<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO CURRENT REPORT
ON
FORM 8-K/A
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): APRIL 8, 1997
AMERICAN SUPERCONDUCTOR CORPORATION
-----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-19672 04-2959321
- ---------------------------- ------------------------ ----------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
TWO TECHNOLOGY DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
--------------------------------
(Address of principal executive offices, including zip code)
(508) 836-4200
--------------
(Registrant's telephone number, including area code)
<PAGE> 2
The undersigned registrant hereby amends Item 7 of its Current Report on
Form 8-K, dated April 8, 1997, which excluded certain financial statements
because they were not available at the time of filing, to read in its entirety
as follows:
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired.
See pages 3 through 37 hereof.
(b) Pro forma financial information
See pages 38 through 42 hereof.
On April 8, 1997 American Superconductor Corporation ("ASC") completed a
transaction (the "Merger") in which ASC acquired all of the outstanding stock of
Superconductivity, Inc. ("SI") by means of a merger of SI into a subsidiary of
ASC. The Merger will be accounted for as a pooling of interests.
The unaudited pro forma combined condensed balance sheet was prepared as
if the Merger had occurred on March 31, 1997 and combines the balance sheet of
ASC as of March 31, 1997 with the balance sheet of SI as of December 31, 1996.
The unaudited pro forma combined statements of operations reflect the results of
operations of ASC for the three years ending March 31, 1997, March 31, 1996, and
March 31, 1995, combined with the results of operations of SI for the three
years ended December 31, 1996, December 31, 1995, December 31, 1994 respectively
as if the Merger had occurred on April 1, 1994.
The unaudited pro forma financial information was prepared utilizing the
accounting policies of the respective companies. The policies of the Company are
consistent with those of SI. This unaudited pro forma financial information does
not purport to be indicative of the results of operations that would have been
obtained if the operations had been combined as of the beginning of the periods
presented, and is not intended to be a projection of future results.
(c) Exhibits. See Exhibit Index attached hereto at Page 44.
<PAGE> 3
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
For the Years Ended December 31, 1996 and 1995
<PAGE> 4
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheets 2 - 3
Statements of Operations 4
Statements of Shareholders' Equity (Deficit) 5
Statements of Cash Flows 6 - 7
Notes to Financial Statements 8 - 16
<PAGE> 5
[LOGO]
S M I T H & G E S T E L A N D, L L P
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. 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.
Madison, Wisconsin /s/ SMITH & GESTELAND, LLP
February 7, 1997 --------------------------------------
SMITH & GESTELAND, LLP
- --------------------------------------------------------------------------------
Certified Public Accountants and Business Consultans * Post Office Box 1764 *
Madison , WI 53701-1764
(tel) 608/836-7500 * (fax) 608/836-7505 * (e-mail) [email protected]
<PAGE> 6
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
Current assets
Cash $ 7,890 $ 156,348
Receivables 552,242 241,901
Inventories 1,886,515 1,632,195
Prepaid expenses and other current assets 15,623 45,573
---------- ----------
Total current assets 2,462,270 2,076,017
---------- ----------
Machinery and equipment 1,036,568 1,000,625
Accumulated depreciation 902,173 829,970
---------- ----------
134,395 170,655
---------- ----------
Leased equipment 1,037,062 1,037,062
Accumulated depreciation 665,266 455,685
---------- ----------
371,796 581,377
---------- ----------
Total assets $2,968,461 $2,828,049
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 7
<TABLE>
<CAPTION>
1996 1995
----------- -----------
LIABILITIES
<S> <C> <C>
Current liabilities
Note payable - line of credit $ 530,000 $ 525,000
Accounts payable 961,000 658,942
Accrued liabilities 1,114,420 258,975
Deferred revenue 1,519,678 893,700
Current portion of long-term liabilities 673,428 554,311
----------- -----------
Total current liabilities 4,798,526 2,890,928
Long-term liabilities, less current portion 3,073,663 1,888,606
----------- -----------
Total liabilities 7,872,189 4,779,534
----------- -----------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, voting, $.01 par value
(Aggregate liquidation preference - $18,231,939):
