes the information concerning currently
outstanding and exercisable options:
WEIGHTED AVERAGE NUMBER
SHARES EXERCISE PRICE EXERCISABLE
--------- ---------------- -----------
Outstanding at March 31, 1995................. 1,544,485 $14.25 375,495
--------- ------ ---------
Granted....................................... 482,600 13.71
Exercised..................................... (19,660) 1.44
Canceled...................................... (14,670) 19.11
--------- ------ ---------
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
========= ====== =========
Available for grant at March 31, 1998......... 873,891
=========
Stock Purchase Warrants
The Company recorded an increase to additional paid-in capital and a
corresponding charge to deferred contract costs of approximately $336,000 in
January 1998 related to the issuance of stock purchase warrants for 250,500
shares of common stock at $10.20 per share which become exercisable over a
four-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 $17,000 for the fiscal year
ended March 31, 1998.
Deferred compensation
The Company recorded an increase to additional paid-in capital and a
corresponding charge to deferred compensation of approximately $127,000 in
fiscal year 1993 related to the issuance of 10,000 shares of common stock.
Compensation expense related to this and other prior stock transactions of
approximately $25,000, $25,000, and $30,000 was recorded for the fiscal years
ended March 31, 1998, 1997 and 1996, respectively.
B-14
39
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
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 expire on December 31,
2003. The Company has an option to extend these leases for additional five-year
periods. The Company also rents facilities in Woburn, Massachusetts under a
lease which expires in January 1999. 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.
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.
Rent expense under the leases mentioned above and research and development
expenses related to the technology agreement with Superlink Joint Venture and
the license agreement with Lucent included in the consolidated statements of
operations were as follows:
1998 1997 1996
-------- -------- --------
Rent expense............................... $531,546 $520,850 $495,283
-------- -------- --------
Research and development expenses.......... $510,593 $135,000 $150,000
-------- -------- --------
Minimum future lease and license fee commitments at March 31, 1998 were as
follows:
TOTAL
----------
For the years ended March 31
1999................................................... $1,385,453
2000................................................... 1,201,146
2001................................................... 1,201,146
2002................................................... 1,201,146
2003................................................... 1,133,404
2004................................................... 155,030
11. RESEARCH AND DEVELOPMENT AGREEMENTS
In fiscal 1998, the Company entered into four-year research and development
contracts with ABB Power Transmission and Distribution Company (ABB) and
Electricite de France (EDF), a subsidiary 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, 1998, ABB had paid the Company $2.3 million (of which $1.0
million was recorded as revenue in fiscal 1997) and EDF had paid the Company
$1.8 million. 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's development
B-15
40
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
contract with Inco Alloys International was terminated in December 1996. The
Company recorded revenues under these contracts as follows:
1998 1997 1996
---------- ---------- ----------
Inco........................................... -- $ 825,000 $1,100,000
Pirelli........................................ $2,500,000 2,500,000 2,831,000
ABB............................................ 1,275,000 1,000,000 --
EDF............................................ 1,800,000 -- --
---------- ---------- ----------
$5,575,000 $4,325,000 $3,931,000
========== ========== ==========
Future funding commitments under these contracts are $8,675,000 over the
next three years, $2,725,000 from ABB, $3,200,000 from EDF, and $2,750,000 from
Pirelli.
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 of the agreement,
a warrant for 100,000 shares of common stock of the Company was granted 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 agreed to
grant to EPRI another warrant to purchase 110,000 shares of common stock of the
Company, which will become exercisable over the next five years. The Company
will receive exclusive license rights to certain 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 $166,000 and $80,000 for the fiscal years ended
March 31, 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. These funds are used to directly
offset the Company's research and development and selling, general and
administrative expenses and to purchase capital equipment. The Company has
recorded costs and funding under these agreements of $3,139,000 and $1,771,000,
respectively for fiscal 1998, $3,197,000 and $1,706,000, respectively for fiscal
1997 and $2,590,000 and $985,000, respectively for fiscal 1996. At March 31,
1998, total funding received to date under these agreements was $8,130,000.
Future funding expected to be received under existing agreements is
approximately $4,078,000 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 (none were made in fiscal 1998, 1997 or 1996). The Company does
not have post-retirement or post-employment benefit plans.
B-16
41
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS -- (CONTINUED)
15. WRITE DOWN OF INVENTORY AND EQUIPMENT
Pursuant to Statement of Financial Accounting Standards ("SFAS") 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company recorded a provision of $407,000 included in the
consolidated statements of operations for the year ended March 31, 1996. This
provision was required to write down certain items of leased equipment to their
estimated fair value.
In addition, provisions were recorded for certain work-in-process inventory
of $445,000 and $768,000 for the years ended March 31, 1997 and 1996,
respectively. These provisions were recorded due to the inventory not meeting
required performance specifications.
Collectively, these provisions were included in costs of revenue for the
years end March 31, 1997 and 1996.
16. SUBSEQUENT EVENTS
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.
17. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement is effective
for fiscal years beginning after December 15, 1997. Management does not believe
the implementation of this statement will have any significant effect on the
Company's financial statements.
In June 1997 the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards for the
way public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major business customers. This
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments, which are
components of an enterprise about which separate financial information is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement is effective for
financial statements for periods beginning after December 15, 1997. Management
is evaluating this Statement to determine what information is required to be
disclosed.
B-17
42
AMERICAN SUPERCONDUCTOR CORPORATION
OFFICERS AND VICE PRESIDENTS, DIRECTORS AND FOUNDERS
BOARD OF DIRECTORS
Gregory J. Yurek, Ph.D.
