SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended: June 30, 2001 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
organization or incorporation) Identification Number)
Two Technology Drive
Westborough, Massachusetts 01581
--------------------------------
(Address of principal executive offices, including zip code)
(508) 836-4200
-------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES___X___ NO______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 20,375,354
- ----------------------------------------- ---------------------------------
Class Outstanding as of August 6, 2001
AMERICAN SUPERCONDUCTOR CORPORATION
INDEX
Page No.
--------
Part I - Financial Information
Consolidated Balance Sheets
June 30, 2001 (unaudited) and March 31, 2001 3
Consolidated Statements of Operations
for the three months ended
June 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended
June 30, 2001 and 2000 (unaudited) 5
Consolidated Statements of Cash Flows
for the three months ended
June 30, 2001 and 2000 (unaudited) 6
Notes to Interim Consolidated Financial Statements 7-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Part II - Other Information 19
Signatures 20
2
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2001 2001
--------------------- ------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 67,871,783 $ 89,063,299
Accounts receivable 9,779,566 13,416,068
Inventory 16,949,451 14,300,928
Prepaid expenses and other current assets 460,652 603,744
--------------------- ------------------
Total current assets 95,061,452 117,384,039
Property and equipment:
Land 4,144,611 4,138,104
Construction in progress - building and equipment 41,997,131 23,285,351
Equipment 29,095,078 26,667,800
Furniture and fixtures 2,250,642 2,225,296
Leasehold improvements 4,756,554 4,741,947
--------------------- -----------------
82,244,016 61,058,498
Less: accumulated depreciation (19,748,600) (18,746,317)
--------------------- -----------------
Property and equipment, net 62,495,416 42,312,181
Long-term marketable securities 63,995,928 71,161,804
Long-term accounts receivable 1,125,000 1,250,000
Long-term inventory 3,787,000 3,787,000
Goodwill 1,107,735 1,107,735
Other assets 3,389,330 2,924,153
---------------------- ---------------------
Total assets $ 230,961,861 $ 239,926,912
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,206,727 $ 8,576,022
Long-term deferred revenue 3,787,000 3,787,000
Commitments
Stockholders' equity:
Common stock, $.01 par value
Authorized shares-50,000,000; issued and outstanding
- 20,365,422 and 20,290,596 at June 30, 2001 and
March 31, 2001, respectively 203,654 202,906
Additional paid-in capital 356,448,222 355,843,848
Deferred compensation (397,749) (424,266)
Deferred warrant costs (280,943) (336,347)
Accumulated other comprehensive income (loss) 531,160 769,641
Accumulated deficit (137,536,210) (128,491,892)
---------------------- ---------------------
Total stockholders' equity 218,968,134 227,563,890
---------------------- ---------------------
Total liabilities and stockholders' equity $ 230,961,861 $ 239,926,912
====================== =====================
The accompanying notes are an integral part of the consolidated financial
statements.
3
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
2001 2000
------------- -------------
Revenues:
Contract revenue $589,429 $700,432
Product sales and prototype development contracts 1,069,380 3,223,906
------------- -----------
Total revenues 1,658,809 3,924,338
Costs and expenses:
Costs of revenue - contract revenue 585,895 698,392
Costs of revenue - product sales and prototype development contracts 1,695,682 2,920,180
Research and development 6,734,835 5,307,343
Selling, general and administrative 3,714,563 2,954,871
------------- ------------
Total costs and expenses 12,730,975 11,880,786
Interest income 1,816,926 3,494,423
Other income (expense), net 210,922 5,247
------------- ------------
Net loss $(9,044,318) $(4,456,778)
============= ============
Net loss per common share
Basic $(0.44) $(0.22)
============= ============
Diluted $(0.44) $(0.22)
Weighted average number of common shares outstanding
Basic 20,331,783 19,885,363
============== ============
Diluted 20,331,783 19,885,363
============== ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended June 30,
2001 2000
---------------- ------------------
Net loss ($9,044,318) ($4,456,778)
Other comprehensive income (loss)
Foreign currency translation (1,347) (164)
Unrealized gains (losses) on investments (237,134) (163,484)
----------------- -------------------
Other comprehensive income (loss) (238,481) (163,648)
Comprehensive income (loss) $ (9,282,799) $ (4,620,426)
================= ===================
The accompanying notes are an integral part of the consolidated financial
statements.
