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, 2002 Commission File Number 0-19672
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American Superconductor Corporation
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2959321
- -------------------------------------------- ---------------------------------
(State or other jurisdiction of organization (I.R.S. Employer Identification
or incorporation) Number)
Two Technology Drive
Westborough, Massachusetts 01581
--------------------------------
(Address of principal executive offices, including zip code)
(508) 836-4200
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(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______
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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 20,588,234
- --------------------------------------- -------------------------------------
Class Outstanding as of August 9, 2002
AMERICAN SUPERCONDUCTOR CORPORATION
INDEX
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Page No.
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 and March 31, 2002 3
Consolidated Statements of Operations
for the three months ended
June 30, 2002 and 2001 4
Consolidated Statements of Comprehensive Income (Loss)
for the three months ended
June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows
for the three months ended
June 30, 2002 and 2001 6
Notes to Interim Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-23
Item 3. Quantitative and Qualitative Disclosures About Market Risks 24
Part II - Other Information 25
Signatures 26
Exhibits: 10.26 and 99.1 27-33
2
Part I. Financial Information
Item 1. Financial Statements
AMERICAN SUPERCONDUCTOR CORPORATION
Consolidated Balance Sheets
June 30, March 31,
2002 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,673,787 $ 37,170,927
Accounts receivable 7,676,895 7,583,505
Inventory 13,145,714 13,212,831
Prepaid expenses and other current assets 743,953 708,079
------------- -------------
Total current assets 43,240,349 58,675,342
Property and equipment:
Land 4,244,611 4,244,611
Construction in progress - building and equipment 84,454,788 79,685,813
Equipment 24,949,600 24,939,124
Furniture and fixtures 3,833,016 3,833,016
Leasehold improvements 6,234,304 6,226,267
------------- -------------
123,716,319 118,928,831
Less: accumulated depreciation (22,489,135) (21,209,230)
------------- -------------
Property and equipment, net 101,227,184 97,719,601
Long-term marketable securities 23,937,780 31,028,683
Long-term inventory 3,787,000 3,787,000
Goodwill 1,107,735 1,107,735
Other assets 5,626,437 5,476,563
------------- -------------
Total assets $ 178,926,485 $ 197,794,924
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,202,591 $ 20,784,931
Deferred revenue 247,878 1,056,806
------------- -------------
Total current liabilities 13,450,469 21,841,737
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
- 20,536,459 and 20,497,514 at June 30, 2002 and
March 31, 2002, respectively 205,365 204,975
Additional paid-in capital 358,238,020 357,781,718
Deferred compensation (477,061) (318,199)
Deferred contract costs (85,068) (121,167)
Accumulated other comprehensive income 113,780 95,641
Accumulated deficit (196,306,020) (185,476,781)
------------- -------------
Total stockholders' equity 161,689,016 172,166,187
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Total liabilities and stockholders' equity $ 178,926,485 $ 197,794,924
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
3
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
2002 2001
--------------- ---------------
Revenues:
Contract revenue $ 131,125 $ 589,429
Product sales and prototype development contracts 2,728,848 1,069,380
--------------- ---------------
Total revenues 2,859,973 1,658,809
Costs and expenses:
Costs of revenue-contract revenue 128,118 585,895
Costs of revenue-product sales and prototype
development contracts 4,230,822 1,695,682
Research and development 6,217,335 6,734,835
Selling, general and administrative 3,463,923 3,714,563
--------------- ---------------
Total costs and expenses 14,040,198 12,730,975
Operating loss (11,180,225) (11,072,166)
Interest income 370,806 1,816,926
Other income (expense), net (19,820) 210,922
--------------- ---------------
Net loss $(10,829,239) $ (9,044,318)
=============== ===============
Net loss per common share
Basic $ (0.53) $ (0.44)
=============== ===============
Diluted $ (0.53) $ (0.44)
=============== ===============
Weighted average number of common shares outstanding
Basic 20,535,175 20,331,783
=============== ===============
Diluted 20,535,175 20,331,783
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
4
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three Months Ended
June 30,
2002 2001
------------ -----------
Net loss $(10,829,239) $(9,044,318)
Other comprehensive income (loss)
Foreign currency translation 19,827 (1,347)
Unrealized losses
on investments (1,688) (237,134)
------------ -----------
Other comprehensive income (loss) 18,139 (238,481)
comprehensive
Comprehensive loss $(10,811,100) $(9,282,799)
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $(10,829,239) $ (9,044,318)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization 1,520,406 1,134,733
Deferred compensation expense 34,578 26,517