President, Chief Executive Officer and
Chairman of the Board
Albert J. Baciocco, Jr.
Vice Admiral, U.S. Navy (Retired)
President, The Baciocco Group, Inc.
Colonel Frank Borman
Chairman of the Board, DBT Online Inc.
President, Patlex Corporation
Peter O. Crisp
Vice Chairman
Rockefeller Financial Services, Inc.
Richard Drouin, O.C., Q.C.
Partner, McCarthy Tetrault
Vice Chairman, Morgan Stanley Canada Limited
Former Chairman and Chief Executive Officer
Hydro-Quebec
Gerard J. Menjon
Executive Vice President
Head of Research & Development Division
Electricite de France
Andrew G.C. Sage II
President, Sage Capital Corporation
John B. Vander Sande, Ph.D.
Cecil and Ida Green Distinguished Professor
Department of Material Science and Engineering
Associate Dean of Engineering
Massachusetts Institute of Technology
CORPORATE OFFICERS AND VICE PRESIDENTS
Gregory J. Yurek, Ph.D.
President, Chief Executive Officer and
Chairman of the Board
Stanley D. Piekos
Vice President, Corporate Development,
Chief Financial Officer, Treasurer and Secretary
Paul F. Koeppe
Executive Vice President
Strategic Planning for Power Quality Solutions
Roland E. Lefebvre
Executive Vice President, Chief Operating Officer
Alexis P. Malozemoff, Ph.D.
Senior Vice President
Chief Technical Officer
Ross S. Gibson
Vice President, Human Resources
John B. Howe
Vice President, Electric Industry Affairs
Gero G. Papst, Ph.D.
Managing Director
American Superconductor Europe GmbH
Robert E. Schwall, Ph.D.
Vice President, Engineering
John D. Scudiere
Vice President, Manufacturing
FOUNDERS
Dr. Yet-Ming Chiang, Ph.D.
Kyocera, Professor of Ceramics
Department of Materials Science and Engineering
Massachusetts Institute of Technology
David A. Rudman, Ph.D.
Project Leader
Electro Magnetic Technology Division
National Institute of Standards and Technology
John B. Vander Sande, Ph.D.
(see above)
Gregory J. Yurek, Ph.D.
(see above)
43
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
By: /s/ Gregory J. Yurek
--------------------------------------
Gregory J. Yurek
Chairman of the Board, President and
Chief Executive Officer
Date: June 25, 1998
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.
Name Title Date
- ---- ----- ----
/s/ Gregory J. Yurek Director, Chairman of the ) June 25, 1998
- --------------------------- Board, President and Chief )
Gregory J. Yurek Executive Officer (Principal )
Executive Officer) )
/s/ Stanley Piekos Vice President, Corporate ) June 25, 1998
- --------------------------- Development, Chief Financial )
Stanley Piekos Officer, Treasurer (Principal )
Financial Officer and Principal )
Accounting Officer) and )
Secretary )
/s/ Albert J. Baciocco, Jr. Director ) June 25, 1998
- --------------------------- )
Albert J. Baciocco, Jr. )
/s/ Frank Borman Director ) June 25, 1998
- --------------------------- )
Frank Borman )
/s/ Peter O. Crisp Director ) June 25, 1998
- --------------------------- )
Peter O. Crisp )
44
Director ) June __, 1998
- --------------------------- )
Richard Drouin )
/s/ Gerard J. Menjon Director ) June 25, 1998
- --------------------------- )
Gerard J. Menjon )
/s/ Andrew G.C. Sage, II Director ) June 25, 1998
- --------------------------- )
Andrew G.C. Sage, II )
/s/ John B. Vander Sande Director ) June 25, 1998
- --------------------------- )
John B. Vander Sande )
45
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
46
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
$$10.21## -1996 Stock Incentive Plan
$10.22### -Management Agreement between Electric Power
Research Institute, Inc. and American Superconductor
Corporation, effective January 1, 1996
$10.23### -Technology License Agreement between Electric Power
Research Institute, Inc. and American Superconductor
Corporation, effective January 1, 1996
$10.24### -Warrant granted to Electric Power Research Institute, Inc.
by American Superconductor Corporation, dated
March 26, 1996.
10.25@ -Strategic Alliance Agreement by and among the Registrant and CHARTH
(Compagnie Holding D'Applications Et De Realisations
Thermiques Et Hydrauliques), dated as of April 1, 1997
$$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
$$$10.29 -Agreement effective April 1, 1997 by and between ABB
Transmission & Distribution Technology Ltd. and the
Registrant
21.1 -Subsidiaries
23.1 -Consent of Coopers & Lybrand L.L.P.
23.2 -Consent of Smith & Gesteland, LLP
23.3 -Consent of Ernst & Young LLP
27.1 -Financial Data Schedule
- ------------------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-43647).
** Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 29, 1992.
*** Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 29, 1993.
47
+ Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1993 filed with the
Commission on January 26, 1994.
++ Incorporated by reference to Exhibits to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q/A for the quarter ended December
31, 1993 filed with the Commission on March 28, 1994.
+++ Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 29, 1994.
# Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 29, 1995.
## Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 28, 1996.
### Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K/A filed with the Commission on March 10, 1997.
@ Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K filed with the Commission on June 30, 1997.
$ Confidential treatment previously requested and granted with respect to
certain portions, which portions were omitted and filed separately with the
Commission.
$$ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-K.
$$$ Confidential treatment requested as to certain portions, which portions
were omitted and filed separately with the Commission with this Annual
Report on Form 10-K.