5
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (9,044,318) $ (4,456,778)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization 1,134,733 721,373
Deferred compensation expense 26,517 26,517
Deferred warrant costs 68,726 88,629
Stock compensation expense 11,843 52,057
Changes in operating asset and liability accounts
(net of effect of acquisition):
Accounts receivable 3,761,502 (961,285)
Inventory (2,648,523) (1,337,380)
Prepaid expenses and other current assets 143,092 (81,694)
Accounts payable and accrued expenses (369,295) (156,055)
Deferred revenue - current and long-term - (341,250)
---------------- ----------------
Total adjustments 2,128,595 (1,989,088)
Net cash used by operating activities (6,915,723) (6,445,866)
Cash flows from investing activities:
Purchase of property and equipment (net) (21,186,865) (3,326,844)
Purchase of long-term marketable securities - (61,715,895)
Sale of long-term marketable securities 6,928,742 -
Purchase of assets of Intergrated Electronics, LLC - (755,000)
Increase in other assets (597,627) (239,501)
---------------- ----------------
Net cash used in investing activities (14,855,750) (66,037,240)
Cash flows from financing activities:
Net proceeds from issuance of common stock 579,957 2,323,117
---------------- ----------------
Net cash provided by financing activities 579,957 2,323,117
Net increase (decrease) in cash and cash equivalents (21,191,516) (70,159,989)
Cash and cash equivalents at beginning of period 89,063,299 126,917,768
---------------- ----------------
Cash and cash equivalents at end of period $ 67,871,783 $ 56,757,779
================ ================
Supplemental schedule of cash flow information:
Noncash issuance of common stock $ 38,360 $ 1,156,699
The accompanying notes are an integral part of the consolidated financial
statements.
6
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS:
-----------------------
American Superconductor Corporation (the "Company"), which was formed on April
9, 1987, is a world leader in developing and manufacturing products using
superconducting materials and power electronic switches for electric power
applications. The focus of the Company's development and commercialization
efforts is on electrical equipment for use by electric utilities and
industrial and commercial users of electrical power. For large-scale
applications, the Company's development efforts are focused on high
temperature superconducting ("HTS") power transmission cables and electric
motors and generators. In the area of industrial power quality and
transmission network power reliability, the Company is focused on marketing
and selling commercial superconducting magnetic energy storage ("SMES")
devices, on development and commercialization of new SMES products, and on
development of power electronic subsystems. The Company operates in two
business segments.
The Company currently derives a substantial portion of its revenue from
research and development contracts. A significant portion of this contract
revenue relates to a development contract with Pirelli Cables and Systems
("Pirelli"), who (through an affiliated company) is a stockholder of the
Company.
Costs of revenue include research and development and selling, general and
administrative expenses that are incurred in the performance of these
development contracts.
Research and development and selling, general and administrative expenses
included as costs of revenue were as follows:
Three Months Ended June 30,
2001 2000
------------- -------------
Research and development expenses $1,223,907 $1,338,371
Selling, general and administrative expenses $ 439,801 $ 439,794
2. BASIS OF PRESENTATION:
----------------------
The accompanying consolidated financial statements are unaudited, except for
those dated as of March 31, 2001, and have been prepared in accordance with
generally accepted accounting principles. Certain information and footnote
disclosure normally included in the Company's annual consolidated financial
statements have been condensed or omitted. The interim consolidated financial
statements, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the results
for the interim periods ended June 30, 2001 and 2000 and the financial
position at June 30, 2001.
7
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
The results of operations for the interim period are not necessarily
indicative of the results of operations to be expected for the fiscal year.
It is suggested that these interim consolidated financial statements be read
in conjunction with the audited consolidated financial statements for the year
ended March 31, 2001 which are contained in the Company's Annual Report on
Form 10-K covering the year ended March 31, 2001.
On June 1, 2000, the Company acquired substantially all of the assets of
Integrated Electronics, LLC ("IE"). The IE acquisition was accounted for under
the purchase method of accounting. Goodwill of $1,329,282 represented the
excess of the purchase price of $1,833,125 over the fair value of the acquired
assets of $503,843 at June 1, 2000. The purchase price consisted of cash paid
to IE of $675,000, miscellaneous transaction costs of $80,000, and the value
of 37,500 shares of the Company's common stock at June 1, 2000 of $1,078,125.