Deferred warrant costs 49,421 68,726
Stock compensation expense - 11,843
Changes in operating asset and liability accounts:
Accounts receivable (93,390) 3,761,502
Inventory 67,117 (2,648,523)
Prepaid expenses and other current assets (16,047) 143,092
Accounts payable and accrued expenses (7,582,340) (369,295)
Deferred revenue - current and long-term (808,928) -
------------ ------------
Net cash used by operating activities (17,658,422) (6,915,723)
Cash flows from investing activities:
Purchase of property and equipment (4,787,488) (21,186,865)
Sale of long-term marketable securities 7,089,215 6,928,742
Increase in other assets (390,375) (597,627)
------------ ------------
Net cash (used in) provided by investing activities 1,911,352 (14,855,750)
Cash flows from financing activities:
Net proceeds from issuance of common stock 249,930 579,957
------------ ------------
Net cash provided by financing activities 249,930 579,957
Net decrease in cash and cash equivalents (15,497,140) (21,191,516)
Cash and cash equivalents at beginning of period 37,170,927 89,063,299
------------ ------------
Cash and cash equivalents at end of period $ 21,673,787 $ 67,871,783
============ ============
Supplemental schedule of cash flow information:
Noncash issuance of common stock $ 34,578 $ 38,360
The accompanying notes are an integral part
of the consolidated financial statements.
6
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business:
American Superconductor Corporation (the "Company"), which was formed on
April 9, 1987, is a world leader in developing and manufacturing products
using superconducting materials and power electronic converters for
electric power applications. The focus of the Company's development and
commercialization efforts is on electrical equipment for electric
utilities, transmission grid operators, industrial and commercial users of
electrical power, and commercial and military ships. For large-scale
applications, the Company's development efforts are focused on high
temperature superconductor ("HTS") wire for use in power transmission
cables, motors, and generators. The Company is also developing and
commercializing electric motors and generators based on its HTS wire. For
power quality and reliability applications, the Company is focused on
proprietary power electronic converters that rapidly switch, control and
modulate power. The Company also designs, manufactures, and sells systems
based on those power electronic converters for power quality and
reliability solutions. The Company operates in three business segments -
HTS Wire, Electric Motors and Generators, and Power Electronic Systems.
The Company currently derives a portion of its revenue from research and
development contracts. The Company recorded contract revenue related to
research and development contracts of $131,125 and $589,429 for the three
months ended June 30, 2002 and 2001, respectively. In addition, the Company
recorded prototype development contract revenues of $2,271,611 and
$863,707, which are included under "Revenues - Product sales and prototype
development contracts", on two U.S. Navy contracts in the three months
ended June 30, 2002, and on three U.S. Navy contracts in the three months
ended June 30, 2001, respectively.
Costs of revenue include research and development and selling, general and
administrative expenses that are incurred in the performance of these
development contracts.
Research and development and selling, general and administrative expenses
included as costs of revenue were as follows:
Three Months Ended
June 30,
2002 2001
---- ----
Research and development expenses $2,087,747 $1,223,907
Selling, general and administrative
expenses $ 308,745 $ 439,801
7
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Basis of Presentation:
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. Certain
information and footnote disclosure normally included in the Company's
annual consolidated financial statements have been condensed or omitted.
The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods ended June 30, 2002 and 2001 and the financial position at June 30,
2002.
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, 2002 which are contained in the Company's Annual
Report on Form 10-K covering the year ended March 31, 2002
Effective April 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," and ceased amortizing the goodwill recorded as a result
of the acquisition of substantially all of the assets of Integrated
Electronics, LLC ("IE") on June 1, 2000. The Company reviews its goodwill
and other long-term assets at least annually or when events or changes in
circumstances indicate that the carrying amount of such assets may not be
fully recoverable. If the carrying amount of the net tangible and
intangible assets in a given reporting unit exceed the reporting unit's
fair value, a detailed impairment loss analysis would be performed to
calculate the amount of impairment, if any, as prescribed by SFAS 142.
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
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 dilutive effect of stock
options. For the three months ended June 30, 2002 and 2001, common
equivalent shares of 4,817,851 and 2,551,748 were not included in the
calculation of diluted EPS as their effect was antidilutive.
