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
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For The Quarter Ended: September 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 Identification Number)
organization or incorporation)
Two Technology Drive
Westborough, Massachusetts 01581
--------------------------------
(Address of principal executive offices, including zip code)
(508) 836-4200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO______
-----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 20,459,219
- ----------------------------------------- --------------------------------------------
Class Outstanding as of November 13, 2001
AMERICAN SUPERCONDUCTOR CORPORATION
INDEX
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Page No.
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Part I - Financial Information
Consolidated Balance Sheets
September 30, 2001 and March 31, 2001 3
Consolidated Statements of Operations
for the three months ended
September 30, 2001 and 2000 and the
six months ended September 30, 2001
and 2000 4
Consolidated Statements of Comprehensive Income (Loss)
for the three months ended
September 30, 2001 and 2000 and the
six months ended September 30, 2001
and 2000 5
Consolidated Statements of Cash Flows
for the six months ended
September 30, 2001 and 2000 6
Notes to Interim Consolidated Financial Statements 7-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-20
Part II - Other Information 21
Signatures 22
2
AMERICAN SUPERCONDUCTOR CORPORATION
Consolidated Balance Sheets
September 30, March 31,
2001 2001
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 61,697,409 $ 89,063,299
Accounts receivable 10,480,296 13,416,068
Inventory 18,023,708 14,300,928
Prepaid expenses and other current assets 599,931 603,744
------------- -------------
Total current assets 90,801,344 117,384,039
Property and equipment:
Land 4,144,611 4,138,104
Construction in progress - building and equipment 58,720,200 23,285,351
Equipment 29,166,108 26,667,800
Furniture and fixtures 2,315,910 2,225,296
Leasehold improvements 4,767,462 4,741,947
------------- -------------
99,114,291 61,058,498
Less: accumulated depreciation (20,948,585) (18,746,317)
------------- -------------
Property and equipment, net 78,165,706 42,312,181
Long-term marketable securities 44,712,302 71,161,804
Long-term accounts receivable 1,000,000 1,250,000
Long-term inventory 3,787,000 3,787,000
Goodwill 1,107,735 1,107,735
Other assets 3,383,751 2,924,153
------------- -------------
Total assets $ 222,957,838 $ 239,926,912
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,789,260 $ 8,576,022
Deferred revenue 243,452 -
------------- -------------
Total current liabilities 9,032,712 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
- 20,376,214 and 20,290,596 at September 30, 2001 and
March 31, 2001, respectively 203,762 202,906
Additional paid-in capital 356,577,492 355,843,848
Deferred compensation (371,232) (424,266)
Deferred warrant costs (225,540) (336,347)
Accumulated other comprehensive income (loss) 606,068 769,641
Accumulated deficit (146,652,424) (128,491,892)
------------- -------------
Total stockholders' equity 210,138,126 227,563,890
------------- -------------
Total liabilities and stockholders' equity $ 222,957,838 $ 239,926,912
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Contract revenue $ 704,671 $ 694,556 $ 1,294,100 $ 1,394,988
Product sales and prototype
development contracts 2,552,028 4,022,948 3,621,408 7,246,854
------------ ------------ ------------- ------------
Total revenues 3,256,699 4,717,504 4,915,508 8,641,842
Costs and expenses:
Costs of revenue-contract revenue 696,940 688,045 1,282,835 1,386,437
Costs of revenue-product sales and prototype
development contracts 2,682,453 2,840,019 4,378,135 5,760,199
Research and development 6,724,289 6,030,797 13,459,124 11,338,140
Selling, general and administrative 3,626,385 3,715,354 7,340,948 6,670,225
------------ ------------ ------------- ------------
Total costs and expenses 13,730,067 13,274,215 26,461,042 25,155,001
Interest income 1,356,146 3,499,307 3,173,072 6,993,730
Other income (expense), net 1,008 12,480 211,930 17,727
------------ ------------ ------------- ------------
Net loss $ (9,116,214) $ (5,044,924) $ (18,160,532) $ (9,501,702)
============ ============ ============= =============
Net loss per common share $ (0.45) $ (0.25) $ (0.89) $ (0.47)
============ ============ ============= =============