The fair value of the assets acquired were accounts receivable of $52,278,
inventory of $259,980, and fixed assets of $191,585. These asset purchases
are included under "Purchase of assets of Integrated Electronics, LLC" in the
Consolidated Statements of Cash Flows for the period ended June 30, 2000 and
thus are excluded from the "Changes in operating asset and liability accounts"
section of the Consolidated Statements of Cash Flows.
Effective April 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," and has ceased amortizing the goodwill acquired in the IE
purchase. The Company reviews its goodwill and other long-term assets at least
annually or when events or changes in circumstances indicate that the carrying
amount of such assets may not be fully recoverable. If the carrying amount of
the asset is determined to exceed its fair value, an impairment loss would be
recognized in an amount equal to that excess.
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
3. NET LOSS PER COMMON SHARE:
--------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128 which requires presentation of basic earnings per share ("EPS") and, for
companies with complex capital structures, diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS includes dilution and is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Common equivalent shares include the effect of the exercise
of stock options. For the three months ended June 30, 2001 and 2000, common
equivalent shares of 2,551,748 and 1,881,232 were not included for the
calculation of diluted EPS as their effect was antidilutive.
8
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. COST-SHARING AGREEMENTS:
-----------------------
The Company received funding of approximately $119,000 under a U.S. Air Force
cost-sharing agreement in the three months ended June 30, 2001, compared to
approximately $194,000 from two Department of Energy cost-sharing agreements
in the three months ended June 30, 2000. This funding was used to directly
offset research and development and selling, general and administrative
expenses.
5. BUSINESS SEGMENT INFORMATION:
----------------------------
The Company adopted Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). The Company has two reportable business segments as defined by SFAS
131-High Temperature Superconducting ("HTS") business segment, and the Power
Quality and Reliability ("PQ&R") business segment.
The HTS business segment develops and commercializes HTS wire, wire products
and systems. The focus of this segment's development effort is on HTS wire for
power transmission cables and electric motors and generators.
The PQ&R business segment is focused on marketing and selling commercial low
temperature SMES devices, on development and commercialization of new SMES
products, and on development and commercialization of power electronic
switches.
The operating segment results for the HTS and PQ&R business segments were as
follows:
Three Months Ended June 30,
2001 2000
---------- ----------
Revenues
- --------
HTS $1,626,622 $1,780,733
PQ&R 32,187 2,143,605
---------- ----------
Total $1,658,809 $3,924,338
========== ==========
Operating Income (loss)
- -----------------------
HTS $(7,117,514) $(5,928,315)
PQ&R (3,572,560) (1,692,490)
Unallocated Corporate Expenses (382,092) ( 335,643)
--------- ----------
Total $(11,072,166) $(7,956,448)
============ ============
9
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
The segment assets for the HTS and PQ&R business segments were as follows:
June 30, 2001 March 31, 2001
------------------- ------------------
HTS $ 69,130,141 $ 48,501,903
PQ&R 29,964,009 31,199,906
Corporate cash and marketable
securities 131,867,711 160,225,103
------------ ------------
Total $230,961,861 $239,926,912
============ ============
The accounting policies of the business segments are the same as those
described in Note 2, except that certain corporate expenses which we do not
believe are specifically attributable or allocable to either business segment
have been excluded from the segment operating losses.
6. NEW ACCOUNTING PRONOUNCEMENTS:
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS 142 addresses the initial recognition
and measurement of intangible assets acquired outside of a business combination,
whether acquired individually or with a group of other assets, and the
accounting and reporting for goodwill and other intangibles subsequent to their
acquisition. These standards require all future business combinations to be
accounted for using the purchase method of accounting. Goodwill will no longer
be amortized but instead will be subject to impairment tests at least annually.
The Company has adopted SFAS 142 and has discontinued the amortization of
goodwill as of April 1, 2001. The Company is required to adopt these standards
on a prospective basis as of April 1, 2002; however, certain provisions of these
new standards may also apply to any acquisitions concluded subsequent to June
30, 2001.
10
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
American Superconductor Corporation was founded in 1987. We are focused on
developing, manufacturing and selling products using two core technologies: high
temperature superconductor ("HTS") wires and power electronic switches for
electric power applications. We also assemble superconductor wires and power
electronic switches into fully-integrated products, such as superconducting
magnetic energy storage ("SMES") systems and ship propulsion motors, which we
sell to end users.