8
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Inventories:
Inventories at June 30, 2002 and March 31, 2002 consisted of the following:
June 30, 2002 March 31, 2002
------------- --------------
Raw materials $ 1,894,210 $ 1,545,327
Work-in-progress 9,327,803 10,046,359
Finished goods 1,923,701 1,621,145
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$ 13,145,714 $ 13,212,831
5. Cost-Sharing Agreements:
The Company received funding under a government cost-sharing agreement of
$103,321 and $119,219 for the three months ended June 30, 2002 and 2001,
respectively. This funding was used to directly offset research and
development and selling, general and administrative expenses.
6. Restructuring and other charges:
In the fourth quarter of fiscal 2002, the Company announced two events
which resulted in a combined fiscal 2002 charge of $13.9 million.
In March 2002, the Company announced a series of restructuring,
consolidation and cost-cutting measures to create a more streamlined and
flatter organization aimed at reducing the cost structure of the Company as
it drives to commercialize its technologies and products. The Company
incurred an aggregate charge of $9.9 million of restructuring and other
charges, of which $3.5 million was inventory-related and was classified as
"Costs of revenue - product sales and prototype development contracts" and
$0.7 million was related to an allowance for doubtful accounts reserve and
was classified as "Selling, general, and administrative" expense. The
remaining $5.7 million was shown as "Restructuring costs" on the fiscal
2002 Consolidated Statements of Operations.
In addition, the Company announced a new agreement with Pirelli in February
2002 in which the Company acquired the right to sell its HTS wire to other
cable manufacturers in addition to Pirelli at a cost of $4.0 million.
The restructuring charges and other charges recorded in the fourth quarter
of fiscal 2002 and their corresponding June 30, 2002 status are summarized
below:
9
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total
Restructuring & Cash Other Balance as of
other charges Payments Adjustments June 30, 2002
------------- -------- ----------- -------------
Workforce Reduction 1,548,897 1,263,983 --- 284,914
Consolidation of facilities,
fixed asset write-offs,
& other charges 4,117,161 --- 2,980,165 1,136,996
Inventory Write-down 3,464,275 --- 1,791,259 1,673,016
Allowance for Doubtful
Accounts 727,028 --- 727,028 ---
Pirelli License 4,009,890 2,289,390 1,375,000 345,500
---------- --------- --------- ---------
13,867,251 3,553,373 6,873,452 3,440,426
The Company currently anticipates payments for the restructuring activities
and other charges to be completed within fiscal 2003 except for certain
long-term contractual obligations.
7. Business Segment Information:
The Company has three reportable business segments as defined by SFAS
131--HTS Wire, Electric Motors and Generators, and Power Electronic
Systems.
The HTS Wire business segment develops and sells HTS wire. The focus of
this segment's current development, manufacturing and sales efforts is on
HTS wire for power transmission cables, motors and generators.
The Electric Motors and Generators business segment is developing and
commercializing electric motors and generators based on HTS wire. Its
primary focus is on ship propulsion motors and generators.
The Power Electronic Systems business segment develops and sells power
electronic converters and designs, manufactures and sells integrated
systems based on those converters for power quality and reliability
solutions.
The operating results for the three business segments are as follows:
Three Months Ended
June 30,
2002 2001
---- ----
Revenues
--------
HTS Wire $ 217,633 $ 762,915
Electric Motors and Generators 1,535,849 863,707
Power Electronic Systems 1,106,491 32,187
---------- ----------
Total $2,859,973 $1,658,809
========== ==========
10
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended
June 30,
2002 2001
---- ----
Operating Loss
HTS Wire $ (6,979,978) $ (5,118,702)
Electric Motors and Generators (1,762,721) (1,998,812)
Power Electronic Systems (2,108,006) (3,572,560)
Unallocated Corporate Expenses (329,520) (382,092)
------------ ------------
Total $(11,180,225) $(11,072,166)
============ ============
The assets for the three business segments (plus Corporate Cash) are as
follows:
June 30, 2002 March 31, 2002
------------- --------------
HTS Wire $105,058,888 $102,010,166
Electric Motors and Generators 5,786,115 6,424,532
Power Electronic Systems 22,469,915 21,160,616
Corporate cash and marketable securities 45,611,567 68,199,610
------------ ------------
Total $178,926,485 $197,794,924
============ ============
The accounting policies of the business segments are the same as those for
the consolidated company, except that certain corporate expenses which we
do not believe are specifically attributable or allocable to any of the
three business segments have been excluded from the segment operating
losses.
8. New Accounting Pronouncements:
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 became effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
thus became effective for the Company
11
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on April 1, 2002. The adoption of SFAS 144 had no impact on the Company's
financial statements and related disclosures.
