<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported):
September 5, 1997
-----------------
AMERICAN SUPERCONDUCTOR CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Massachusetts
- --------------------------------------------------------------------------------
State or Other Jurisdiction of Incorporation)
0-19672 04-2959321
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
Two Technology Drive, Westborough, MA 01581
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(508) 836-4200
- --------------------------------------------------------------------------------
Registrant's Telephone Number, Including Area Code
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS
On April 8, 1997, a wholly owned subsidiary of American
Superconductor Corporation merged with Superconductivity, Inc., a
Delaware corporation ("SI"). As a result of the merger, shareholders
of SI received 0.3292 share of the Company for each share of SI stock
held (942,961 shares in the aggregate) and SI became a wholly-owned
subsidiary of the Company.
The consolidated financial statements filed herewith have been
prepared accounting for the merger using the pooling of interests
method of accounting. These consolidated financial statements will
become the historical financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits:
--------
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Ernst & Young LLP
23.3 Consent of Smith & Gesteland, LLP
99.1 Consolidated Financial Statements of American Superconductor
Corporation at March 31, 1997 and 1996 and for the three years in
the period ended March 31, 1997 and Reports of Independent
Accountants thereon.
99.2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<PAGE> 3
SIGNATURE
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 hereunto duly authorized.
Date: September 5, 1997 AMERICAN SUPERCONDUCTOR
CORPORATION
By: /s/ Gregory J. Yurek
------------------------------
Gregory J. Yurek
President and CEO
<PAGE> 4
Exhibit Index
-------------
Exhibit
Number Title Page
- ------ ----- ----
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Ernst & Young LLP
23.3 Consent of Smith & Gesteland, LLP
99.1 Consolidated Financial Statements of American
Superconductor Corporation at March 31, 1997
and 1996 and for the three years in the period
ended March 31, 1997 and Reports of Independent
Accountants thereon.
99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE> 1
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation of our report dated August 18, 1997, on our
audits of the consolidated financial statements of American Superconductor
Corporation as of March 31, 1997 and 1996, and for the three years ended March
31, 1997 which report is included in this Registration Statement on Form 8K,
into the Company's previously filed Registration Statements on Form S-8 (File
Nos. 33-44962, 33-44963, 33-64832, 33-74418, 33-86106 and 33-86108).
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
September 3, 1997
<PAGE> 1
Exhibit 23.2
------------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-44962, 33-44963, 33-64832, 33-74418, 33-86108, 33-86106)
pertaining to various employee and director stock option plans of American
Superconductor Corporation of our report dated February 29, 1996, with respect
to the financial statements of Superconductivity, Inc. included in the Current
Report on Form 8-K dated September 3, 1997, filed by American Superconductor
Corporation with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
September 3, 1997
<PAGE> 1
Exhibit 23.3
------------
[Logo]
SMITH & GESTELAND, LLP
Partners In Your Success-Since 1948
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation of our report dated February 7, 1997, on
our audit of the financial statements of Superconductivity, Inc., as of December
31, 1996, and for the year then ended, which report is included in this
Registration Statement on Form 8K, into the Company's previously filed
Registration Statements on Form S-8 (file numbers 33-44962, 33-44963, 33-64832,
33-74418, 33-86106, and 33-86108).
Madison, Wisconsin /s/ Smith & Gesteland, LLP
September 3, 1997 SMITH & GESTELAND, LLP
Certified Public Accountants and Business Consultants * Post Office Box 1764
* Madison, WI 55701-1764
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Superconductor Corporation
We have audited the consolidated balance sheets of American Superconductor
Corporation as of March 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
years ended March 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The financial statements give retroactive effect to the merger of American
Superconductor Corporation and Superconductivity, Inc. on April 8, 1997 which
has been accounted for as a pooling of interests as described in Note 1 to the
consolidated financial statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American
Superconductor Corporation at March 31, 1997 and 1996, and the consolidated
results of operations and cash flows for the three years ended March 31, 1997,
in conformity with generally accepted accounting principles.
We have audited the consolidated balance sheets of American Superconductor
Corporation as of March 31, 1997 and 1996 and the related consolidated
statements of operations and cash flows for the three years ended March 31, 1997
prior to their restatement for the 1997 pooling of interests. The contribution
of Superconductivity, Inc. to total assets, revenues and net loss represented 11
percent, 32 percent and 22 percent of the respective restated totals. Separate
financial statements of Superconductivity, Inc. included in the restated
consolidated balance sheets and statements of operations and cash flows were
audited and reported on separately by other auditors. We also audited the
combination of the accompanying consolidated balance sheets of March 31, 1997
and 1996 and the consolidated statements of operations and cash flows for the
three years ended March 31, 1997 after restatement for the 1997 pooling of
interests; in our opinion, such consolidated statements have been properly
combined on the basis described in Note 2 of notes to consolidated financial
statements.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
August 18, 1997
<PAGE> 2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Superconductivity, Inc.
We have audited the accompanying balance sheets of Superconductivity, Inc. (a
development stage company, the Company) as of December 31, 1995 and 1994, and
the related statements of operations, shareholders' equity (deficit) and cash
flows for the years then ended and the period from March 22, 1988 (Inception) to
December 31, 1995 (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended and the period from March 22, 1988 (Inception) to December 31,
1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Madison, Wisconsin
February 29, 1996
<PAGE> 3
[Logo]
SMITH & GESTELAND, LLP
Partners In Your Success-Since 1948
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Superconductivity, Inc.
Middleton, Wisconsin
We have audited the accompanying balance sheet of Superconductivity, Inc.,
as of December 31, 1996, and the related statements of operations,
shareholders' equity (deficit), and cash flows for the year then ended (not
presented separately herein). These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
Superconductivity, Inc., as of December 31, 1995, and for the year then ended,
were audited by other auditors whose report dated February 29, 1996, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation,
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Superconductivity, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
We have not audited the financial statements of Superconductivity, Inc., for any
period subsequent to December 31, 1996.