We derive our revenues from contracts to perform research and development,
product sales and prototype development contracts. We recognize revenues from
our research and development and prototype development contracts based on the
percentage of completion method measured by the relationship of costs incurred
to total contract costs. We recognize revenues from product sales upon shipment,
installation or acceptance, where applicable, or for some programs, on the
percentage of completion method of accounting.
RESULTS OF OPERATIONS
- ---------------------
Total revenues during the three months ended June 30, 2001 were $1,659,000,
compared to $3,924,000 for the same period a year earlier. Revenues for the
first quarter of fiscal year 2002 decreased by $2,265,000 due primarily to fewer
SMES systems sales. Power Quality and Reliability business segment sales, which
include SMES systems and power electronic switches, were $32,000 in the current
quarter, compared to $2,144,000 during the first quarter of last year. HTS
segment revenues were $1,627,000 in the three months ended June 30, 2001,
compared to $1,781,000 for the same period last year, as a result of a planned
decrease in funding from U. S. Government Small Business Innovation Research
(SBIR) grants.
For the three months ended June 30, 2001, we recorded approximately $119,000 of
funding under a government cost-sharing agreement with the U. S. Air Force. For
the three months ended June 30, 2000, we recorded $194,000 of funding under two
cost sharing agreements with the Department of Energy ("DOE"). We anticipate
that a portion of our funding in the future will continue to come from cost-
sharing agreements as we continue to develop joint programs with government
agencies. Funding from government cost-sharing agreements is recorded as an
offset to research and development and selling, general and administrative
expenses, as required by government contract accounting guidelines, rather than
as revenues.
Total costs and expenses for the three months ended June 30, 2001 were
$12,731,000, compared to $11,881,000 for the same period last year. The increase
in costs and expenses was primarily the result of our increased investment in
research and development, partially offset by reduced costs of revenue
associated mainly with the lower level of SMES system sales.
Adjusted research and development ("R&D") expenses, which include amounts
classified as costs of revenue and amounts offset by cost sharing funding,
increased to $8,020,000 in the three months ended June 30, 2001 from $6,746,000
for the same period of the prior year. This increase was due to the continued
scale-up of our internal research and development activities, including the
hiring of additional personnel and the purchase of materials and equipment, and
higher spending on licenses and consultants/outside contractors. A portion of
11
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
the R&D expenditures related to externally funded development contracts has been
classified as costs of revenue (rather than as R&D expenses). Additionally, a
portion of R&D expenses was offset by cost sharing funding. Net R&D expenses
(exclusive of amounts classified as costs of revenues and amounts offset by cost
sharing funding) increased to $6,735,000 in the quarter ended June 30, 2001 from
$5,307,000 for the same period last year.
Our R&D expenditures are summarized as follows:
Three Months Ended June 30,
2001 2000
---------- ----------
R&D expenses per Consolidated Statements of
Operations................................... $6,735,000 $5,307,000
R&D expenditures on development contracts
classified as Costs of revenue............... 1,224,000 1,339,000
R&D expenditures offset by cost sharing
funding...................................... 61,000 100,000
---------- ----------
Adjusted R&D expenses $8,020,000 $6,746,000
========== ==========
Adjusted selling, general and administrative ("SG&A") expenses, which include
amounts classified as costs of revenue and amounts offset by cost sharing
funding, increased to $4,213,000 for the three months ended June 30, 2001,
compared to $3,489,000 for the same period a year earlier. This increase was
primarily due to the hiring of additional personnel and related expenses
incurred to support corporate development, marketing, and recruiting activities
and future planned growth. A portion of the SG&A expenditures related to
externally funded development contracts has been classified as costs of revenue
(rather than as SG&A expenses). Additionally, a portion of SG&A expenses was
offset by cost sharing funding. Net SG&A expenses (exclusive of amounts
classified as costs of revenues and amounts offset by cost sharing funding)
increased to $3,715,000 in the quarter ended June 30, 2001 from $2,955,000 for
the same period last year.