In November 2001, the Emerging Issues Task Force (EITF), a committee of the
FASB, reached a consensus on EITF Issue 01-9, Accounting for Consideration
Given by a Vendor to a Customer or Reseller of the Vendor's Products ("EITF
01-9"). EITF 01-9 presumes that consideration, including equity
instruments, from a vendor to a customer or reseller of the vendor's
products is a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement and could lead to negative
revenue under certain circumstances. Revenue reduction is required unless
consideration relates to a separate identifiable benefit and the benefit's
fair value can be established. EITF 01-9 was applicable for the Company as
of April 1, 2002. The adoption of EITF Issue 01-9 had no impact on the
Company's financial statements and related disclosures.
During January 2002, the EITF reached consensus on EITF Issue 01-14, Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred ("EITF 01-14"). The EITF concluded in EITF 01-14 that
reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the income statement with the offsetting costs
recorded as costs of revenue. Out-of-pocket expenses generally include, but
are not limited to, expenses related to airfare, mileage, hotel stays,
out-of-town meals, photocopies, and telecommunications and facsimile
charges. EITF 01-14 was applicable for the Company as of April 1, 2002. The
adoption of EITF 01-14 had no impact on the Company's financial statements
and related disclosures.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This
statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. EITF 94-3 allowed for an exit cost liability to be
recognized at the date of an entity's commitment to an exit plan. SFAS 146
also requires that liabilities recorded in connection with exit plans be
initially measured at fair value. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002,
with early adoption encouraged. The Company does not expect the adoption of
SFAS 146 to have a material impact on its financial position or results of
operations.
12
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
American Superconductor Corporation was founded in 1987. We are focused on
developing, manufacturing and selling products using two core technologies: high
temperature superconductor ("HTS") wires and power electronic converters for
electric power applications. We also assemble superconductor wires and power
electronic converters into fully-integrated products, such as superconductor
magnetic energy storage ("SMES") systems and ship propulsion motors, which we
sell or plan to sell to end users.
Critical Accounting Policies
The preparation of consolidated financial statements requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to long-term production and research and development contracts, accounts
receivable reserve requirements, inventories, investments, intangible assets,
income taxes and potential warranty obligations. We base our estimates on
historical experiences and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ under
different assumptions or conditions.
Our accounting policies that involve the most significant judgments and
estimates are as follows:
. Revenue recognition;
. Allowance for doubtful accounts;
. Valuation of long-lived and intangible assets and goodwill;
. Inventory accounting;
. Deferred tax assets; and
. Acquisition accounting.
Revenue recognition. For certain arrangements, such as contracts to perform
research and development and prototype development contracts, we record revenues
using the percentage of completion method, measured by the relationship of costs
incurred to total estimated contract costs. We follow this method since
reasonably dependable estimates of the revenue and costs applicable to various
stages of a contract can be made. Since many contracts extend over a long period
of time, revisions in cost and funding estimates during the progress of work
have the effect of adjusting earnings applicable to performance in prior periods
in the current period. Recognized revenues and profit or loss are subject to
revisions as the contract progresses to completion. Revisions in profit or loss
estimates are charged to income in the period in which the facts that give rise
to the revision become known.
We recognize revenue from product sales upon shipment, installation or
acceptance, where applicable, provided persuasive evidence of an arrangement
exists, delivery has occurred,
13
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
the sales price is fixed or determinable and collectibility is reasonably
assured, or for some programs, on the percentage of completion method of
accounting. When other significant obligations remain after products are
delivered, revenue is recognized only after such obligations are fulfilled.
Allowance for doubtful accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional provisions for bad debt allowances may be required.
Long-lived assets. We assess the impairment of identifiable intangibles,
long-lived assets and goodwill at least annually or whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.
Factors we consider important which could trigger an impairment review include
the following:
. Significant underperformance relative to expected historical or
projected future operating results;
. Significant changes in the manner of our use of the acquired assets or
the strategy for our overall business; and
. Significant negative industry or economic trends.
When we determine that the carrying value of intangibles, long-lived assets or
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of potential impairment, we assess whether an impairment has
occurred based on whether net book value of the assets exceeds related projected
undiscounted cash flows from these assets, considering a number of factors
including past operating results, budgets, economic projections and market
trends. When necessary, we write down an impaired asset to its estimated fair
value based on the best information available. Estimated fair value is generally
based on either appraised value or measured by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows.
Inventory accounting. We write down inventory for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
the inventory and the estimated realizable value based upon assumptions of
future demand and market conditions. If actual market conditions are less
favorable than those projected, additional inventory write-downs may be
required.