/s/ Smith & Gesteland, LLP
---------------------------------
SMITH & GESTELAND, LLP
Madison, Wisconsin
February 7, 1997
<PAGE> 4
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 584,804 $ 4,261,051
Accounts receivable 3,070,573 1,727,529
Notes receivable 383,607 607,536
Inventory 2,940,656 2,411,623
Prepaid expenses and other current assets 345,344 271,752
------------ ------------
Total current assets 7,324,984 9,279,491
Property and equipment:
Equipment 10,137,721 8,817,336
Furniture and fixtures 733,794 710,473
Leasehold improvements 1,732,215 1,663,806
------------ ------------
12,603,730 11,191,615
Less: accumulated depreciation (8,835,754) (6,892,029)
------------ ------------
Property and equipment, net 3,767,976 4,299,586
Long-term marketable securities 15,446,106 22,257,898
Other assets 42,028 19,472
------------ ------------
Total assets $ 26,581,094 $ 35,856,447
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-line of credit $ 530,000 $ 525,000
Accounts payable and accrued expenses 4,283,612 2,201,475
Deferred revenue 1,519,678 893,700
Current portion of long-term debt 673,428 558,789
------------ ------------
Total current liabilities 7,006,718 4,178,964
Long-term debt (less current portion) 3,073,663 1,897,601
Commitments (Note 10)
Stockholders' equity:
Common stock, $.01 par value
Authorized shares-20,000,000; issued
and outstanding shares-10,505,118
in 1997 and 10,422,996 in 1996 105,051 104,230
Additional paid-in capital 76,388,679 75,663,526
Deferred compensation (25,480) (50,960)
Deferred contract costs - warrants (557,265) --
Unrealized loss on investments (143,661) (61,970)
Cumulative translation adjustment (9,892) 4,602
Accumulated deficit (59,256,719) (45,879,546)
------------ ------------
Total stockholders' equity 16,500,713 29,779,882
------------ ------------
Total liabilities and stockholders' equity $ 26,581,094 $ 35,856,447
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Contract revenue $ 6,867,444 $ 7,526,306 $ 6,596,177
Prototypes and prototype
development contracts 2,936,567 2,366,351 1,107,374
Rental revenue 545,130 595,700 866,480
Other revenue 201,416 276,069 22,749
------------ ----------- -----------
Total revenues 10,550,557 10,764,426 8,592,780
Costs and expenses:
Costs of revenue 10,577,376 11,553,016 7,993,459
Research and development 8,477,365 5,704,494 5,348,872
Selling, general and
administrative 4,290,500 4,538,167 3,924,180
------------ ----------- -----------
Total costs and expenses 23,345,241 21,795,677 17,266,511
Merger related fees (710,105)
Interest income 1,177,386 1,585,168 1,872,811
Interest expense (356,366) (214,671) (212,191)
Fees - terminated transaction (669,627)
Other income (expense), net (23,777) (37,529) (23,093)
------------ ----------- -----------
Net loss $(13,377,173) $(9,698,283) $(7,036,204)
============ =========== ===========
Net loss per common share $ (1.27) $ (0.94) $ (0.69)
============ =========== ===========
Weighted average number of
common shares outstanding 10,497,643 10,351,993 10,248,890
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 6
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(13,377,173) (9,698,283) (7,036,204)
Adjustments to reconcile net loss to net
cash used by operations:
Forgiveness of notes receivable 206,744 104,778 --
Depreciation and amortization 1,983,531 2,106,569 1,946,780
Write down of inventory and equipment 444,538 1,175,142 --
Gain on disposals of property and equipment (9,697) -- --
Deferred compensation expense 25,480 29,960 112,680
Deferred contract costs-warrant 79,613 -- --
Interest accrued on convertible debentures 230,746 100,383 150,000
Changes in operating asset and liability accounts :
Accounts receivable (1,343,043) 994,748 (1,726,788)
Inventory (973,571) (1,073,049) (620,586)
Prepaid expenses and other current assets (73,592) (27,796) (12,283)
Accounts payable and accrued expenses 2,082,137 (639,139) 541,771
Deferred revenue 625,978 678,700 15,000
------------ ----------- -----------
Net cash used by operating activities (10,098,309) (6,247,987) (6,629,630)
Cash flows from investing activities:
Notes receivable (82,815) (40,973) (671,341)
Repayment of notes receivable 100,000 -- --
Purchase of property and equipment (1,451,142) (1,342,922) (1,869,066)
Sale of long-term marketable securities 6,730,101 9,924,608 3,099,626
Decrease (increase) in other assets (37,130) 28,676 (701)
------------ ----------- -----------
Net cash provided by investing activities 5,259,014 8,569,389 558,518
Cash flows from financing activities:
Payments on notes payable (131,049) (422,352) (472,876)
Proceeds from notes payable (net) 5,000 -- 1,550,000
Proceeds from 10% convertible debentures 1,200,000 -- --
Net proceeds from issuance of common stock 89,097 379,969 545,964
------------ ----------- -----------
Net cash provided by financing activities 1,163,048 (42,383) 1,623,088
Net increase (decrease) in cash and cash equivalents (3,676,247) 2,279,019 (4,448,024)
Cash and cash equivalents at beginning of year 4,261,051 1,982,032 6,430,056
------------ ----------- -----------
Cash and cash equivalents at end of year $ 584,804 $ 4,261,051 $ 1,982,032
============ =========== ===========
Supplemental schedule of cash flow
information-cash paid for interest $ 125,620 $ 114,288 $ 39,442
</TABLE>
Supplemental disclosure of non-cash transaction in 1996:
Exchange of $150,000 convertible debentures in partial payment of exercise
of stock warrants.
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 7
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------
Number Par Additional Deferred Unrealized Cumulative
of Shares Value Paid-in Deferred Contract Gain/Loss on Translation
Capital Compensation Costs investments Adjustment
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 9,333,608 $ 93,336 $62,889,244 $(193,600) $ (4,121)
Effect of SI Merger 866,175 8,662 11,700,581
Exercise of stock options 136,244 1,362 515,847
Issuance of common stock 1,500 15 28,740
Purchase of fractional shares (21)
Amortization of deferred
compensation 112,680
Unrealized loss on investments (573,081)
Translation adjustment 17,314
Net loss
-------------------------------------------------------------------------------------------------
Balance at March 31, 1995 10,337,506 103,375 75,134,412 (80,920) (573,081) 13,193
Exercise of warrants 65,840 658 499,342
Exercise of stock options 19,660 197 29,772
Purchase of fractional shares (10)
Amortization of deferred
compensation 29,960
Unrealized gain on investments 511,111
Translation adjustment (8,591)
Net loss
-------------------------------------------------------------------------------------------------
Balance at March 31, 1996 10,422,996 104,230 75,663,526 (50,960) (61,970) 4,602
Exercise of stock options 82,122 821 88,275
Amortization of deferred
compensation 25,480
Deferred contract costs-warrant 636,878 (636,878)
Warrant expense 79,613
Unrealized loss on investments (81,691)
Translation adjustment (14,494)
Net loss
-------------------------------------------------------------------------------------------------
Balance at March 31, 1997 10,505,118 $105,051 $76,388,679 $ (25,480) $(557,265) $(143,661) $ (9,892)
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
-----------------------------------
<S> <C> <C>
Balance at March 31, 1994 $(18,624,115) $ 44,160,744
Effect of SI Merger (10,520,944) 1,188,299
Exercise of stock options 517,209
Issuance of common stock 28,755
Purchase of fractional shares
Amortization of deferred
compensation 112,680
Unrealized loss on investments (573,081)
Translation adjustment 17,314
Net loss (7,036,204) (7,036,204)
-----------------------------------
Balance at March 31, 1995 (36,181,263) 38,415,716
Exercise of warrants 500,000
Exercise of stock options 29,969
Purchase of fractional shares
Amortization of deferred
compensation 29,960
Unrealized gain on investments 511,111
Translation adjustment (8,591)
Net loss (9,698,283) (9,698,283)
-----------------------------------
Balance at March 31, 1996 (45,879,546) 29,779,882
Exercise of stock options 89,096
Amortization of deferred
compensation 25,480
Deferred contract costs-warrant --
Warrant expense 79,613
Unrealized loss on investments (81,691)
Translation adjustment (14,494)
Net loss (13,377,173) (13,377,173)
-----------------------------------
Balance at March 31, 1997 $(59,256,719) $ 16,500,713
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 8
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
1. NATURE OF THE BUSINESS
American Superconductor Corporation (the "Company" or "ASC"), which was
formed on April 9, 1987, develops and commercializes high temperature
superconducting ("HTS") wire, wire products and systems, including current
leads, multistrand conductors, electromagnetic coils, and electromagnets and
subsystems comprising electromagnetics integrated with appropriate cooling
systems. The focus of the Company's development and commercialization efforts is
on electrical equipment for use by electric utilities and industrial users of
electrical power. For large-scale applications, the Company's development
efforts are focused on power transmission cables, motors, transformers,
generators and fault current limiters. In the area of power quality, the Company
is focused on marketing and selling commercial low temperature superconducting
magnetic energy storage ("SMES") devices, on development and commercialization
of new SMES products, and on development of power electronic subsystems and
engineering services for the power quality marketplace. The Company operates in
one business segment. As the Company is moving toward commercialization of its
technology, the Company is no longer reporting its financial statements as a
development stage enterprise.