Our SG&A expenditures are summarized as follows:
Three Months Ended June 30,
2001 2000
---------- ----------
SG&A expenses per Consolidated Statements of
Operations.............................................. $3,715,000 $2,955,000
SG&A expenditures on development contracts classified as
Costs of revenue........................................ 440,000 440,000
SG&A expenditures offset by cost sharing
funding................................................. 58,000 94,000
---------- ----------
Adjusted SG&A expenses................................... $4,213,000 $3,489,000
========== ==========
12
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
Interest income and other income (expense), net, resulting primarily from
investments in long-term marketable securities, was $2,028,000 in the quarter
ended June 30, 2001, compared to $3,500,000 for the same period in the previous
year. This decrease in investment income reflects the lower cash balances
available for investment as a result of cash being used to fund our operations
and to purchase property, plant, and equipment, as well as lower interest rates
available on our investments. Other income (expense), net of $211,000 in the
quarter ended June 30, 2001 consists primarily of investment gains from long-
term marketable securities.
We expect to continue to incur operating losses in the next year, as we continue
to devote significant financial resources to our research and development
activities and commercialization efforts.
We expect to be party to agreements which, from time to time, may result in
costs incurred exceeding expected revenues under such contracts. We may enter
into such agreements for a variety of reasons including, but not limited to,
entering new product application areas, furthering the development of key
technologies, and advancing the demonstration of commercial prototypes in
critical market applications.
Please refer to the "Future Operating Results" section below for a discussion of
certain factors that may affect our future results of operations and financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 2001, we had cash, cash equivalents and long-term marketable
securities of $131,868,000 compared to $160,225,000 at March 31, 2001. The
principal uses of cash during the three months ended June 30, 2001 were
$6,916,000 for the funding of our operations and $21,187,000 for the
acquisition of property, plant, and equipment, primarily related to the
construction in progress on our new HTS manufacturing facility in Devens,
Massachusetts.
Long-term accounts receivable of $1,125,000 represents the amount due after June
30, 2002 on the $2,500,000 recognized as revenue in the year ended March 31,
2000 for R&D work performed by us prior to the effective date (October 1, 1999)
of the Pirelli development agreement. The $2,500,000 payment by Pirelli for R&D
performed before October 1, 1999 is guaranteed by the agreement and is payable
in quarterly installments over the five-year period between October 1, 1999 and
September 30, 2004.
Goodwill of $1,108,000 at June 30, 2001 represents the excess of the purchase
price paid for the acquisition of substantially all of the assets of Integrated
Electronics, LLC ("IE") on June 1, 2000, over the fair value of IE's assets,
less amortization taken between June 1, 2000 and March 31, 2001. The IE
transaction was accounted for under the purchase method of accounting. Goodwill
was initially calculated to be $1,329,000, and was being amortized over a five-
year period beginning June 1, 2000, in an amount equal to $22,000 per month.
Effective April 1, 2001, the Company adopted the provisions of Statement of
13
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," and has ceased amortizing the goodwill acquired in the IE purchase. The
Company reviews its goodwill and other long-term assets at least annually or
when events or changes in circumstances indicate that the carrying amount of
such assets may not be fully recoverable. If the carrying amount of the asset
is determined to exceed its fair value, an impairment loss would be recognized
in an amount equal to that excess.
We have potential funding commitments (excluding amounts included in accounts
receivable) of approximately $14,494,000 to be received after June 30, 2001 from
strategic partners and government and commercial customers, compared to
$12,436,000 at March 31, 2001. However, these commitments, including $4,643,000
on U.S. government contracts, are subject to certain cancellation provisions. Of
the current commitment amount of $14,494,000, approximately 53% is potentially
collectable within the next 12 months.
To date, inflation has not had a material impact on our financial results.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination,
whether acquired individually or with a group of other assets, and the
accounting and reporting for goodwill and other intangibles subsequent to their
acquisition. These standards require all future business combinations to be
accounted for using the purchase method of accounting. Goodwill will no longer
be amortized but instead will be subject to impairment tests at least annually.
The Company has adopted SFAS 142 and has discontinued the amortization of
goodwill as of April 1, 2001. The Company is required to adopt these standards
on a prospective basis as of April 1, 2002; however, certain provisions of these
new standards may also apply to any acquisitions concluded subsequent to June
30, 2001.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
Our exposure to market risk through derivative financial instruments and other
financial instruments, such as investments in short-term marketable securities
and long-term debt, is not material.
Future Operating Results
Various statements included herein, as well as other statements made from time
to time by our representatives, which relate to future matters (including but
not limited to statements concerning our future commercial success) constitute
forward looking statements and are made under the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. There are a number of
important factors which could cause our actual results of operations and
financial condition in the future to vary from that indicated in such forward
looking statements. Factors that may cause such differences include, without
limitation, the risks, uncertainties and other information set forth below.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE EXPECT TO CONTINUE TO INCUR LOSSES
IN THE FUTURE.