Authorized shares - 4,000,000; issued and
outstanding shares - 2,114,668 21,147 21,147
Additional paid-in capital 11,678,374 11,678,374
Common stock, $.01 par value:
Authorized shares - 7,500,000; issued and
outstanding shares - 496,136 in 1996 and
474,136 in 1995 4,961 4,741
Additional paid-in capital 510,748 508,169
Retained earnings (deficit) (17,118,958) (14,163,916)
----------- -----------
Total shareholders' equity (deficit) (4,903,728) (1,951,485)
----------- -----------
Total liabilities and shareholders' equity
(deficit) $ 2,968,461 $ 2,828,049
=========== ===========
</TABLE>
3
<PAGE> 8
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
STATEMENTS OF OPERATIONS
For the Years Ended December 31
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Product sales $ 1,059,050 $
Contract revenue 1,570,474 2,761,758
Rental revenue 545,130 595,700
Other revenue 201,416 276,069
----------- -----------
Total revenues 3,376,070 3,633,527
----------- -----------
Costs and expenses:
Costs of revenue 3,069,750 4,221,626
Research and development 768,606 363,057
Marketing 680,406 411,905
General and administrative 791,774 806,811
----------- -----------
Total costs and expenses 5,310,536 5,803,399
----------- -----------
Loss from operations (1,934,466) (2,169,872)
Other income (expense):
Professional fees - nonoperating (669,627)
Interest income 5,417 6,133
Interest expense (356,366) (214,671)
----------- -----------
NET LOSS $(2,955,042) $(2,378,410)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 9
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ----------------------- Retained
Par Additional Par Additional Earnings
Value Paid-In Capital Value Paid-In Capital (Deficit) Total
----- --------------- ----- --------------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $21,147 $11,678,374 $2,742 $ 10,168 $(11,785,506) $ (73,075)
Issuance of 200,000 shares
of common stock from
exercise of warrants 1,999 498,001 500,000
Net loss (2,378,410) (2,378,410)
------- ----------- ------ -------- ------------ -----------
Balance at December 31, 1995 21,147 11,678,374 4,741 508,169 (14,163,916) (1,951,485)
Issuance of 22,000 shares
of common stock from
exercise of options 220 2,579 2,799
Net loss (2,955,042) (2,955,042)
------- ----------- ------ -------- ------------ -----------
Balance at December 31, 1996 $21,147 $11,678,374 $4,961 $510,748 $(17,118,958) $(4,903,728)
======= =========== ====== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 10
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
STATEMENTS OF CASH FLOWS
For the Years Ended December 31
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,955,042) $(2,378,410)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 281,782 482,668
Provision for impairment 444,538 1,175,142
Interest expense on convertible debentures 230,746 100,383
Changes in assets and liabilities:
Receivables (310,341) 630,734
Inventories (698,858) (984,695)
Prepaid expenses and other current assets 29,950 (2,725)
Accounts payable 302,058 (34,976)
Accrued liabilities 855,446 80,419
Deferred revenue 625,978 678,700
----------- -----------
Net cash used in operating activities (1,193,743) (252,760)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (35,943) (33,288)
----------- -----------
Net cash used in investing activities (35,943) (33,288)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (126,572) (422,352)
Proceeds from notes payable (net) 5,000
Proceeds from 10% convertible debentures 1,200,000
Proceeds from sale of common stock 2,800 350,000
----------- -----------
Net cash provided by (used in) financing
activities 1,081,228 (72,352)
----------- -----------
Decrease in cash (148,458) (358,400)
Cash - beginning 156,348 514,748
----------- -----------
Cash - ending $ 7,890 $ 156,348
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 11
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 125,620 $ 114,288
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During 1995, the company exchanged
$150,000 of its convertible
debentures for partial payment of
the exercise of common stock warrants
by the debenture holder.
</TABLE>
7
<PAGE> 12
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
Superconductivity, Inc. (the company), was incorporated on July 27,
1987, and commenced activities on March 22, 1988. Management's
plans for 1997 include a business combination (see Note 11) and
continued development, marketing, and sale or lease of SSD units.
The current principal markets for the SSD products are the United
States Government and a utility company based in South Africa.
Prior to 1996, the company was in the development stage.
B. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
C. INVENTORIES
Inventories are carried at the lower of cost or market using the
first-in, first-out (FIFO) method and consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $ 115,785 $ 433,670
Work in process 1,852,497 1,328,374
Finished goods 59,372
---------- ----------
2,027,654 1,762,044
Less allowance
for obsolescence 141,139 129,849
---------- ----------
$1,886,515 $1,632,195
========== ==========
</TABLE>
8
<PAGE> 13
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - INFORMATION ABOUT THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
D. EQUIPMENT AND LEASED EQUIPMENT
Equipment and leased equipment are stated at cost. Depreciation is
computed by the straight-line method for financial reporting
purposes.
E. GOVERNMENT CONTRACTS
Sales under the company's cost reimbursement government contracts
are recorded as costs are incurred and include estimated fees in
the proportion that costs incurred to-date bear to total estimated
costs. Costs incurred and estimated fees earned are billed monthly.
Sales under the company's fixed price commercial and government
contracts are recorded at the time of site installation and
customer acceptance. Customer deposits are recorded as deferred
revenue until the related sales are recognized.
F. 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.
NOTE 2 - NOTE PAYABLE - LINE OF CREDIT
The company has a $750,000 bank line of credit under which $530,000 is
outstanding at December 31, 1996. The line of credit expires December
19, 1997. Interest is payable monthly on the unpaid principal balance
at prime (8.25% at December 31, 1996) plus 2%. The line of credit is
secured by a General Business Security Agreement and assignment of
certain lease agreements. The collateral interest in inventory (SSD
unit #107) is subordinated to the note payable to the ABB Power T&D
Company, Inc. (see Note 3) and the collateral interest in inventory SSD
Unit #101 is subordinated to a collateral interest of Silcon Power
Electronics (SPE), relating to development fees payable to SPE.
9
<PAGE> 14
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995, consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable to ABB Power T&D Company, Inc.,
interest payable monthly at 7.5%,
with principal due April 1997. $ 673,428 $ 800,000
Subordinated convertible debentures issued
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 December 31, 1996 and 1995,
respectively, due January 1998. 3,073,663 1,642,917
---------- ----------
Total 3,747,091 2,442,917
Less amount due within one year 673,428 554,311
---------- ----------
$3,073,663 $1,888,606
========== ==========
</TABLE>
The note payable to ABB Power T&D Company, Inc. (ABB) is secured by SSD
unit #107 and is payable in the amount of $224,479 upon the sale of
each the first three SSD units in 1997 or in full in April 1997. SSD
unit #107 is included in work-in-process with a carrying value of
$520,000 at December 31, 1996.
The subordinated convertible debenture holders are also preferred and
common stockholders and a director of the company. The debentures are
secured by all intellectual property rights held by the company. The
debentures plus accrued but unpaid interest convert to Series F
preferred stock upon the first closing of a private placement of the
Series F preferred stock of not less than $2,500,000. The conversion
price is equal to the price paid by Series F purchasers. There is a
mandatory redemption of the principal and accrued but unpaid interest
on the debentures upon the closing of an initial public offering which
results in more than $5,000,000 proceeds to the company. The debenture
purchasers also received 1,080,000 common stock warrants exercisable at
$2.50 per share (see Note 5).
10
<PAGE> 15
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - LONG-TERM DEBT (continued)
Subsequent to December 31, 1996, the holders of the 1993 and 1996
convertible debentures extended the maturity date of January 31, 1997
to January 31, 1998. Accordingly, the 1993 and 1996 convertible
debentures are classified as a long-term liability at December 31,
1996.