The Company has devoted a significant part of its efforts to research and
development. The Company has recorded contract revenue related to research and
development contracts of $6,867,444, $7,526,306 and $6,596,177 for the fiscal
years ended March 31, 1997, 1996 and 1995, respectively. As discussed in Note
11, a significant portion of this contract revenue relates to development
contracts with two stockholders, Inco Alloys International, Inc. ("Inco") and
Pirelli Cavi S.p.A. ("Pirelli"). Included in costs of revenue are research and
development expenses of approximately $5,322,000, $5,256,000 and $3,032,000 for
the fiscal years ended March 31, 1997 1996 and 1995, respectively. Selling,
general and administrative expenses also included as costs of revenue for the
fiscal years ended March 31,1997, 1996 and 1995, were approximately $2,186,000,
$2,075,000 and $1,365,000, respectively.
As explained more fully in Note 3 to these financial statements, on April
8, 1997, a wholly owned subsidiary of the Company merged with Superconductivity
Inc. ("SI"). SI is a manufacturer of low temperature superconductor products for
the industrial power quality market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. As described more fully in Note 3, on
April 8, 1997, a wholly owned subsidiary of ASC merged with SI. These
consolidated financial statements have been prepared following the pooling of
interests method of accounting and reflect the combined financial position,
<PAGE> 9
operating results and cash flows of ASC and SI as if they had been combined for
all periods presented. Prior to the merger, SI's fiscal year end was December
31. Effective with the merger, SI's year end was changed to March 31 to conform
with ASC's fiscal year end. The audited results of SI's operations for the
twelve month periods ended December 31, 1996, 1995, and 1994 are included in the
Company's results of operations for the fiscal years ended March 31, 1997, 1996
and 1995, respectively. SI's audited balance sheets at December 31, 1996 and
1995 are included in the Company's balance sheets at March 31, 1997 and March
31, 1996, respectively. As a result, SI's results of operations for the quarter
ended March 31, 1997 are not included in the consolidated statements of
operations. In the quarter ended March 31, 1997, SI recorded revenues of
$262,295 and incurred a net loss of $2,156,399 which included merger expenses of
$1,457,054.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances have been
eliminated.
Reclassification
Certain prior year amounts have been reclassified to be consistent with
current year presentation.
Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist of government obligations, short-term certificates of deposit and
repurchase agreements.
Accounts Receivable
Due to scheduled billing requirements specified under certain contracts, a
portion of the Company's accounts receivable balance at March 31, 1997 and 1996
was unbilled. The unbilled portion included in the accounts receivable balance
was approximately $1,090,000 or 35% of total accounts receivable and $588,000 or
34% of total accounts receivable at March 31, 1997 and 1996, respectively. The
Company expects the amounts to be billed in the next year.
Long-term Marketable Securities
Long-term marketable securities, with original maturities of more than 12
months when purchased, consist primarily of U.S. Treasury Notes and a U.S.
government agency security. These marketable securities are stated at amortized
cost plus accrued interest which approximates fair value. Interest income is
accrued as earned.
Inventories
Inventories are stated at the lower of cost (determined on a first-in
first-out basis) or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, which range from 3 to 7
years. Leasehold improvements are amortized over the shorter of the useful life
of the improvement or the remaining term of the lease. Expenditures for
maintenance and repairs are expensed as incurred. Upon retirement or other
<PAGE> 10
disposition of assets, the costs and related accumulated depreciation are
eliminated from the accounts and the resulting gain or loss is reflected in
income.
Revenue Recognition
The Company has entered into contracts to perform research and development
(see Note 11). Revenues from these contracts are recognized utilizing the
percentage of completion method, measured by the relationship of costs incurred
to total contract costs. Costs include direct engineering and development costs
and applicable overhead. The Company generally recognizes its prototype revenue
upon shipment, or, for certain programs, on the percentage of completion method
of accounting. Customer deposits are recorded as deferred revenue until the
related sales are recognized. The Company rents equipment to customers on a
monthly basis and recognizes rental income as it is earned.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce net deferred tax assets to the amount expected to be
realized. No current or deferred income taxes have been provided because of the
net operating losses incurred by the Company since its inception.
Computation of Net Loss per Common Share
Net loss per common share is computed using the weighted average number of
common shares outstanding. Common equivalent shares are included in the per
share calculations only when the effect of their inclusion would be dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which is
effective for fiscal years ending after December 15, 1997, including interim
periods. Earlier application is not permitted. The Statement requires
restatement of all prior-period earnings per share presented after the effective
date. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. The Company will adopt SFAS 128 in fiscal
year 1998 and has determined the impact to be immaterial.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the local
currency. The assets and liabilities of this operation are translated into U.S.
dollars at the exchange rate in effect at the balance sheet date and income and
expense items are translated at average rates for the period. Cumulative
translation adjustments are excluded from net loss and shown as a separate
component of stockholders' equity. Foreign currency transaction gains and losses
are included in the net loss and have not been material to date.
<PAGE> 11
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and would
impact future results of operations and cash flows.
The Company invests its cash and cash equivalents with high credit quality
financial institutions and invests primarily in investment grade marketable
securities, including, but not limited to, government obligations, repurchase
agreements and money market funds.
The Company's accounts receivable are comprised mostly of amounts owed by
government agencies and some commercial companies. The Company does not require
collateral or other security to support customer receivables. The Company
believes any credit losses will not be material.
3. THE MERGER
In April, 1997, the Company completed a transaction (the "Merger") with SI.
This transaction, in which the Company acquired all of the outstanding stock of
SI by means of a merger of a subsidiary of the Company into SI, is being
accounted for as a pooling of interests. The merger was effected through the
exchange of 942,961 shares of the Company's common stock for all of the issued
and outstanding shares of SI, based on a merger exchange ratio of .3292 shares
of the Company's common stock for each share of SI common stock.
All fees and expenses related to the merger will be expensed as required
under the pooling of interests accounting method. A charge of $710,105 has been
recorded in the fiscal 1997 consolidated statement of operations reflecting
merger expenses incurred in the period. SI incurred merger expenses of
$1,457,054 in the quarter ended March 31, 1997. As noted in footnote 2, SI's
results of operations for the quarter ended March 31, 1997 are not included in
the consolidated statement of operations. The Company does not expect to incur
significant additional merger expenses in fiscal year 1998 related to this
transaction. Merger expenses consist principally of financial advisory, legal
and accounting fees.
Combined and separate results of ASC and SI for the periods preceding the
merger were as follows (in thousands):
<TABLE>
<CAPTION>
ASC SI Combined
--- -- --------
<S> <C> <C> <C>
Year ended March 31, 1997
Revenues ..................... $ 7,175 $ 3,376 $ 10,551
Net loss ..................... $(10,422) $(2,955) $(13,377)
Year ended March 31, 1996
Revenues ..................... $ 7,131 $ 3,633 $ 10,764
Net loss ..................... $ (7,320) $(2,378) $ (9,698)
Year ended March 31, 1995
Revenues ..................... $ 4,270 $ 4,323 $ 8,593
Net loss ..................... $ (5,772) $(1,264) $ (7,036)
</TABLE>
<PAGE> 12
4. LONG-TERM MARKETABLE SECURITIES
Long-term marketable securities at March 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Aggregate Fair Value Gross Unrealized
Cost Loss
<S> <C> <C> <C>
U.S. government and U.S.
government agency securities $15,589,767 $15,446,106 $143,661
</TABLE>
The Company's long-term marketable securities are classified as
available-for-sale securities and, accordingly, are recorded at amortized cost
plus accrued interest which approximates fair value. The difference between cost
and fair value is included in stockholders' equity. All of these securities
mature in one to three years.