Deferred tax assets. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we
consider future taxable income and tax planning strategies in assessing the need
for the valuation allowance, if management were to determine that we would be
able to realize deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should we determine that we would
not be able to
14
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
realize all or part of any deferred tax assets in the future, an adjustment to
the deferred tax asset would decrease income in the period such determination
was made.
Acquisition accounting. In June 2000, we acquired 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 fair value of the assets
acquired were accounts receivable of $52,278, inventory of $259,980 and fixed
assets of $191,585. Significant judgments and estimates were involved in
determining the fair market value of assets acquired and their useful lives.
Different assumptions could yield materially different results.
Restructuring
In March 2002, we announced a series of restructuring, consolidation and
cost-cutting measures to create a more streamlined and flatter organization
aimed at reducing our cost structure as we drive to commercialize our
technologies and products. The restructuring resulted in the elimination of 99
full-time employees across all business functions at our Massachusetts and
Wisconsin locations. Our Power Quality and Reliability business unit, based in
Middleton, WI, and our Power Electronics business unit, based in New Berlin, WI,
were combined into a new business unit called Power Electronic Systems. This
change leveraged personnel with similar skills in the two business units and
significantly reduced the cost structure. As part of the restructuring, we also
announced that we will outsource our future requirements for low temperature
superconductor (LTS) magnets used in our SMES systems and as a result
discontinued operations in one of our two buildings in Middleton, WI comprising
approximately 27,000 square feet. Cash payments related to the workforce
reduction were substantially completed in the first quarter of fiscal 2003. Exit
costs related to the leased facility will be incurred over the 19-month period
ending December 31, 2003. Anticipated cost savings as a result of this
restructuring are estimated to be approximately $9.0 million during the fiscal
year ending March 31, 2003.
Results of Operations
Total revenues during the three months ended June 30, 2002 were $2,860,000,
compared to $1,659,000 for the same period a year earlier. Revenues for the
first quarter of fiscal year 2003 increased by $1,201,000 compared to the same
prior-year period. The increase in revenue resulted from significantly higher
prototype development contract revenues in two of our three business units -
Power Electronic Systems and Electric Motors and Generators. Power Electronic
Systems revenues, which include SMES systems, services and power electronic
converters, were $1,106,000 in the current quarter, compared to $32,000 during
the first quarter of last year, an increase of $1,074,000. This increase was
driven by work performed on a U.S.
15
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
Navy prototype development contract relating to the Power Electronics Building
Blocks program.
Revenues in the Electric Motors and Generators business unit were $1,536,000 in
the first quarter of fiscal 2003, compared to $864,000 for the first quarter in
fiscal 2002, an increase of $672,000 as a result of higher prototype development
contract revenue with the U.S. Navy relating to work performed on a 5-megawatt
HTS ship propulsion motor.
These increases in revenues were partially offset by lower HTS Wire business
unit revenues, which declined to $218,000 in the first quarter of fiscal 2003,
compared to $763,000 in the first quarter of fiscal 2002, as a result of lower
contract revenues, primarily with Pirelli Energy Cables and Systems. Pirelli
provided us with $500,000 of research and development funding in the first
quarter of fiscal 2002, and no funding in the first quarter of fiscal 2003, as a
result of the discontinuance of its funding commitment as part of a new
agreement reached with Pirelli in February 2002 that allows us to sell our HTS
wire to other cable manufacturers in addition to Pirelli.
For the three months ended June 30, 2002, we recorded approximately $103,000 in
funding under a government cost-sharing agreement with the U.S. Air Force. For
the three months ended June 30, 2001, we recorded approximately $119,000 of
funding under this agreement. We anticipate that a portion of our funding in the
future will continue to come from cost-sharing agreements as we continue to
develop joint programs with government agencies. Funding from government
cost-sharing agreements is recorded as an offset to research and development and
selling, general and administrative expenses, as required by government contract
accounting guidelines, rather than as revenues.
Total costs and expenses for the quarter ended June 30, 2002 were $14,040,000
compared to $12,731,000 for the same period last year. "Costs of revenue -
product sales and prototype development contracts" increased due to the higher
level of prototype development contract revenue with the U.S. Navy in both the
Electric Motors and Generators and Power Electronic Systems business units. It
also increased by $896,000 as a result of increased costs (including building
depreciation) related to our occupancy of the new Devens, Massachusetts
manufacturing plant and initial test production runs of multifilamentary
composite wire in that facility. "Costs of revenue - contract revenue" declined
proportionally with the lower level of contract revenue.