NOTE 4 - PREFERRED STOCK
Preferred stock consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Preferred stock, voting, $.01 par value,
4,000,000 shares authorized:
Preferred Series A, 451,860 shares designated,
issued and outstanding, aggregate liquidation
preference of $1,695,087 at December 31, 1996 $ 4,519 $ 4,519
Additional paid-in capital - Preferred Series A 899,201 899,201
Preferred Series B, 472,250 shares designated,
issued and outstanding, aggregate liquidation
preference of $3,304,822 at December 31, 1996 4,723 4,723
Additional paid-in capital - Preferred Series B 1,884,277 1,884,277
Preferred Series C, 500,067 shares designated,
issued and outstanding, aggregate liquidation
preference of $4,773,784 at December 31, 1996 5,000 5,000
Additional paid-in capital - Preferred Series C 2,995,402 2,995,402
Preferred Series D, 200,000 shares designated,
issued and outstanding, aggregate liquidation
preference of $2,210,272 at December 31, 1996 2,000 2,000
Additional paid-in capital - Preferred Series D 1,498,000 1,498,000
Preferred Series E, 777,777 shares designated,
490,491 shares issued and outstanding,
aggregate liquidation preference of $6,247,974
at December 31, 1996 4,905 4,905
Additional paid-in capital - Preferred Series E 4,401,494 4,401,494
Preferred Series F, 1,500,000 shares designated,
no shares issued and outstanding
----------- -----------
Total preferred stock $11,699,521 $11,699,521
=========== ===========
</TABLE>
The company's articles of incorporation provide that merger or
consolidation of the company, except where the company is the surviving
entity, will be considered a liquidation for purposes of the
liquidation preference if the company's shareholders, as defined, own
less than 50 percent of the shares of the surviving entity.
11
<PAGE> 16
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - PREFERRED STOCK (continued)
Each share of preferred stock is convertible into one share of common
stock at the option of the holder, subject to certain antidilutive
adjustments. The preferred shareholders are entitled to preference
payments in liquidation aggregating the respective cost per share for
each series of preferred stock plus 8% per annum for each year in which
dividends are not declared and paid or set aside for preferred stock;
this 8% feature aggregates to $6,524,398 and $5,173,883 at December 31,
1996 and 1995, respectively.
NOTE 5 - STOCK OPTION PLAN AND WARRANTS
The Superconductivity, Inc., 1988 stock option plan provides for grants
of options to officers and certain other key employees of the company
to purchase in the aggregate up to 605,000 shares of the company's
common stock reserved for this purpose. Options are granted at prices
estimated to be fair market value at the date of grant and are
generally exercisable in equal annual installments over a four year
period beginning one year after date of grant. The options expire ten
years from date of grant or three months after an employee terminates
employment.
The types of options granted under the plan may be either incentive
stock options meeting certain Internal Revenue Code requirements or
nonstatutory stock options which are not intended to meet those
requirements.
The company has elected to follow APB No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations in accounting
for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No.
123, "Accounting for Stock-Based Compensation" (FAS 123), requires use
of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
Pro forma information regarding net loss is required by FAS 123 and has
been determined as if the company had accounted for its employee stock
options under the "minimum value" method of that statement. The fair
value for these options was estimated at the date of the grant using
the present-value method with the following assumptions for 1996 and
1995: risk-free interest rate of 6%; no dividends; and a
weighted-average expected life of the option of seven years.
12
<PAGE> 17
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - STOCK OPTION PLAN AND WARRANTS (continued)
The minimum-value method was developed for use in estimating the
minimum fair value of options for a non-public company. This model does
not necessarily provide a reliable single measure of the fair value of
the company's stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The
company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
------- -----------
<S> <C> <C>
Pro forma net loss $(2,999,422) $(2,399,763)
=========== ===========
A summary of the status of the company's stock option plans follows:
<CAPTION>
Number of Exercise Price
Options Per Option
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1995 544,348 $.10 - 5.00
Granted 51,000 5.00
------- -----------
Outstanding at December 31, 1995 595,348 $.10 - 5.00
Granted 55,000 5.00
Exercised (22,000) .10 - .25
Cancelled (99,323) .25 - 5.00
------- -----------
Outstanding at December 31, 1996 529,025 $.01 - 5.00
======= ===========
Exercisable at December 31, 1996 302,650 $.01 - 5.00
======= ===========
</TABLE>
13
<PAGE> 18
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - STOCK OPTION PLAN AND WARRANTS (continued)
The following table details the weighted average remaining contractual
life of options outstanding at December 31, 1996 by exercise price:
<TABLE>
<CAPTION>
Number of Options Remaining Contractual
Exercise Price Outstanding Life of Options Outstanding
-------------- ----------- ---------------------------
<S> <C> <C>
$0.10 59,000 2.23 years
$0.25 47,500 3.01 years
$1.00 30,825 4.52 years
$2.50 244,200 6.75 years
$5.00 147,500 8.59 years
</TABLE>
As explained in Note 3, the company issued warrants in 1993 and 1996 to
the convertible debenture holders to purchase 1,080,000 shares of
common stock at $2.50 per share. The company also issued warrants in
1993 to consultants to purchase 10,000 shares of common stock at $9.00
per share. These warrants are exercisable at any time and expire in
1998.