5. INVENTORIES
Inventories at March 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 546,776 $ 720,655
Work-in-progress 2,164,179 1,651,620
Finished goods 229,701 39,348
---------- ----------
$2,940,656 $2,411,623
========== ==========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at March 31, 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
<S> <C> <C>
Accounts payable $2,919,739 $1,756,320
Accrued professional fees 585,522 --
Accrued expenses 563,051 294,790
Accrued vacation 215,300 150,365
----------------------------------------------------------------------
$4,283,612 $2,201,475
</TABLE>
<PAGE> 13
7. LONG-TERM DEBT
Long-term debt at March 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Subordinated convertible debentures issued by SI in 1993
and 1996, principal of $2,537,492 and $1,337,492 plus
accrued interest at 10% per annum aggregating $536,171
and $305,425 at March 31, 1997 and 1996, respectively,
due January 1998 $3,073,663 $1,642,917
Note payable to ABB Power T & D Company Inc.,
interest payable monthly at 7.5%,
with principal due April 1997 673,428 800,000
Obligation under capital lease -- 13,473
---------- ----------
3,747,091 2,456,390
Less amount due within one year 673,428 558,789
---------- ----------
$3,073,663 $1,897,601
========== ==========
</TABLE>
The note payable to ABB Power T & D Company, Inc. ("ABB") is secured by
specific items in SI's inventory and was payable in the amount of $224,479 upon
the sale of each of the first three specified items in 1997 or in full in April
1997. The related inventory is included in work-in-process with a carrying value
of $520,000 at December 31, 1996. Prior to the effective date of the Merger the
repayment terms of the ABB note were renegotiated. In lieu of the final
principal payment originally due April 20, 1997 as indicated above, the revised
repayment schedule consists of a principal payment in the amount of $330,000 due
April 30, 1997 with the balance of the note to be paid in twelve equal monthly
installments of principal and interest of $29,795 commencing May 31, 1997.
In conjunction with the Merger, SI's subordinated convertible debentures
have been exchanged for 7% subordinated notes of the Company, due April 8, 1999,
with interest payable semiannually. At the option of the Company, principal and
interest may also be paid in shares of the Company's common stock of equivalent
value.
8. INCOME TAXES
The principal components of the Company's deferred tax liabilities and
assets were the following:
<TABLE>
<CAPTION>
March 31 1997 1996
---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 22,932,000 $ 18,561,000
Research and development and other credits 2,035,000 1,673,000
Depreciation and other 1,918,000 1,101,000
Valuation allowance (26,885,000) (21,335,000)
---------------------------------------------------------------------------
Net -- --
---------------------------------------------------------------------------
</TABLE>
<PAGE> 14
At March 31, 1997 the Company had available for federal income tax purposes
net operating loss carryforwards of approximately $44,300,000, which commence
expiring in years 2005 through 2012. SI also had net operating loss
carryforwards amounting to approximately $13,217,000, the tax effect of which is
included above. These loss carryforwards begin expiring in 2003 and their
utilization by the Company will be subject to annual limitations. Research and
development and other credit carryforwards amounting to approximately $2,035,000
are available to offset federal and state income taxes and expire in years 2005
through 2012. Under current tax law, the utilization of net operating loss
carryforwards may be subject to annual limitations in the event of future
significant changes in ownership.
9. STOCKHOLDERS' EQUITY
In November 1994, the Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend effective November 28, 1994, for
stockholders of record on November 14, 1994. All share and per share data have
been restated to reflect the split.
STOCK-BASED COMPENSATION PLANS
Under APB 25 no compensation expense has been recorded. The Company has
adopted the disclosure only option under Statement of Financial Accounting
Standards (SFAS) 123 "Accounting for Stock-Based Compensation" as of March 31,
1997. Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of that Statement. Consistent
with the method of SFAS 123, the Company's net loss and net loss per share would
have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the years ended March 31, 1997 1996
--------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss (in thousands) As reported $(13,377) $(9,698)
Pro forma $(14,095) $(9,871)
Loss per share As reported $ (1.27) $(0.94)
Pro forma $ (1.34) $(0.96)
</TABLE>
The pro forma amounts included above combine the effects of the valuation
of the stock options issued under various stock-based compensation plans of ASC
together with the 1988 SI stock option plan. The following notes provide details
concerning the stock option plans of ASC, the 1988 Stock Option Plan of SI, (the
"1988 SI Plan") and SI stock purchase warrants.
Pursuant to the merger agreement, options outstanding under the 1988 SI
Plan to purchase shares of SI common stock were converted into options to
purchase shares of ASC common stock based on the merger exchange ratio of 0.3292
shares of ASC common stock for each share of SI stock.
<PAGE> 15
The ASC stock option plans
The pro forma amounts include the effects of all activity under ASC's
stock-based compensation plans since April 1, 1995. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions used for grants; a weighted average
risk free interest rate of 6.4% and 5.5% in 1997 and 1996 respectively; expected
stock price volatility of 45%; no dividends; and a weighted average life of the
options of 5 years. The weighted average fair value of options granted during
1997 and 1996 was $5.02 per share and $6.42 per share respectively. The Company
expects it will have additional activity under these plans in the future.
ASC has five stock option plans including two Directors' Plans. The stock
option plans (the "Plans") include the 1987 Stock Plan (the "1987 Plan"), the
1993 Stock Option Plan (the "1993 Plan"), the 1996 Stock Incentive Plan (the
"1996 Plan"), the 1991 Directors' Stock Option Plan (the "1991 Directors' Plan")
and the 1994 Directors' Stock Option Plan (the "1994 Directors' Plan"). The
Plans are administered by the Compensation Committee of the Board of Directors
and permit the Company to sell or award common stock or to grant stock options
for the purchase of common stock.
The Plans provide for the issuance of incentive stock options and
non-qualified stock options to purchase the Company's common stock. In the case
of incentive stock options, the exercise price shall be equal to at least the
fair market value of the common stock, as determined by the Board of Directors,
on the date of grant. In the event that non-qualified stock options are granted
under the 1987 Plan, the exercise price shall be not less than the lesser of the
book value per share of common stock at the end of the fiscal year preceding the
date of grant or 50% of the fair market value at the time of grant.
The 1991 and 1994 Directors' Plans are stock option plans for members of
the Board of Directors who are not also employees of the Company ("outside
directors"). The 1994 Directors' Plan provides for the automatic grant of stock
options for the purchase of common stock by outside directors at an exercise
price equal to fair market value at the grant date. The 1991 Directors' Plan is
no longer operative.
Options granted under the Plans generally become exercisable in equal
annual increments over a four or five year period and expire 10 years from the
date of grant or from two to three months after termination of employment.
<PAGE> 16
The following table summarizes information about stock options outstanding
at March 31, 1997.