Weighted average number of
common shares outstanding 20,375,836 20,151,987 20,353,930 20,019,403
============ ============ ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
4
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- ------- --------- ---------
Net loss $(9,116,214) $(5,044,924) $(18,160,532) $(9,501,702)
Other comprehensive income (loss)
Foreign currency translation 14,388 (17,625) 13,041 (17,789)
Unrealized gains (losses)
on investments 60,520 488,667 (176,614) 325,183
----------- ----------- ------------ -----------
Other comprehensive income (loss) 74,908 471,042 (163,573) 307,394
Comprehensive income (loss) $(9,041,306) $(4,573,882) $(18,324,105) $(9,194,308)
=========== =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net loss $(18,160,532) $ (9,501,702)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization 2,479,210 1,577,990
Deferred compensation expense 53,034 53,034
Deferred warrant costs 137,452 177,259
Stock compensation expense 11,843 87,398
Changes in operating asset and liability accounts:
Accounts receivable 3,185,772 (4,747,733)
Inventory (3,722,780) (2,950,448)
Prepaid expenses and other current assets 3,813 (328,874)
Accounts payable and accrued expenses 213,238 673,276
Deferred revenue - current and long-term 243,452 1,802,340
------------ ------------
Total adjustments 2,605,034 (3,655,758)
Net cash used by operating activities (15,555,498) (13,157,460)
Cash flows from investing activities:
Purchase of property and equipment (net) (38,042,752) (9,561,224)
Purchase of long-term marketable securities - (55,874,482)
Sale of long-term marketable securities 26,272,888 -
Purchase of assets of Integrated Electronics, LLC - (755,000)
Increase in other assets (736,540) (416,210)
------------ ------------
Net cash used in investing activities (12,506,404) (66,606,916)
Cash flows from financing activities:
Net proceeds from issuance of common stock 696,012 4,922,537
------------ ------------
Net cash provided by financing activities 696,012 4,922,537
Net decrease in cash and cash equivalents (27,365,890) (74,841,839)
Cash and cash equivalents at beginning of period 89,063,299 126,917,768
------------ ------------
Cash and cash equivalents at end of period $ 61,697,409 $ 52,075,929
============ ============
Supplemental schedule of cash flow information:
Noncash issuance of common stock $ 64,877 $ 1,218,557
The accompanying notes are an integral part of the consolidated financial
statements.
6
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--
1. Nature of the Business:
-----------------------
American Superconductor Corporation (the "Company"), which was formed on
April 9, 1987, is a world leader in developing and manufacturing products
using superconducting materials and power electronic converters for
electric power applications. The focus of the Company's development and
commercialization efforts is on electrical equipment for 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 Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Research and development expenses $1,689,252 $1,117,402 $2,913,159 $2,455,773
Selling, general and administrative
expenses $ 448,070 $ 311,446 $ 887,871 $ 751,240
2. Basis of Presentation:
----------------------
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles. Certain
information and footnote disclosure normally included in the Company's
annual consolidated financial statements have been condensed or omitted.
The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods ended September 30, 2001 and 2000 and the financial position at
September 30, 2001.
7
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
--
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
It is suggested that these interim consolidated financial statements be
read in conjunction with the audited consolidated financial statements for
the year ended March 31, 2001 which are contained in the Company's Annual
Report on Form 10-K covering the year ended March 31, 2001.
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 recorded as a
result of the acquisition of substantially all the assets of Intergrated
Electronics, LLC ("IE") on June 1, 2000. The Company reviews its goodwill
and other long-term assets at least annually or when events or changes in
circumstances indicate that the carrying amount of such assets may not be
fully recoverable. If the carrying amount of the asset is determined to
exceed its fair value, an impairment loss would be recognized.