During 1995, warrants issued in 1989 for 200,000 shares of common stock
were exercised at $2.50 per share and warrants for 50,000 shares of
common stock expired on December 31, 1995.
As of December 31, 1996, 1,619,025 shares of authorized, but unissued
common stock are reserved for issuance in accordance with the warrants
and stock option plans described above.
NOTE 6 - INCOME TAXES
The components of the company's net deferred taxes consisted of the
following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Deferred tax assets $7,765,000 $ 6,326,000
Less valuation allowance 7,364,000 (6,155,000)
---------- -----------
Net deferred tax assets 401,000 171,000
Deferred tax liability (401,000) (171,000)
---------- -----------
$ -- $ --
========== ===========
</TABLE>
14
<PAGE> 19
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (continued)
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the
net deferred tax asset and their approximate tax effects were as
follows at December 31, 1996:
<TABLE>
<CAPTION>
Temporary Tax
Difference Effect
----------- ----------
<S> <C> <C>
Inventory, depreciation, deferred revenue
and other $ 2,975,000 $1,167,000
Net operating loss carryforward 13,217,000 5,183,000
Research tax credit carryforward 1,014,000
----------- ----------
$16,192,000 $7,364,000
=========== ==========
</TABLE>
The net operating and research tax credit carryforwards expire
beginning in 2003. Under provisions of the Tax Reform Act of 1986, the
utilization of the carryforwards may be limited as a result of future
significant changes in ownership.
NOTE 7 - LEASE
The lease for the company's operating facilities expires December 31,
1998, and is cancelable by the company or the lessor on December 31,
1997, upon notice during March 1997. Rent expense, $138,850 and
$113,283 in 1996 and 1995, respectively, is subject to an annual
adjustment based on the change in the Consumer Price Index; rent
expense for 1997 will be $142,347. The company also pays for
maintenance, certain insurance coverage, and real estate taxes.
NOTE 8 - EMPLOYEE RETIREMENT 401(K) PLAN
The company has a 401(k) employee savings plan which covers all
full-time employees who have completed six months of service and are at
least 21 years old. Any contributions by the company are discretionary
(none in 1996 or 1995).
15
<PAGE> 20
SUPERCONDUCTIVITY, INC.
Middleton, Wisconsin
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - PROVISION FOR IMPAIRMENT
Effective January 1, 1996, the company adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires that impairment losses be
recorded on long-lived assets that will be used in operations when
events and circumstances indicate that the assets might be impaired and
the fair value of those assets is less than the carrying amount of
those assets.
During 1995, events and circumstances indicated that certain items of
power electronics equipment in the company's SSD units in
work-in-process inventories ($768,302) and leased equipment ($406,840)
were impaired. This power electronics equipment did not meet the
required performance specifications. As a result, the company recorded
a provision of $1,175,142 in 1995, to adjust the carrying value of the
assets to their estimated fair value and classified the charge as part
of costs of revenue.
During 1996, events and circumstances indicated that certain SSD units
in inventory ($444,538) were impaired. As a result, the company
recorded a provision of $444,538 in 1996 to adjust the carrying value
of the assets to the estimated fair value and classified the charge as
part of costs of revenue.
NOTE 10 -MAJOR CUSTOMERS
The company's sales to three of its customers comprised 79% of total
sales in the year ended December 31, 1996. The company's sales to two
of its customers comprised 83% of total sales in the year ended
December 31, 1995.