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 3/31/97 Life Price at 3/31/97 Price
-------------- ---------- ---- ----- ---------- -----
<C> <C> <C> <C> <C> <C>
$ .27 - 1.07 140,350 3.3 $ 0.44 140,350 $ 0.44
$ 6.23 - 9.75 894,765 8.4 $ 9.11 217,465 $ 7.48
$ 10.25 - 13.50 565,650 8.3 $12.47 152,370 $11.61
$ 14.00 - 18.50 404,400 7.5 $16.78 164,660 $17.25
$ 19.83 - 23.25 540,500 7.3 $21.72 222,050 $21.67
--------- -------
$ .27 - 23.25 2,545,665 896,895
========= =======
</TABLE>
The following table summarizes the information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
Weighted average Number
Shares Exercise Price Exercisable
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at March 31, 1994 979,935 $ 7.79 231,386
--------------------------------------------------------------------------------
Granted 746,500 $20.89
Exercised (132,540) $ 3.89
Canceled (49,410) $14.02
--------------------------------------------------------------------------------
Outstanding at March 31, 1995 1,544,485 $14.25 375,495
--------------------------------------------------------------------------------
Granted 482,600 $13.71
Exercised (19,660) $ 1.44
Canceled (14,670) $19.11
--------------------------------------------------------------------------------
Outstanding at March 31, 1996 1,992,755 $14.21 652,885
--------------------------------------------------------------------------------
Granted 766,650 $10.43
Exercised (74,880) $ 1.11
Canceled (138,860) $17.49
--------------------------------------------------------------------------------
Outstanding at March 31, 1997 2,545,665 $13.28 896,895
================================================================================
Available for grant at March 31, 1997 934,810
=======
</TABLE>
<PAGE> 17
The 1988 SI Stock Option Plan
Pro forma information relative to net loss has been determined using the
"minimum value" method of SFAS 123. The fair value for these options was
estimated at the date of the grant using the present-value method with the
following assumptions for 1997 and 1996: risk-free interest rate of 6%; no
dividends; and a weighted-average expected life of the options of 7 years. The
minimum-value method was developed for use in estimating the minimum fair value
of options for a non-public company.
In the following summary of the status of the 1988 SI Plan, each original
option to purchase SI common stock has been converted to an equivalent number of
options to purchase ASC stock by multiplying the original number of shares
subject to options by the merger exchange ratio of 0.3292 and the corresponding
original exercise prices have been converted by dividing by the same merger
exchange ratio:
<TABLE>
<CAPTION>
Number of Range of
Options Exercise Price
------- --------------
<S> <C> <C>
Outstanding at January 1, 1994 164,550 $0.30 - 7.59
Granted 20,410 15.19
Exercised (3,703) 0.76 - 3.04
Canceled (2,058) 3.04 - 7.59
--------
Outstanding at January 1, 1995 179,199 0.30 - 15.19
Granted 16,789 15.19
--------
Outstanding at January 1, 1996 195,988 0.30 - 15.19
Granted 18,106 15.19
Exercised (7,242) 0.30 - 0.76
Canceled (32,697) 3.04 - 15.19
--------
Outstanding at December 31, 1996 174,155 $0.30 - 15.19
========
Exercisable at December 31, 1996 99,632 $0.30 - 15.19
========
</TABLE>
The following table details the weighted average remaining contractual life
of options outstanding at December 31, 1996 using the equivalent ASC shares and
ASC exercise prices:
<TABLE>
<CAPTION>
Number of Options Remaining Contractual
Exercise Price Outstanding Life of Options Outstanding
-------------- ----------- ---------------------------
<S> <C> <C>
$ 0.30 19,423 2.23 years
$ 0.76 15,637 3.01 years
$ 3.04 10,147 4.52 years
$ 7.59 80,391 6.75 years
$15.19 48,557 8.59 years
-------
174,155
</TABLE>
At the time of the Merger options to purchase 172,427 shares of ASC common
stock were issued in exchange for outstanding options under the 1988 SI Plan.
<PAGE> 18
SI Stock Purchase Warrants
In 1993 and 1996 SI issued warrants to its convertible debenture holders to
purchase 1,080,000 shares of common stock at $2.50 per share. These warrants
were still outstanding at December 31, 1996. Holders of these warrants were
allowed to exercise them on a cashless basis at the time of the Merger and
received 83,484 shares of ASC common stock in the merger in exchange for the SI
shares acquired upon exercise of such warrants.
Deferred compensation
The Company recorded an increase to additional paid-in capital and a
corresponding charge to deferred compensation of approximately $127,000 in
fiscal year 1993 related to the issuance of 10,000 shares of common stock.
Compensation expense related to this and other prior stock transactions of
approximately $25,000, $30,000, and $113,000 was recorded for the fiscal years
ended March 31, 1997, 1996 and 1995, respectively.
10. COMMITMENTS
The Company rents its headquarters premises in Westborough, Massachusetts
under an operating lease, the first term of which expires in May 1998. The
Company has an option to extend this lease for two additional five-year periods.
The Company also rents operating facilities near Madison, Wisconsin under a
lease which expires December 31, 1998. Under both leases the Company pays for
real estate taxes, certain insurance coverage and operating expenses.
In October 1992, the Company entered into a five-year collaborative
technology development agreement with Superlink Joint Venture. The Company has
the right to terminate this agreement under certain conditions.
Rent expense under the leases mentioned above and research and development
expenses related to the technology agreement with Superlink Joint Venture
included in the consolidated statements of income were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Rent expense $520,850 $495,283 $481,984
-------- -------- --------
Research and development expenses $135,000 $150,000 $230,000
-------- -------- --------
</TABLE>
Minimum future lease and funding commitments at March 31, 1997 were as
follows:
<TABLE>
<CAPTION>
For the years ended March 31 Leases Funding Total
------ ------- -----
<S> <C> <C> <C>
1998 $524,347 $50,000 $574,347
1999 $170,760 -- $170,760
</TABLE>
<PAGE> 19
11. RESEARCH AND DEVELOPMENT AGREEMENTS
In March of 1996 the Company extended its development contract with
Pirelli, a Stockholder in the Company, to jointly develop high temperature
superconducting cable wires. The Company terminated its development contracts
with both Hoechst AG and Inco Alloys International in August 1994 and December
1996, respectively. The Company recorded revenues under these contracts as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Inco $ 825,000 $1,100,000 $1,100,000
Pirelli 2,500,000 2,831,000 1,000,000
Hoechst -- -- 500,000
-------------------------------------------------------------------
$3,325,000 $3,931,000 $2,600,000
===================================================================
</TABLE>
Future funding commitments under the Pirelli contract are approximately
$5,250,000 over the next two and one half years.
In March 1996, the Company entered into a new strategic alliance with the
Electric Power Research Institute (EPRI) to develop and commercialize
next-generation HTS wire. Under this agreement, warrants to purchase common
stock of the Company will be granted to EPRI and become exercisable over the
next five years. The Company will receive exclusive license rights to
jointly-developed intellectual property from EPRI. This agreement is subject to
early termination if certain conditions are not met. The Company recorded an
increase to additional paid-in capital and a corresponding charge to deferred
contract costs of $637,000 in fiscal 1997 relating to these warrants. Warrant
expense related to this agreement was $80,000 for the fiscal year ended March
31, 1997.
12. COST SHARING ARRANGEMENTS
The Company has entered into several cost-sharing arrangements with various
agencies of the United States government. These funds are used to directly
offset the Company's research and development and selling, general and
administrative expenses and to purchase capital equipment. The Company has
recorded costs (including capital equipment purchases) and funding under these
agreements of $3,197,000 and $1,706,000, respectively for fiscal 1997 and
$2,590,000 and $985,000, respectively for fiscal 1996. At March 31, 1997, total
funding received to date under these agreements was $5,853,000. Future funding
expected to be received under existing agreements is approximately $6,355,000
over the next four years subject to continued future funding allocations.