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
3. Net Loss Per Common Share:
--------------------------
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" which requires
presentation of basic earnings per share ("EPS") and, for companies with
complex capital structures, diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS includes dilution and is computed using the weighted average
number of common 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 September 30, 2001 and 2000,
common equivalent shares of 2,622,421 and 1,976,674 were not included for
the calculation of diluted EPS as their effect was antidilutive. For the
six months ended September 30, 2001 and 2000, common equivalent shares of
2,819,430 and 2,230,780 were also not included for the calculation of
diluted EPS as their effect was antidilutive.
4. Cost-Sharing Agreements:
------------------------
The Company received approximately $200,000 in funding under a government
cost-sharing agreement in the three months ended September 30, 2001. The
Company did not receive funding under government cost-sharing agreements
for the three months ended September 30, 2000. For the six months ended
September 30, 2001 and 2000, government cost-sharing funding was $319,000
and $194,000, respectively. This funding was used to directly offset
research and development and selling, general and administrative expenses.
8
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
--
5. Business Segment Information:
-----------------------------
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
converters.
The operating segment results for the HTS and PQ&R business segments were
as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ----------- ------------ ------------
Revenues
--------
HTS $ 2,182,629 $ 1,414,204 $ 3,809,251 $ 3,194,937
PQ&R 1,074,070 3,303,300 1,106,257 5,446,905
------------ ----------- ------------ ------------
Total $ 3,256,699 $ 4,717,504 $ 4,915,508 $ 8,641,842
============ =========== ============ ============
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ----------- ------------ -----------
Operating Income (loss)
- -----------------------
HTS $ (6,961,422) $(6,880,179) $(14,078,936) $(12,808,494)
PQ&R (2,888,797) (1,341,600) (6,461,357) (3,034,090)
Unallocated Corporate Expenses (623,149) (334,932) (1,005,241) (670,575)
------------- ------------ ------------- -------------
Total $(10,473,368) $(8,556,711) $(21,545,534) $(16,513,159)
============ =========== ============ ============
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:
September 30, 2001 March 31, 2001
---------------------- ----------------------
HTS $ 85,921,167 $ 48,501,903
PQ&R 30,626,960 31,199,906
Corporate cash and marketable securities 106,409,711 160,225,103
------------ ------------
Total $222,957,838 $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. Certain provisions of SFAS 141 may also apply to any acquisitions
concluded subsequent to June 30, 2001.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 supercedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles
Board Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 is effective
for financial statements issued for fiscal years beginning after December
15, 2001, and thus becomes effective for the Company on April 1, 2002.
Management believes the future impact on our financial statements as a
result of this interpretation will be immaterial.
10
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 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 converters for
electric power applications. We also assemble superconductor wires and power
electronic converters 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 September 30, 2001 were $3,257,000,
compared to $4,718,000 for the same period a year earlier. For the six months
ended September 30, 2001, revenues were $4,916,000 as compared to $8,642,000 for
the comparable period in 2000. Revenues for the quarter and six-month period
decreased by $1,461,000 and $3,726,000, respectively, compared to the same
prior-year periods. The decrease in revenue resulted from fewer SMES system
sales. Power Quality and Reliability business segment sales, which include SMES
systems and power electronic switches, were $1,074,000 in the current quarter,
compared to $3,303,000 during the second quarter of last year, a decrease of
$2,229,000. Power Quality and Reliability sales for the recent six-month period
were $1,106,000, compared to $5,447,000 recorded during the first six months of
last year, a decrease of $4,341,000. These decreases were partially offset by
increases in HTS business segment revenues of $768,000 and $615,000 for the
quarter and six-month periods ended September 30, 2001, respectively, compared
to the same prior-year periods, due to higher prototype development contract
revenue from the U.S. Navy.