We have been principally engaged in research and development activities. We
have incurred net losses in each year since our inception. Our net loss for
fiscal 1999, fiscal 2000, fiscal 2001, and the first three months of fiscal 2002
was $15,326,000, $17,598,000, $21,676,000, and $9,044,000, respectively. Our
accumulated deficit as of June 30, 2001 was $137,536,000. We expect to continue
to incur operating losses in the next year and there can be no assurance that we
will ever achieve profitability.
14
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
There are a number of technological challenges that must be successfully
addressed before our superconducting products can gain widespread commercial
acceptance.
Many of our products are in the early stages of commercialization and testing,
while others are still under development. We do not believe any company has yet
successfully developed and commercialized significant quantities of HTS wire or
wire products. There are a number of technological challenges that we must
successfully address to complete our development and commercialization efforts.
For example, we face engineering challenges in producing HTS wire in longer
lengths and commercial quantities. We also believe that several years of further
development in the cable and motor industries will be necessary before a
substantial number of additional commercial applications for our HTS wire in
these industries can be developed and proven. We may also need to improve the
quality of our HTS wire to expand the number of commercial applications for it.
We may be unable to meet such technological challenges. Delays in development,
as a result of technological challenges or other factors, may result in the
introduction of our products later than anticipated.
THE COMMERCIAL USES OF SUPERCONDUCTING PRODUCTS ARE VERY LIMITED TODAY, AND A
WIDESPREAD COMMERCIAL MARKET FOR OUR PRODUCTS MAY NOT DEVELOP.
To date, there has been no widespread commercial use of HTS products. Although
LTS products are currently used in several commercial applications, commercial
acceptance of LTS products, other than for medical magnetic resonance imaging
and superconducting magnetic energy storage products, has been significantly
limited by the cooling requirements of LTS materials. Even if the technological
hurdles currently limiting commercial uses of HTS and LTS products are overcome,
it is uncertain whether a robust commercial market for those new and unproven
products will ever develop. It is possible that the market demands we currently
anticipate for our HTS and LTS products will not develop and that
superconducting products will never achieve widespread commercial acceptance.
WE EXPECT TO SPEND SIGNIFICANT AMOUNTS ON THE EXPANSION OF OUR MANUFACTURING
CAPACITY, AND OUR EXPANSION PROJECTS MAY NOT BE SUCCESSFUL.
In anticipation of significantly increased demand for our products, we are
currently building a facility exclusively dedicated to HTS wire manufacturing at
the Devens Commerce Center in Devens, Massachusetts. During the current fiscal
year, we plan to continue to use a large portion of the net proceeds from our
March 2000 stock offering to fund the construction and purchase equipment for
the new HTS wire manufacturing facility in Devens. We can only estimate the
costs of this project, and the actual costs may be significantly in excess of
our estimates. In addition, the completion of this new facility may be delayed,
or we may experience start-up difficulties or other problems once the facility
becomes operational. Finally, if increased demand for our products does not
materialize, we will not generate sufficient revenue to offset the cost of
establishing and operating the facility.
15
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
WE HAVE NO EXPERIENCE MANUFACTURING OUR HTS PRODUCTS IN COMMERCIAL QUANTITIES.
To be financially successful, we will have to manufacture our products in
commercial quantities at acceptable costs while also preserving the quality
levels achieved in manufacturing these products in limited quantities. This
presents a number of technological and engineering challenges for us. We cannot
assure you that we will be successful in developing product designs and
manufacturing processes that permit us to manufacture our HTS products in
commercial quantities at commercially acceptable costs while preserving quality.
In addition, we may incur significant start-up costs and unforeseen expenses in
our product design and manufacturing efforts.
WE HAVE HISTORICALLY FOCUSED ON RESEARCH AND DEVELOPMENT ACTIVITIES AND HAVE
LIMITED EXPERIENCE IN MARKETING AND SELLING OUR PRODUCTS.
We have been primarily focused on research and development of our
superconducting products. Consequently, our management team has limited
experience directing our commercialization efforts, which are essential to our
future success. To date, we only have limited experience marketing and selling
our products, and there are very few people anywhere who have significant
experience marketing or selling superconducting products. Once our products are
ready for commercial use, we will have to develop a marketing and sales
organization that will effectively demonstrate the advantages of our products
over both more traditional products and competing superconducting products or
other technologies. We may not be successful in our efforts to market this new
and unfamiliar technology, and we may not be able to establish an effective
sales and distribution organization.