<PAGE> 20
13. RELATED PARTY TRANSACTIONS
In fiscal 1995 the Company made a series of loans to an officer of the
Company in the aggregate amount of $671,000 including accrued interest. The
Compensation Committee of the Board of Directors forgave $206,700 and $104,800
in fiscal years 1997 and 1996, respectively, of principal and accrued interest
of the loans. In addition, the officer repaid $100,000 of principal in November
1996. The remaining principal and interest on the loan, which is approximately
$331,000, is repayable on November 1, 1998.
14. EMPLOYEE BENEFIT PLANS
The Company has implemented two deferred compensation plans under Section
401(k) of the Internal Revenue Code. Any contributions by the Company are
discretionary (none were made in fiscal 1997, 1996 or 1995). The Company does
not have post-retirement or post-employment benefit plans.
15. WRITE DOWN OF INVENTORY AND EQUIPMENT
Pursuant to Statement of Financial Accounting Standards ("SFAS") 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company recorded a provision of $407,000 included in the
consolidated statements of operations in the year ended March 31, 1996. This
provision was required to write down certain items of leased equipment to their
estimated fair value.
In addition, provisions were recorded for certain work-in-process inventory
of $445,000 and $768,000 for the years ended March 31, 1997 and 1996,
respectively. These provisions were recorded due to the inventory not meeting
required performance specifications.
Collectively, these provisions were included in costs of revenue for the
years end March 31, 1997 and 1996.
16. SUBSEQUENT EVENTS
In April 1997, the Company entered into a strategic alliance agreement with
an affiliate of Electricite de France ("EDF") under which EDF purchased one
million shares of the Company's common stock at $10 per share. The Company
intends to use the proceeds of this $10 million equity investment to accelerate
the development and commercialization of HTS technology for uses specific to the
electric utility industry.
On July 31, 1997 the Company completed a transaction in which the Company
acquired all the outstanding stock of Applied Engineering Technologies, Ltd.
("AET") in exchange for 68,306 shares of the Company's common stock, valued at
approximately $700,000 as of the closing of the acquisition. The Company also
assumed approximately $121,000 of AET's liabilities. AET will operate as a
division of the Company under the name AET Cryogenics. The transaction will be
accounted for under the pooling of interests method.
<PAGE> 21
17. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement is effective
for fiscal years beginning after December 15, 1997. Management does not believe
the implementation of this statement will have any significant effect on the
Company's financial statements.
In June 1997 the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards for the
way public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major business customers. This
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments, which are
components of an enterprise about which separate financial information is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement is effective for
financial statements for periods beginning after December 15, 1997. Management
is evaluating this Statement to determine what information is required to be
disclosed.
<PAGE> 1
EXHIBIT 99.2
American Superconductor Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
American Superconductor Corporation (the "Company") was founded in 1987 to
develop for commercialization high temperature superconducting ("HTS") wires and
wire products. As the Company is moving toward commercialization of the
technology, the Company is no longer reporting its financial statements as a
development stage enterprise.
Results for all periods presented have been restated to reflect the
acquisition of Superconductivity, Inc. ("SI"), a developer and manufacturer of
low temperature superconductor products for the industrial power quality market.
The Company completed the transaction on April 8, 1997, acquiring all the
outstanding stock of SI by means of a merger of a subsidiary of the Company into
SI, which is now being operated as a wholly-owned subsidiary of the Company. The
transaction was accounted for as a pooling of interests. When referring to
results for the Company prior to the merger the term "Former ASC" is used.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Revenues
Total revenues decreased to $10,551,000 in fiscal 1997 from $10,764,000 in
fiscal 1996. The Former ASC's revenues from research and development contracts,
prototype development contracts and the sale of prototypes increased to
$7,175,000 in fiscal 1997 from $7,131,000 in fiscal 1996. This increase was due
primarily to work performed on a research and development contract with Asea
Brown Boveri (ABB) and increases in funding on various U. S. Government grants
and prototype development contracts. This increase was largely offset by a drop
in prototype sales associated with a major cable prototype on which the Former
ASC concluded shipping HTS wire in the year ended March 31, 1996, and by the
discontinuation (effective December 31, 1996) of the joint research and
development program on metallic precursor wire technology with Inco Alloys
International, Inc., which had been providing $1.1 million in annual funding.
At SI, revenues in fiscal 1997 were $3,376,000 compared to $3,633,000 in
fiscal 1996. This decrease in revenues is due to the completion of a long-term
cost-plus-fixed-fee government contract in September 1996, which was in progress
during all of fiscal 1996. SI began an additional long-term government contract
in October of 1996; however, revenue under this firm fixed-price contract will
not be recognized until fiscal 1998. The decrease in SI's contract revenue (from
a total of $2,762,000 in 1996 to $1,570,000 in 1997) was partially offset by
SI's first commercial sale of a customer evaluation unit which generated
$993,000 in revenue in fiscal 1997.
In addition to reported revenues, the Former ASC also received funding of
$1,706,000 in fiscal 1997 under government cost-sharing agreements as compared
to $985,000 in fiscal 1996. This increased cost-sharing funding was primarily
due to the award of a $20.5 million Phase II Superconductivity Partnership
Initiative (SPI) contract on commercial-scale HTS motors by the Department of
Energy to the Company and Reliance Electric Company (a Rockwell Automation
business). The Company expects to receive approximately $7.3 million over the
next five years (including the year ended March 31, 1997) and Reliance expects
to receive $2.9 million, with each company investing a corresponding amount of
their own funds to bring the total program value to $20.5 million. The Company
anticipates that a portion of its funding in the future will continue to come
from cost-sharing agreements as the Company continues to develop joint programs
with government agencies. Funding from government cost-sharing agreements is
recorded as an offset to research and development and selling, general and
administrative expenses, as required by government contract accounting
guidelines, rather than as revenue.
Operating expenses
The Company's total operating expenses in fiscal 1997 were $23,345,000 compared
to $21,796,000 in fiscal 1996. At the Former ASC, operating expenses increased
to $18,035,000 in fiscal 1997 from $15,992,000 in fiscal 1996. Costs of revenue,
which include costs of research and development contracts and costs of
prototypes and prototype development contracts, increased to $7,508,000 in
fiscal 1997 compared to $7,331,000 in fiscal 1996 at the Former ASC. This
increase reflects expenditures to support the increase in contract and prototype
development revenues, including the hiring of additional personnel and purchases
of materials and equipment, partially offset by lower costs of revenue
associated with the decreased sales of prototypes.
<PAGE> 2
At SI, operating expenses decreased to $5,310,000 in fiscal 1997 from
$5,804,000 in fiscal 1996. SI's cost of revenue decreased to $3,070,000 in
fiscal 1997 from $4,222,000 in fiscal 1996. Included in cost of revenue are
write-down provisions of $445,000 and $1,175,000 in fiscal 1997 and fiscal 1996
respectively. These provisions were required to adjust the carrying values of
certain items of inventory and equipment to their market values.
Research and development ("R&D") expenses increased to $8,477,000 in fiscal
1997 from $5,704,000 the prior year. The Former ASC's R&D expenses were
$7,709,000 in fiscal 1997 compared to $5,341,000 in fiscal 1996. This increase
was due to the continued scale-up of the Former ASC's internal research and
development activities including the hiring of additional personnel and
purchases of materials and equipment. In addition to these expenses, a portion
of the Former ASC's R&D expenditures related to externally funded development
contracts has been classified as costs of revenue (rather than as R&D expenses).