For the three months ended September 30, 2001, we recorded approximately
$200,000 in funding under a government cost-sharing agreement with the U.S. Air
Force. For the three months ended September 30, 2000, we did not record any
funding under cost-sharing agreements. For the six months ended September 30,
2001, funding under government cost-sharing agreements was $319,000, compared to
$194,000 for the comparable period in 2000. 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 September 30, 2001 were
$13,730,000 compared to $13,274,000 for the same period last year. Total costs
and expenses for the first six
11
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
months of the current fiscal year were $26,461,000, compared to $25,155,000
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 $8,517,000 in the three months ended September 30, 2001 from
$7,148,000 for the same period of the prior year. For the six-month periods
ended September 30, 2001 and 2000, adjusted research and development expenses
were $16,537,000 and $13,894,000, respectively. These increases were due to the
continued scale-up of our internal research and development activities,
including the hiring of additional personnel and the purchases of materials and
equipment, and higher spending on licenses, consultants and outside contractors.
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).
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 $6,724,000 in the three months
ended September 30, 2001 from $6,031,000 for the same period last year. For the
six months ended September 30, 2001 and 2000, these amounts were $13,459,000
and $11,338,000, respectively.
Our R&D expenditures are summarized as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
R&D expenses per Consolidated Statements of
Operations .................................... $ 6,724,000 $ 6,031,000 $13,459,000 $11,338,000
R&D expenditures on development contracts
classified as Costs of revenue ................ 1,690,000 1,117,000 2,913,000 2,456,000
R&D expenditures offset by cost sharing
funding ....................................... 103,000 0 165,000 100,000
----------- ----------- ----------- -----------
Adjusted R&D expenses ......................... $ 8,517,000 $ 7,148,000 $16,537,000 $13,894,000
=========== =========== =========== ===========
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 $4,171,000 for the three months ended September 30, 2001,
compared to $4,027,000 for the same period a year earlier. For the six-month
periods ended September 30, 2001 and 2000, adjusted SG&A expenses were
$8,383,000 and $7,515,000, respectively. These increases were 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
12
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
was offset by cost sharing funding. Net SG&A expenses (exclusive of amounts
classified as costs of revenue and amounts offset by cost sharing funding) were
$3,626,000 in the three months ended September 30, 2001 compared to $3,715,000
for the same period last year. For the six months ended September 30, 2001 and
2000, these amounts were $7,341,000 and $6,670,000, respectively.
Our SG&A expenditures are summarized as follows:
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
SG&A expenses per Consolidated Statements of
Operations ...................................... $3,626,000 $3,715,000 $7,341,000 $6,670,000
SG&A expenditures on development contracts
classified as Costs of revenue .................. 448,000 312,000 888,000 751,000
SG&A expenditures offset by cost sharing
funding ......................................... 97,000 0 154,000 94,000
---------- ---------- ---------- ----------
Adjusted SG&A expenses .......................... $4,171,000 $4,027,000 $8,383,000 $7,515,000
========== ========== ========== ==========
Interest income and other income (expense), net resulting primarily from
investments in long-term marketable securities, was $1,357,000 in the quarter
ended September 30, 2001, compared to $3,512,000 for the same period in the
previous year. For the six months ended September 30, 2001 and 2000, these
amounts were $3,385,000 and $7,011,000, respectively. These decreases in
interest income reflect the lower cash balances available for investment as a
result of cash being used to fund our operations and to purchase property, plant
and equipment, as well as lower interest rates available on our investments.
Other income (expense), net of $212,000 in the six months ended September 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.
13
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
Liquidity and Capital Resources
- -------------------------------
At September 30, 2001, we had cash, cash equivalents and long-term marketable
securities of $106,410,000 compared to $160,225,000 at March 31, 2001. The
principal uses of cash during the six months ended September 30, 2001 were
$15,555,000 for the funding of our operations and $38,043,000 for the
acquisition of property, plant and equipment, primarily related to the
construction in progress on our HTS manufacturing facility in Devens,
Massachusetts.