Adjusted research and development ("R&D") expenses, which include amounts
classified as costs of revenue and amounts offset by cost sharing funding,
increased to $8,358,000 in the three months ended June 30, 2002 from $8,020,000
for the same period of the prior year. This increase was primarily due to higher
research and development spending, both internally and externally funded, in the
Electric Motors and Generators business unit. This increase was partially offset
by reduced R&D spending in the HTS Wire and Power Electronic Systems business
units, as a result of the reduction in force implemented in our March 2002
restructuring program. 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
16
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
R&D expenses was offset by cost sharing funding. Net R&D expenses (exclusive of
amounts classified as costs of revenues and amounts offset by cost sharing
funding) decreased to $6,217,000 in the three months ended June 30, 2002 from
$6,735,000 for the same period last year.
Our R&D expenditures are summarized as follows:
Three Months Ended June 30,
2002 2001
---- ----
R&D expenses per Consolidated
Statements of Operations ........................ $6,217,000 $6,735,000
R&D expenditures on development
contracts classified as Costs of
revenue ......................................... 2,088,000 1,224,000
R&D expenditures offset by cost
sharing funding ................................. 53,000 61,000
---------- ----------
Adjusted R&D expenses ........................... $8,358,000 $8,020,000
========== ==========
Adjusted selling, general and administrative ("SG&A") expenses, which include
amounts classified as costs of revenue and amounts offset by cost sharing
funding, decreased to $3,823,000 for the three months ended June 30, 2002,
compared to $4,212,000 for the same period a year earlier. This decrease was
primarily due to the reductions in force implemented as part of our March 2002
restructuring program. A portion of the SG&A expenditures related to externally
funded development contracts has been classified as costs of revenue (rather
than as SG&A expenses). Additionally, a portion of SG&A expenses was offset by
cost sharing funding. Net SG&A expenses (exclusive of amounts classified as
costs of revenue and amounts offset by cost sharing funding) was $3,464,000 in
the three months ended June 30, 2002 compared to $3,715,000 for the same period
last year.
Our SG&A expenditures are summarized as follows:
Three Months Ended June 30,
2002 2001
---- ----
SG&A expenses per Consolidated
Statements of Operations ........................ $3,464,000 $3,715,000
SG&A expenditures on development contracts
classified as Costs of
revenue ......................................... 309,000 440,000
SG&A expenditures offset by cost
sharing funding ................................. 50,000 57,000
---------- ----------
Adjusted SG&A expenses .......................... $3,823,000 $4,212,000
========== ==========
17
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
Interest income was $371,000 in the quarter ended June 30, 2002, compared to
$1,817,000 for the same period in the previous year. The decrease in interest
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 was ($20,000) in the first quarter of fiscal 2003,
reflecting taxes on investment income, compared to $211,000 in the prior-year
quarter, reflecting investment gains from the sale of long-term marketable
securities, partially offset by taxes on investment income.
We expect to continue to incur operating losses until the end of the fiscal year
ending March 31, 2005 as we continue to devote significant financial resources
to our research and development activities and commercialization efforts.
We expect to be party to agreements which, from time to time, may result in
costs incurred exceeding expected revenues under such contracts. We may enter
into such agreements for a variety of reasons including, but not limited to,
entering new product application areas, furthering the development of key
technologies, and advancing the demonstration of commercial prototypes in
critical market applications.
Please refer to the "Future Operating Results" section below for a discussion of
certain factors that may affect our future results of operations and financial
condition.
Liquidity and Capital Resources
At June 30, 2002, we had cash, cash equivalents and long-term marketable
securities of $45,612,000 compared to $68,200,000 at March 31, 2002. The
principal uses of cash during the three months ended June 30, 2002 were
$17,658,000 for the funding of our operations (including $7,582,000 to reduce
our fiscal 2002 year-end accounts payable liabilities resulting from equipment
purchases and restructuring and other one-time charges incurred during the
fourth quarter of fiscal 2002), and $4,787,000 for the acquisition of equipment,
primarily for our new HTS manufacturing facility in Devens, Massachusetts.
Goodwill of $1,108,000 at June 30, 2002 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. Effective April
1, 2001 we adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" and ceased amortizing
the goodwill acquired in the IE purchase.
18
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
The possibility exists that we may pursue acquisition and joint venture
opportunities in the future that may affect liquidity and capital resource
requirements.
We have potential funding commitments (excluding amounts included in accounts
receivable) of approximately $10,891,000 to be received after June 30, 2002 from
government and commercial customers, compared to $11,020,000 at March 31, 2002.