These R&D expenditures that were included as costs of revenue during fiscal 1997
and fiscal 1996 were $5,322,000 and $5,256,000, respectively. Additionally, R&D
expenses that were offset by cost share funding were $879,000 and $584,000 in
fiscal years 1997 and 1996, respectively. At SI, R&D expenses increased from
$363,000 in fiscal 1996 to $769,000 in fiscal 1997 because a higher proportion
of R&D expenses were classified as cost of revenue as a result of the higher
funding by the government cost-plus-fixed-fee contract in fiscal 1996 because of
the completion of the contract during fiscal 1997.
Selling, general and administrative ("SG&A") expenses were $4,291,000 in
fiscal 1997 as compared to $4,538,000 in fiscal 1996. At the Former ASC, SG&A
expenses decreased to $2,818,000 in fiscal 1997 from $3,319,000 in fiscal 1996.
This was primarily the result of certain SG&A expenditures that were offset by
the increased funding received under cost sharing agreements. The SG&A amounts
offset by cost share funding at the Former ASC were $828,000 and $378,000 in
fiscal years 1997 and 1996, respectively. SI's SG&A expenses increased from
$1,219,000 in fiscal 1996 to $1,472,000 in fiscal 1997. This increase was
principally due to an increase in selling expenses, primarily relating to the
hiring of additional sales and marketing personnel to support the South African
market and SI's expanding line of commercial products. In addition to these
expenses, a portion of the Former ASC's SG&A expenditures related to externally
funded development contracts has been classified as costs of revenue (rather
than as SG&A expenses). SG&A expenditures included as costs of revenue during
fiscal 1997 and fiscal 1996 were $2,186,000 and $2,075,000, respectively.
Non-operating expenses
Interest income decreased to $1,177,000 in fiscal 1997, as compared to
$1,585,000 in fiscal 1996. This decrease primarily reflects lower cash, cash
equivalents and long-term marketable securities balances available for
investment as a result of cash being used to fund the Company's operations and
to purchase capital equipment. Interest expense increased from $215,000 in
fiscal 1996 to $356,000 in fiscal 1997 primarily due to SI's $1,200,000
convertible debenture financing. Other expense, net is comprised primarily of
miscellaneous taxes net of gains on the disposition of excess capital equipment.
Merger related fees of $710,000 in fiscal 1997 related to the costs
incurred through March 31, 1997 in connection with the Company's acquisition of
SI, and consisted primarily of financial advisory and legal fees. In fiscal 1997
SI incurred professional fees relating to a terminated merger negotiation
amounting to $670,000.
The Company expects to continue to incur operating losses for at least the next
few years, as it continues to devote significant financial resources to its
research and development activities.
The Company expects to be a party to agreements which, from time to time,
may result in costs incurred exceeding expected revenues under such contracts.
The Company may enter into such agreements for a variety of reasons including,
but not limited to, entering new product application areas, furthering the
development of key technologies, and advancing the demonstration of commercial
prototypes in critical market applications.
In October 1995, Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" was issued. The expense recognition
provision encouraged by SFAS 123 would require fair-value based financial
accounting to recognize compensation expense for employee stock option plans.
The Company made a determination to elect the disclosure only alternative and
accordingly the Company has disclosed the pro forma net loss and per share
amounts in the notes to the financial statements using the fair value based
method beginning in fiscal 1997, with comparable disclosures for fiscal 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128),
which is effective for fiscal years ending after December 15, 1997, including
interim periods. Earlier application is not permitted. The Statement requires
restatement of all prior-period earnings per share presented after the effective
date. SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share. The Company will adopt SFAS 128 in fiscal
year 1998 and has determined the impact to be immaterial.
<PAGE> 3
FISCAL YEARS ENDED MARCH 31, 1996 AND MARCH 31, 1995.
Revenues
Total revenues increased to $10,764,000 in fiscal 1996 from $8,593,000 in fiscal
1995. The Former ASC's revenues from research and development contracts,
prototype development contracts and the sale of prototypes increased to
$7,131,000 in fiscal 1996 from $4,270,000 in fiscal 1995. This increase was due
primarily to the expansion of the corporate development contract with Pirelli
Cavi S.p.A. and an increase in sales of prototypes. This increase was partially
offset by the completion of work and related funding under a collaborative
research and development agreement in August 1994.
The Former ASC also received funding of $985,000 in fiscal 1996 under
government cost-sharing agreements as compared to $2,866,000 in fiscal 1995.
This lower level of cost-sharing funding was primarily due to a decrease in work
performed under several cost-sharing contracts with the Department of Energy and
the Department of Commerce which were completed during fiscal 1996. This funding
was recorded as an offset to research and development and selling, general and
administrative expenses, as required by government contract accounting
guidelines, rather than as revenue.
At SI, revenues decreased from $4,323,000 in fiscal 1995 to $3,634,000 in
fiscal 1996. This decrease was attributable to lower revenues recognized on the
cost-plus-fixed-fee contract ($3,356,000 in fiscal 1995 compared to $2,575,000
in fiscal 1996).
Operating expenses
The Company's total operating expenses in fiscal 1996 were $21,796,000, compared
to $17,267,000 in fiscal 1995. At the Former ASC, operating expenses were
$15,992,000, compared to $11,887,000 in fiscal 1995. Costs of revenue at the
Former ASC, which include costs of research and development contracts and costs
of prototypes and prototype development contracts, increased to $7,331,000 in
fiscal 1996 compared to $4,397,000 in fiscal 1995. This increase reflects
expenditures to support the increase in sales of prototypes, including the
hiring of additional personnel and purchases of materials and equipment.
At SI, operating expenses increased from $5,379,000 in fiscal 1995 to
$5,803,000 in fiscal 1996. This increase was primarily due to two factors
affecting cost of revenue in fiscal 1996. These were a write-down of inventory
and equipment that amounted to $1,175,000 which was partially offset by a
decrease in other costs of revenue of $550,000 primarily resulting from the
reduction in revenue from the government cost-plus-fixed-fee contract.
Research and development expenses increased to $5,704,000 in fiscal 1996
from $5,349,000 the prior year. This increase was due to the continued scale-up
of the Company's internal research and development activities including the
hiring of additional personnel and purchases of materials and equipment. In
addition to these expenses, a portion of R&D expenditures related to externally
funded development contracts has been classified as costs of revenue (rather
than as research and development expenses). R&D expenditures included as costs
of revenue during fiscal 1996 and fiscal 1995 were $5,256,000, and $3,032,000,
respectively. Additionally, R&D expenses that were offset by cost share funding
were $584,000 and $1,673,000 in fiscal years 1996 and 1995, respectively.
Selling, general and administrative expenses were $4,538,000 in fiscal 1996
as compared to $3,924,000 in fiscal 1995. This increase reflects increased
staffing, recruiting costs, and legal costs associated with the signing of
several corporate development agreements and other expenses necessary to support
the overall increase in the Company's revenues, sales and marketing programs and
internal research and development activities. In addition to these expenses, a
portion of SG&A expenditures related to externally funded development contracts
has been classified as costs of revenue (rather than as SG&A expenses). SG&A
expenditures included as costs of contract revenue during fiscal 1996 and fiscal
1995 were $2,075,000 and $1,365,000 respectively. The SG&A amounts offset by
cost share funding were $378,000 and $956,000 in fiscal years 1996 and 1995,
respectively.