NOTE 11 -SUBSEQUENT EVENT
The company signed a letter of intent on January 14, 1997, to merge
with a US publicly held company ("acquiror"). The merger would be
accounted for by the pooling of interest method. It is expected that
the company's preferred stockholders will convert to common stock and
all common stockholders will receive the acquiror's common stock at a
conversion rate to be determined prior to closing. Merger costs and
expenses of approximately $1,375,000 will be paid at closing from the
acquiror's funds. These costs and expenses include an investment
banking fee of $1,250,000. This fee was originally $1,750,000 but is
expected to be reduced under the terms of an oral arrangement with the
investment banking firm. These costs and expenses are not accrued as of
December 31, 1996 due to closing contingencies. The letter of intent is
subject to contingencies including approval by the Board of Directors
of each of the companies and by the company's stockholders as well as
approval and determination of certain other provisions.
16
<PAGE> 21
------------------------------------------------
[GRAPHIC]
FINANCIAL STATEMENTS
SUPERCONDUCTIVITY, INC.
Years ended December 31, 1995 and
1994 and the Period March 22, 1988
(Date of Inception) to December 31, 1995
[LOGO] ERNST & YOUNG LLP
<PAGE> 22
Superconductivity, Inc.
Financial Statements
Years ended December 31, 1995 and 1994
and the Period March 22, 1988 (Date of Inception)
to December 31, 1995
CONTENTS
Report of Independent Auditors.........................................1
Financial Statements
Balance Sheets.........................................................2
Statements of Operations...............................................4
Statements of Shareholders' Equity (Deficit)...........................5
Statements of Cash Flows...............................................6
Notes to Financial Statements..........................................7
<PAGE> 23
[LOGO] ERNST & YOUNG LLP * Suite 204 * Phone 608 836 0800
8000 Excelsior Drive Fax 608 831 0374
Madison, Wisconsin 503717
Mailing Address
P.O. Box 1610
Madison, Wisconsin 503717
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. 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
February 29, 1996
1
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE> 24
Superconductivity Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------------------
<S> <C> <C>
ASSETS (Note 2)
Current assets:
Cash $ 156,348 $ 514,748
Receivables 241,901 872,635
Inventories (Notes 1 and 11) 1,632,195 1,415,802
Prepaid expenses and other current assets 45,573 42,848
----------------------
Total current assets 2,076,017 2,846,033
Equipment (Note 3):
Machinery and equipment 1,000,625 967,337
Accumulated depreciation 829,970 693,640
----------------------
170,655 273,697
Leased equipment, less accumulated depreciation
of 455,685 and $391,218, respectively (Notes 581,377 1,334,555
3, 7, and 11)
----------------------
Total assets $2,828,049 $4,454,285
======================
</TABLE>
2
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - line of credit (Note 2) $ 525,000 $ 550,000
Accounts payable 658,942 693,918
Accrued liabilities 258,975 178,556
Deferred revenue 893,700 312,029
Current portion of long-term debt (Note 3) 554,311 1,100,323
-------------------------
Total current liabilities 2,890,928 2,834,826
Long-term debt, less current portion (Note 3) 1,888,606 1,692,534
Shareholders' equity (deficit) (Notes 4 and 5):
Preferred stock, voting, $.01 par value:
Authorized shares--4,000,000;
issued and outstanding shares--2,114,668 21,147 21,147
Additional paid-in capital 11,678,374 11,678,374
Common stock, $.01 par value:
Authorized shares--7,500,000;
issued and outstanding shares--474,136
in 1995 and 274,136 in 1994 4,741 2,742
Additional paid-in capital 508,169 10,168
Deficit accumulated during the development
stage (14,163,916) (11,785,506)
-------------------------
Total shareholders' deficit (1,951,485) (73,075)
-------------------------
Total liabilities and shareholders' equity $ 2,828,049 $ 4,454,285
=========================
</TABLE>
3
<PAGE> 26
Superconductivity, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
MARCH 22, 1988
YEAR ENDED DECEMBER 31 (INCEPTION)
------------------------- TO DECEMBER 31,
1995 1994 1995
------------------------- --------------
<S> <C> <C> <C>
Revenues:
Contract revenue $ 2,761,758 $ 3,433,305 $ 7,756,965
Rental revenue 595,700 866,480 2,333,310
Other revenue 276,069 22,749 641,262
------------------------- ------------
Total revenues 3,633,527 4,322,534 10,731,537
Costs and expenses:
Costs of revenue 4,221,626 3,596,887 11,364,978
Research and development 363,057 714,855 7,574,928
Marketing 411,905 353,087 1,861,256
General and administrative 806,811 714,281 4,087,175
------------------------- ------------
Total costs and expenses 5,803,399 5,379,110 24,888,337
------------------------- ------------
Loss from operations (2,169,872) (1,056,576) (14,156,800)
Other income (expense):
Interest income 6,133 4,205 480,128
Interest expense (214,671) (212,191) (487,244)
------------------------- ------------
(208,538) (207,986) (7,116)
------------------------- ------------
Net loss $(2,378,410) $(1,264,562) $(14,163,916)
========================= ============
</TABLE>
See accompanying notes.