However, these current funding commitments, including $7,694,000 on U.S.
government contracts, are subject to certain cancellation provisions. Of the
current commitment amount of $10,891,000, approximately 83% is potentially
collectable within the next 12 months.
We believe, based upon our current business plan, that our existing capital
resources will be sufficient to fund our operations until the end of fiscal
2005, at which time we expect to reach corporate-wide profitability. However, we
may need additional funds sooner than anticipated if our performance deviates
significantly from our current business plan, if there are significant changes
in competitive or other market factors, or if unforeseen circumstances arise.
There can be no assurance that such funds, whether from equity or debt
financing, development contracts or other sources, will be available, or
available under terms acceptable to us.
To date, inflation has not had a material impact on our financial results.
New Accounting Pronouncements
See Note 8 of the Notes to the Interim Consolidated Financial Statements for a
discussion of new accounting pronouncements.
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.
19
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
We have been principally engaged in research and development activities. We
have incurred net losses in each year since our inception. Our net loss for
fiscal 2000, fiscal 2001, fiscal 2002, and the first three months of fiscal 2003
was $17,598,000, $21,676,000, $56,985,000, and $10,829,000 respectively. Our
accumulated deficit as of June 30, 2002 was $196,306,000. We expect to continue
to incur operating losses until the end of fiscal 2005 and there can be no
assurance that we will ever achieve profitability.
We believe, based upon our current business plan, that our existing capital
resources will be sufficient to fund our operations until the end of fiscal
2005. However, we may need additional funds sooner than anticipated if our
performance deviates significantly from our current business plan, if there are
significant changes in competitive or other market factors, or if unforeseen
circumstances arise. Such funds, whether from equity or debt financing,
development contracts or other sources, may not be available, or may not be
available under terms acceptable to us.
There are a number of technological challenges that must be successfully
addressed before our superconductor products can gain widespread commercial
acceptance.
Many of our products are in the early stages of commercialization and
testing, while others are still under development. We do not believe any company
has yet successfully developed and commercialized significant quantities of HTS
wire or wire products. There are a number of technological challenges that we
must successfully address to complete our development and commercialization
efforts. 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 or commercial acceptance of our products later than anticipated.
The commercial uses of superconductor products are very limited today, and a
widespread commercial market for our products may not develop.
To date, there has been no widespread commercial use of HTS products.
Although LTS products are currently used in several commercial applications,
commercial acceptance of LTS products, other than for medical magnetic resonance
imaging and superconductor magnetic energy storage products, has been
significantly limited by the cooling requirements of LTS materials. Even if the
technological hurdles currently limiting commercial uses of HTS and LTS products
are overcome, it is uncertain whether a robust commercial market for those new
and unproven products will ever develop. It is possible that the market demands
we currently anticipate for our HTS and LTS products will not develop and that
superconductor products will never achieve widespread commercial acceptance.
20
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
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
completing a project to expand our HTS wire manufacturing capacity at the Devens
Commerce Center in Devens, Massachusetts. We used 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. While
we expect to complete this project within our estimates, the actual costs for
equipment may be in excess of our expectations. In addition, we may experience
start-up difficulties or other problems once the facility becomes fully
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 we have achieved in manufacturing these products in limited quantities.
This presents a number of technological and engineering challenges for us. We
cannot make assurances that we will be successful in developing product designs
and manufacturing processes that permit us to manufacture our HTS products in
commercial quantities at commercially acceptable costs while preserving quality.
In addition, we may incur significant start-up costs and unforeseen expenses in
our product design and manufacturing efforts.
We have historically focused on research and development activities and have
limited experience in marketing and selling our products.
We have been primarily focused on research and development of our
superconductor products. Consequently, our management team has limited
experience directing our commercialization efforts, which are essential to our
future success. To date, we have only limited experience marketing and selling
our products, and there are very few people anywhere who have significant
experience marketing or selling superconductor products. Once our products are
ready for commercial use, we will have to develop a marketing and sales
organization that will effectively demonstrate the advantages of our products
over both more traditional products and competing superconductor products or
other technologies. We may not be successful in our efforts to market this new
and unfamiliar technology, and we may not be able to establish an effective
sales and distribution organization.
We may decide to enter into arrangements with third parties for the
marketing or distribution of our products, including arrangements in which our
products, such as HTS wire, are included as a component of a larger product,
such as a motor. For example, we have a marketing and sales alliance with GE
Industrial Systems giving GE the exclusive right to offer our Distributed-SMES
21
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
(D-SMES) and D-VAR product lines 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.