Non-operating expenses
Interest income decreased to $1,585,000 in fiscal 1996 as compared to
$1,873,000 in fiscal 1995. This decrease primarily reflects lower cash, cash
equivalents and long-term marketable securities balances available for
investment as a result of cash being used to fund the Company's operations and
to purchase capital equipment. Other expense, net is comprised primarily of
miscellaneous taxes net of gains on the disposition of excess capital equipment.
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash, cash equivalents and long-term
marketable securities totaling $16,031,000 compared to cash, cash equivalents
and long-term marketable securities totaling $26,519,000 at March 31, 1996. In
fiscal 1997, approximately $10,098,000 was used to fund the Company's
operations. An additional $1,451,000 was used to acquire capital equipment,
primarily for research and development and manufacturing, and to make leasehold
improvements to its facilities.
On April 7, 1997, the Former ASC entered into a strategic alliance
agreement with an affiliate of Electricite de France (EDF) under which EDF
purchased one million shares of the Company's common stock at $10 per share. The
Company intends to use this $10,000,000 equity investment by EDF, which is not
included in the Company's cash balance as of March 31, 1997, to accelerate the
development and commercialization of HTS technology for uses specific to the
electric utility industry.
On April 8, 1997, the Company completed the Merger with SI. The transaction
was effected through the exchange of 942,961 shares of the Company's common
stock for all of the issued and outstanding shares of SI, based on a Merger
exchange ratio of .3292 shares of Company common stock for each share of SI
common stock. As a result of the Merger, the Company also assumed approximately
$6.4 million of SI's liabilities, approximately $3.9 million of which were paid
in April, 1997.
On July 31, 1997 the Company completed a transaction in which the Company
acquired all the outstanding stock of Applied Engineering Technologies, Ltd.
("AET") in exchange for 68,306 shares of the Company's common stock, valued at
approximately $700,000 as of the closing of the acquisition. The Company also
assumed approximately $121,000 of AET's liabilities. AET will operate as a
division of the Company under the name AET Cryogenics. The transaction will be
accounted for under the pooling of interests method.
The Company has potential funding commitments of approximately $15,437,000
to be received after March 31, 1997 from strategic partners and government
agencies (all of which is due within the next four years). However, a total of
$10,187,000 of these commitments (representing commitments under government
contracts) is subject to cancellation.
The Company's policy is to invest available funds in short-term,
intermediate-term, and long-term investment grade marketable securities,
including but not limited to government obligations, repurchase agreements,
certificates of deposit and money market funds.
Transaction gains and losses from foreign currency transactions have not
been material to date.
To date, inflation has not had a material impact on the Company's financial
results.
FUTURE OPERATING RESULTS
The Company does not provide forecasts of its future financial performance.
However, various statements included herein, as well as other statements made
from time to time by Company representatives, which are not statements of
historical facts (including but not limited to statements concerning the future
commercial success of the Company) constitute forward looking statements and are
made under the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. There are a number of important factors which could cause
the Company's actual results of operations and financial condition in the future
to vary from that indicated in such forward looking statements. Factors that may
cause such differences include, without limitation, the risks, uncertainties and
other information set forth below.
The Company's products are in the early stages of commercialization and
testing and there can be no assurance that these products will be technically or
commercially successful or that the Company will be able to manufacture adequate
quantities of its products at commercially acceptable cost levels or on a timely
basis. The Company believes that several years of further development will be
necessary before HTS wires and wire products will be available for significant
commercial end-use applications.
On April 8, 1997, the Company completed the Merger with SI, a developer and
manufacturer of low temperature superconductor products for the industrial power
quality market. The Company believes the acquisition of SI provides the Company
with a strong commercial presence in this market. However, there can be no
assurance that this Merger will produce the benefits anticipated by the Company.
The Company expects to incur operating losses for at least the next few
years, as it continues to devote significant financial resources to its research
and development activities.
The Company expects that some or all of the HTS materials used in
manufacturing its products, and certain of the methods used by the Company in
processing HTS materials, are or will become covered by patents issued to other
parties
<PAGE> 5
(who may include competitors of the Company). Accordingly, the Company
will need to acquire licenses to, or successfully contest the validity of, such
patents in order to avoid patent infringement claims being brought against it.
Although the Company expects that it will be able to obtain, on commercially
reasonable terms, any required licenses, there can be no assurance that it will
be able to do so. If the Company does not obtain such licenses, the Company may
be forced to contest the validity of such patents or may face an infringement
claim by the owners of such patents. The outcome of any such litigation is
impossible to predict with certainty, and, regardless of its outcome, the
Company may incur substantial costs in connection with any such litigation. The
Company generally relies on a combination of patent protection and trade secret
law to protect its proprietary technology. There can be no assurance that the
steps taken by the Company to protect its technology will be adequate to prevent
misappropriation by third parties or that third parties will not be able to
independently develop similar technology.
The HTS industry is characterized by rapidly advancing technology and the
Company encounters intense competition in the development of HTS products,
particularly from several major Japanese companies, including Sumitomo Electric
Industries, Ltd., Showa Electric Wire & Cable Co., Ltd., Hitachi, Ltd., Hitachi
Cable, Ltd., Furukawa Electric Co., Ltd., Fujikura Ltd., Mitsubishi Electric
Corporation, and Kobe Steel, Ltd. Other competitors include Siemens A.G. in
Germany, B.I.C.C. and Oxford Instruments in England, Alcatel-Alsthom in France,
NKT in Denmark, and Intermagnetics General Corporation, Midwest
Superconductivity, Inc., and 3M in the United States. The future success of the
Company will depend in large part on its ability to keep pace with advancing HTS
technology and such industry standards as may develop. There can be no assurance
that the Company's development efforts will not be rendered obsolete by research
efforts and technological advances made by others. Moreover, many of the
Company's competitors have substantially greater financial resources and
research and development, manufacturing and marketing capabilities than the
Company. In addition, as the HTS industry develops, it is possible that other
large industrial companies may enter this field.
The Company believes that revenues from funded development contracts and
the sale of prototypes, together with its current cash and marketable
securities, should provide adequate funding to meet the Company's cash
requirements for its planned operations for at least the next year. Thereafter,
the Company may need substantial additional funds for its research and
development programs, operating expenses, licensing fees, scale-up of
manufacturing capabilities, expansion of sales and marketing capabilities,
potential acquisitions and working capital. Moreover, the Company may need
additional funds sooner than anticipated if the Company's performance deviates
significantly from its current operating plan or if there are significant
changes in competitive or other market factors. There can be no assurance that
such funds, whether from equity or debt financing, development contracts or
other sources, will be available on terms acceptable to the Company.
Insufficient funds may require the Company to reduce, delay or eliminate certain
research and development activities or to license or sell to others certain
proprietary technology, which could delay, either temporarily or permanently,
the development of certain products and technologies currently under development
by the Company.
For the Company to be financially successful, it must manufacture the
products developed by it in commercial quantities, at acceptable costs and on a
timely basis. The production of significant quantities at competitive costs
presents a number of technological and engineering challenges for the Company,
and significant start-up costs and unforeseen expenses may be incurred in
connection with attempts to manufacture commercial quantities of the Company's
products. In addition, the Company will be required to develop a marketing and
sales force that effectively demonstrates the advantages of its products over
more traditional products. The Company may also elect to enter into agreements
or relationships with third parties regarding the commercialization or marketing
of its products. There can be no assurance that the Company will be successful
in its marketing efforts, that it will be able to establish adequate sales and
distribution capabilities, that it will be able to enter into marketing
agreements or relationships with third parties on financially acceptable terms,
or that any such third parties will be successful in marketing the Company's
products.