4
<PAGE> 27
Superconductivity, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Deficit
Preferred Stock Common Stock Accumulated
------------------------ ---------------------------- During
Par Additional Additional Development
Value Paid-in Capital Par Value Paid-in Capital Stage Total
------------------------ ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988 activity:
Sale of 225,000 shares
of common stock $ -- $ -- $2,250 $ -- $ -- $ 2,250
Sale of 451,860 shares
of preferred stock
Series A 4,519 899,201 -- -- -- 903,720
Net loss -- -- -- -- (211,908) (211,908)
------------------------ ---------------------------------------------------------
Balance at
December 31, 1988 4,519 899,201 2,250 -- (211,908) 694,062
Sale of 472,250 shares
of preferred stock
Series B 4,723 1,884,277 -- -- -- 1,889,000
Net loss -- -- -- -- (186,968) (186,968)
------------------------ ---------------------------------------------------------
Balance at
December 31, 1989 9,242 2,783,478 2,250 -- (398,876) 2,396,094
Sale of 500,067 shares
of preferred stock
Series C 5,000 2,995,402 -- -- -- 3,000,402
Net loss -- -- -- -- (1,731,154) (1,731,154)
------------------------ ---------------------------------------------------------
Balance at
December 31, 1990 14,242 5,778,880 2,250 -- (2,130,030) 3,665,342
Sale of 200,000 shares
of preferred stock
Series D 2,000 1,498,000 -- -- -- 1,500,000
Net loss -- -- -- -- (2,949,441) (2,949,441)
------------------------ ---------------------------------------------------------
Balance at
December 31, 1991 16,242 7,276,880 2,250 -- (5,079,471) 2,215,901
Sale of 490,491 shares
of preferred stock
Series E 4,905 4,401,494 -- -- -- 4,406,399
Net loss -- -- -- -- (3,130,438) (3,130,438)
------------------------ ---------------------------------------------------------
Balance at
December 31, 1992 21,147 11,678,374 2,250 -- (8,209,909) 3,491,862
Issuance of 37,886 shares
of common stock from
exercise of options -- -- 379 7,093 -- 7,472
Net loss -- -- -- -- (2,311,035) (2,311,035)
------------------------ ---------------------------------------------------------
Balance at
December 31, 1993 21,147 11,678,374 2,629 7,093 (10,520,944) 1,188,299
Issuance of 11,250 shares
of common stock from
exercise of options -- -- 113 3,075 -- 3,188
Net loss -- -- -- -- (1,264,562) (1,264,562)
------------------------ ---------------------------------------------------------
Balance at
December 31, 1994 21,147 11,678,374 2,742 10,168 (11,785,506) (73,075)
Issuance of 200,000 shares
of common stock from
exercise of warrants 1,999 498,001 500,000
Net loss -- -- -- -- (2,378,410) (2,378,410)
------------------------ ---------------------------------------------------------
Balance at
December 31, 1995 $21,147 $11,678,374 $4,741 $508,169 $(14,163,916) $(1,951,485)
======================== =========================================================
</TABLE>
See accompanying notes.