We may decide to enter into arrangements with third parties for the marketing
or distribution of our products, including arrangements in which our products,
such as HTS wire, are included as a component of a larger product, such as a
motor. We have entered into a marketing and sales alliance with GE Industrial
Systems giving GE the exclusive right to offer our Distributed-SMES (D-SMES)
product line in the United States to utilities and the right to sell industrial
Power Quality-SMES (PQ-SMES) systems to certain of GE's global industrial
accounts. By entering into marketing and sales alliances, the financial
benefits to us of commercializing our products are dependent on the efforts of
others. We may not be able to enter into marketing or distribution arrangements
with third parties on financially acceptable terms, and third parties may not be
successful in selling our products or applications incorporating our products.
WE DEPEND ON OUR STRATEGIC RELATIONSHIPS WITH OUR CORPORATE PARTNERS FOR THE
SUCCESSFUL DEVELOPMENT AND MARKETING OF APPLICATIONS FOR OUR SUPERCONDUCTING
PRODUCTS.
Our business strategy depends upon strategic relationships with corporate
partners, which are intended to provide funding and technologies for our
development efforts and assist us in marketing and distributing our products.
Although we currently are party to a number of strategic relationships, we may
16
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
not be able to maintain these relationships, and these relationships may not be
technologically or commercially successful.
We have an agreement with Pirelli relating to HTS wire for cables used to
transmit both electric power and control signals. In general, we are obligated
to sell our HTS cable wire exclusively to Pirelli, and Pirelli is obligated to
buy this HTS wire exclusively from us or to pay us royalties for any of this
wire that it manufactures for use in these applications anywhere in the world
other than Japan. Pirelli continues to provide us with substantial funding and
has been critical in assisting us in the development and commercialization of
HTS cable wire. Consequently, we are significantly dependent on Pirelli for the
commercial success of this cable wire in these applications.
On July 30, 2001, Pirelli announced its intention to sell its energy cables
business along with certain other businesses as described in Item 5, Other
Information. While we expect to continue a strategic alliance with any acquirer
of this energy cables business, we cannot assure you that any relationship will
continue on the same terms as our current relationship with Pirelli. We also
cannot assess how Pirelli's sale of this business will impact our ability to
successfully produce and market HTS wire for cable.
As we move toward commercialization of several of our products, we plan to use
strategic alliances as an important means of marketing and selling our products.
We have entered into a marketing and sales alliance with GE giving GE the
exclusive right to offer our D-SMES product line in the United States to
utilities and the right to sell industrial PQ-SMES systems to certain of GE's
global industrial accounts. Any strategic relationships established may not
provide us with the commercial benefits we anticipate.
OUR PRODUCTS FACE INTENSE COMPETITION BOTH FROM SUPERCONDUCTING PRODUCTS
DEVELOPED BY OTHERS AND FROM TRADITIONAL, NON-SUPERCONDUCTING PRODUCTS AND
ALTERNATIVE TECHNOLOGIES.
As we begin to market and sell our superconducting products, we will face
intense competition both from competitors in the superconducting field and from
vendors of traditional products and new technologies. There are many companies
in the United States, Europe, Japan and Australia engaged in the development of
HTS products, including Sumitomo Electric Industries, 3M, Intermagnetics General
and Nordic Superconductor Technologies. The superconducting industry is
characterized by rapidly changing and advancing technology. Our future success
will depend in large part upon our ability to keep pace with advancing HTS and
LTS technology and developing industry standards. Our SMES products compete with
a variety of non-superconducting products such as dynamic voltage restorers
("DVRs"), static VAR compensators ("SVCs"), static compensators ("STATCOMS"),
flywheels, power electronic switches and battery-based power supply systems. In
addition, competition for our Power Modules includes products from Ecostar,
Inverpower, Satcon, Semikron and Trace. Research efforts and technological
advances made by others in the superconducting field or in other areas with
applications to the power quality and reliability markets may render our
development efforts obsolete. Many of our competitors have substantially greater
financial resources, research and development, manufacturing and marketing
capabilities than we have. In addition, as the HTS, power quality and power
reliability markets develop, other large industrial companies may enter those
fields and compete with us.