Our products face intense competition both from superconductor products
developed by others and from traditional, non-superconductor products and
alternative technologies.
As we begin to market and sell our superconductor products, we will face
intense competition both from competitors in the superconductor field and from
vendors of traditional products and new technologies. There are many companies
in the United States, Europe, Japan and China engaged in the development of HTS
products, including Sumitomo Electric Industries, 3M, Intermagnetics General,
Nordic Superconductor Technologies, and Innova. The superconductor industry is
characterized by rapidly changing and advancing technology. Our future success
will depend in large part upon our ability to keep pace with advancing HTS and
LTS technology and developing industry standards. Our SMES products and
integrated power electronic products, such as D-VAR(TM), compete with a variety
of non-superconductor products such as dynamic voltage restorers ("DVRs"),
static VAR compensators ("SVCs"), static compensators ("STATCOMS"), flywheels,
power electronic converters and battery-based power supply systems. Competition
for our PowerModules(TM) includes products from Ecostar, Inverpower, Satcon,
Semikron and Trace. The HTS motor and generator products that we are developing
face competition from copper wire-based motors and generators, and from
permanent magnet motors that are being developed. Research efforts and
technological advances made by others in the superconductor field or in other
areas with applications to the power quality and reliability markets may render
our development efforts obsolete. Many of our competitors have substantially
greater financial resources, research and development, manufacturing and
marketing capabilities than we have. In addition, as the HTS wire, HTS electric
motors and generators, and power electronic systems markets develop, other large
industrial companies may enter those fields and compete with us.
Third parties have or may acquire patents that cover the high temperature
superconductor materials we use or may use in the future to manufacture our
products.
We expect that some or all of the HTS materials and technologies we use in
designing and manufacturing our products are or will become covered by patents
issued to other parties, including our competitors. If that is the case, we will
need either to acquire licenses to these patents or to successfully contest the
validity of these patents. The owners of these patents may refuse to grant
licenses to us, or may be willing to do so only on terms that we find
commercially
22
AMERICAN SUPERCONDUCTOR CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2002
unreasonable. If we are unable to obtain these licenses, we may have to contest
the validity or scope of those patents to avoid infringement claims by the
owners of these patents. It is possible that we will not be successful in
contesting the validity or scope of a patent, or that we will not prevail in a
patent infringement claim brought against us. Even if we are successful in such
a proceeding, we could incur substantial costs and diversion of management
resources in prosecuting or defending such a proceeding.
There are numerous patents issued in the field of superconductor materials and
our patents may not provide meaningful protection for our technology.
We own or have licensing rights under many patents and pending patent
applications. However, the patents that we own or license may not provide us
with meaningful protection of our technologies, and may not prevent our
competitors from using similar technologies, for a variety of reasons, such as:
. the patent applications that we or our licensors file may not result
in patents being issued;
. any patents issued may be challenged by third parties; and
. others may independently develop similar technologies not protected by
our patents or design around the patented aspects of any technologies
we develop.
Moreover, we could incur substantial litigation costs in defending the
validity of our own patents. We also rely on trade secrets and proprietary
know-how to protect our intellectual property. However, our non-disclosure
agreements and other safeguards may not provide meaningful protection for our
trade secrets and other proprietary information.
Our success is dependent upon attracting and retaining qualified personnel.
Our success will depend in large part upon our ability to attract and
retain highly qualified research and development, management, manufacturing,
marketing and sales personnel. Hiring those persons may be especially difficult
due to the specialized nature of our business.
We are particularly dependent upon the services of Dr. Gregory J. Yurek,
our co-founder and our Chairman of the Board, President and Chief Executive
Officer, and Dr. Alexis P. Malozemoff, our Chief Technical Officer. The loss of
the services of either of those individuals could significantly damage our
business and prospects.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk through financial instruments, such as investments
in marketable securities, is not material.
24
AMERICAN SUPERCONDUCTOR CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibit No.
10.26 Second Amended and Restated 1997 Director Stock
Option Plan
99.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
$$ - Management or compensatory plan or arrangement
25
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 14, 2002 /s/ Gregory J. Yurek
___________________________________ ____________________________________
Date Gregory J. Yurek
Chairman of the Board, President and
Chief Executive Officer
August 14, 2002 /s/ Thomas M. Rosa
___________________________________ ____________________________________
Date Thomas M. Rosa
Chief Accounting Officer, Corporate
Controller and Assistant Secretary
26