Long-term accounts receivable of $1,000,000 represents the amount due after
September 30, 2002 on the $2,500,000 recognized as revenue in the year ended
March 31, 2000 for R&D work performed by us related to a development agreement
with Pirelli. This amount is guaranteed by the agreement and is payable in
installments over a five-year period ending September 30, 2004.
Goodwill of $1,108,000 at September 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
amortized on a five-year schedule until March 31, 2001. 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.
We have potential funding commitments (excluding amounts included in accounts
receivable) of approximately $13,552,000 to be received after September 30, 2001
from strategic partners and government and commercial customers, compared to
$12,436,000 at March 31, 2001. However, these commitments, including $3,363,000
on U.S. government contracts, are subject to certain cancellation provisions. Of
the current commitment amount of $13,552,000, approximately 52% 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 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
14
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
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 andother 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. Certain provisions of SFAS 141 may also apply
to any acquisitions concluded subsequent to June 30, 2001.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS 144 applies to
all long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business." SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and thus becomes effective for the Company on April 1,
2002. Management believes the future impact on our financial statements as a
result of this interpretation will be immaterial.
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.
15
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
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 six months of fiscal 2002
was $15,326,000, $17,598,000, $21,676,000, and $18,161,000, respectively. Our
accumulated deficit as of September 30, 2001 was $146,652,000. We expect to
continue to incur operating losses in the next year and there can be no
assurance that we will ever achieve profitability.
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.
16
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
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.
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
17
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
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
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. 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.
18
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
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.
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
19
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2001
our technologies, and may not prevent our competitors from using similar
technologies, for a variety of reasons, such as:
. the patent applications that we or our licensors file may not result in
patents being issued;
. any patents issued may be challenged by third parties; and
. others may independently develop similar technologies not protected by
our patents or design around the patented aspects of any technologies
we develop.
Moreover, we could incur substantial litigation costs in defending the
validity of our own patents. We also rely on trade secrets and proprietary know-
how to protect our intellectual property. However, our non-disclosure agreements
and other safeguards may not provide meaningful protection for our trade secrets
and other proprietary information.
OUR SUCCESS IS DEPENDENT UPON ATTRACTING AND RETAINING QUALIFIED PERSONNEL.
Our success will depend in large part upon our ability to attract and
retain highly qualified research and development, management, manufacturing,
marketing and sales personnel. Hiring those persons may be especially difficult
due to the specialized nature of our business. 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.
20
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
---------------------------------------------------
At the Company's Annual Meeting of Stockholders held on July
27, 2001, the following proposals were adopted by the vote
specified below.
Withheld Authority
to Vote
Proposal Votes for For Nominee
--------------------- --------- ------------------
1. Election of Directors
Gregory J. Yurek 16,950,415 1,224,204
Albert J. Baciocco, Jr. 17,828,198 346,421
Frank Borman 17,827,074 347,545
Clayton M. Christensen 17,590,059 584,560
Peter O. Crisp 17,829,238 345,381
Richard Drouin 17,829,888 344,731
Gerard Menjon 15,121,304 3,053,315
Andrew G.C. Sage, II 17,827,538 347,081
John Vander Sande 17,451,981 722,638
Votes Broker
Votes For Against Abstentions Non-Votes
--------- ------- ----------- ---------
2. Ratification of Independent Auditors 18,083,114 66,150 25,355 None
Please see the Company's Proxy Statement filed with the Commission
in connection with this Annual Meeting for a description of the
matters voted upon.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
21
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
11/14/01 /s/ Gregory J. Yurek
________________________ _____________________________________
Date Gregory J. Yurek
Chairman of the Board, President and
Chief Executive Officer
11/14/01 /s/ Thomas M. Rosa
________________________ _____________________________________
Date Thomas M. Rosa
Chief Accounting Officer, Corporate
Controller and Assistant Secretary
22