THIRD PARTIES HAVE OR MAY ACQUIRE PATENTS THAT COVER THE HIGH TEMPERATURE
SUPERCONDUCTING MATERIALS WE USE OR MAY USE IN THE FUTURE TO MANUFACTURE OUR
PRODUCTS.
17
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2001
We expect that some or all of the HTS materials and technologies we use in
designing and manufacturing our products are or will become covered by patents
issued to other parties, including our competitors. If that is the case, we will
need either to acquire licenses to these patents or to successfully contest the
validity of these patents. The owners of these patents may refuse to grant
licenses to us, or may be willing to do so only on terms that we find
commercially unreasonable. If we are unable to obtain these licenses, we may
have to contest the validity or scope of those patents to avoid infringement
claims by the owners of these patents. It is possible that we will not be
successful in contesting the validity or scope of a patent, or that we will not
prevail in a patent infringement claim brought against us. Even if we are
successful in such a proceeding, we could incur substantial costs and diversion
of management resources in prosecuting or defending such a proceeding.
THERE ARE NUMEROUS PATENTS ISSUED IN THE FIELD OF SUPERCONDUCTING MATERIALS AND
OUR PATENTS MAY NOT PROVIDE MEANINGFUL PROTECTION FOR OUR TECHNOLOGY.
We own or have licensing rights under many patents and pending patent
applications. However, the patents that we own or license may not provide us
with meaningful protection of our technologies, and may not prevent our
competitors from using similar technologies, for a variety of reasons, such as:
o the patent applications that we or our licensors file may not result in
patents being issued;
o any patents issued may be challenged by third parties; and
o others may independently develop similar technologies not protected by our
patents or design around the patented aspects of any technologies we
develop.
Moreover, we could incur substantial litigation costs in defending the validity
of our own patents. We also rely on trade secrets and proprietary know-how to
protect our intellectual property. However, our non-disclosure agreements and
other safeguards may not provide meaningful protection for our trade secrets and
other proprietary information.
OUR SUCCESS IS DEPENDENT UPON ATTRACTING AND RETAINING QUALIFIED PERSONNEL.
Our success will depend in large part upon our ability to attract and retain
highly qualified research and development, management, manufacturing, marketing
and sales personnel. Hiring those persons may be especially difficult due to the
specialized nature of our business. In addition, the demand for qualified
personnel is particularly acute in the New England and Wisconsin areas, where
most of our operations are located, due to the currently low unemployment rate
in these regions.
We are particularly dependent upon the services of Dr. Gregory J. Yurek, our
co-founder and our Chairman of the Board, President and Chief Executive Officer,
and Dr. Alexis P. Malozemoff, our Chief Technical Officer. The loss of the
services of either of those individuals could significantly damage our business
and prospects.
18
AMERICAN SUPERCONDUCTOR CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
On July 30, 2001, Pirelli SpA announced its intention to sell its
energy cables business, along with some of its other businesses, as part of a
restructuring plan involving a focus on telecommunications business
opportunities. A buyer for Pirelli's energy cables business has not yet been
identified and the timing of the sale is not yet known.
We have had a strategic alliance with Pirelli since 1990. This
relationship encompasses development funding from Pirelli; commercial ventures,
such as the use of power cables employing our HTS wire in a Detroit
Edison substation, the successful operation of which should be announced by
December 31, 2001; and contractual arrangements relating to the manufacture,
sale and use of our HTS wire in cables used to transmit electric power and
control signals.
We expect to continue our strategic relationship with Pirelli pending
Pirelli's sale of its energy cables business. We also expect to continue a
strategic alliance with the purchaser of Pirelli's energy cables business. While
we cannot assess with certainty the impact of Pirelli's sale of this business
until a buyer is identified and we are able to discuss our future relationship
with that buyer, we believe this planned sale will have little if any short-term
impact on us, and we are optimistic that it will have no long-term adverse
impact on us.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN SUPERCONDUCTOR CORPORATION
August 7, 2001 /s/ Gregory J. Yurek
- ---------------------- ------------------------------------
Date Gregory J. Yurek
Chairman of the Board, President and
Chief Executive Officer
August 7, 2001 /s/ Thomas M. Rosa
- --------------------- -----------------------------------
Date Thomas M. Rosa
Chief Accounting Officer, Corporate
Controller and Assistant Secretary
20