5
<PAGE> 28
Superconductivity, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
MARCH 22, 1988
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1995 1994 1995
----------- ----------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,378,410) $(1,264,562) $(14,163,916)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 482,668 492,930 1,824,184
Provision for impairment (Note 11) 1,175,142 -- 1,175,142
Interest expense on convertible debentures 100,383 150,000 292,917
Changes in operating assets and liabilities:
Receivables 630,734 (674,305) (241,901)
Inventories (984,695) (60,960) (2,400,497)
Prepaid expenses and other (2,725) 9,600 (45,573)
Accounts payable (34,976) 350,594 658,942
Accrued liabilities 80,419 54,253 258,975
Deferred revenue 678,700 15,000 893,700
---------------------------- ------------
Net cash used in operating activities (252,760) (927,450) (11,748,027)
INVESTING ACTIVITY
Purchase of equipment (33,288) (180,150) (2,182,721)
FINANCING ACTIVITIES
Payments on notes payable (422,352) (472,876) (1,025,335)
Proceeds from notes payable -- 1,550,000 1,550,000
Proceeds from 10% convertible debentures -- -- 1,500,000
Proceeds from sale of preferred stock -- -- 11,699,521
Proceeds from sale of common stock 350,000 3,188 362,910
---------------------------- ------------
Net cash provided by financing activities (72,352) 1,080,312 14,087,096
---------------------------- ------------
Net increase (decrease) in cash (358,400) (27,288) 156,348
Cash at beginning of period 514,748 542,036 --
---------------------------- ------------
Cash at end of period $ 156,348 $ 514,748 $ 156,348
============================ ============
Supplemental schedule of cash flow
information - cash paid for interest $ 114,288 $ 39,442 $ 171,333
============================ ============
</TABLE>
Supplemental schedule of noncash investing and financing activities during 1995,
the Company exchanged $150,000 of its convertible debentures for partial
payment of the exercise of common stock warrants by the debenture holder.
During 1993, the Company exchanged accounts payable to a supplier for three
notes payable totalling $800,335.
See accompanying notes.
6
<PAGE> 29
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1995
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Superconductivity, Inc., (the Company), a development stage company, was
incorporated on July 27, 1987, and commenced activities on March 22, 1988.
Activities since inception have included raising capital, administrative
functions, research and development activities relating to superconductive
storage devices (SSD) for the storage of electricity, starting up of production,
government contracts and commercial rental contracts. Management's plans for
1996 include the issuance of $1,200,000 of additional convertible debentures
(see Note 3) and continued development, marketing and sale or lease of SSD
units. The current principal markets for the SSD products are utility companies
based in North America and South Africa.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INVENTORIES
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method and consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
Raw materials $ 433,670 $ 680,700
Work in process 1,328,374 797,283
-----------------------
1,762,044 1,477,983
Less allowance for obsolescence 129,849 62,181
-----------------------
$1,632,195 $1,415,802
=======================
</TABLE>
EQUIPMENT AND LEASED EQUIPMENT
Equipment and leased equipment are stated at cost. Depreciation is computed by
the straight-line method for financial reporting purposes.
7
<PAGE> 30
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
GOVERNMENT CONTRACT
Sales under the Company's cost-reimbursement government contract are recorded as
costs are incurred and include estimated fees in the proportion that costs
incurred to date bear to total estimated costs. Costs incurred and estimated
fees earned are billed monthly.
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.
RECLASSIFICATIONS
Certain amounts in the 1994 financial statements have been reclassified to
conform to the 1995 presentation.
2. NOTE PAYABLE - LINE OF CREDIT
The Company has a $750,000 bank line of credit under which $525,000 is
outstanding at December 31, 1995. The line of credit expires December 20, 1996.
Interest is payable monthly on the unpaid principal balance at prime (8.50% at
December 31, 1995) plus 2.5%. The line of credit is secured by a General
Business Security Agreement and assignment of certain lease agreements. The
collateral interest in leased equipment (SSD unit #107) is subordinated to the
note payable to the ABB Power T&D Company, Inc. (see Note 3).
8
<PAGE> 31
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994, consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
Note payable to ABB Power T&D Company, Inc., due
$30,000 per month through June 1996 and $70,000
per month thereafter through March 1997, including
interest at 7.5%, with a final payment of $39,252
due April 1997 $ 800,000 $ 902,971
Notes payable to supplier in monthly payments of
$16,895, including interest at 5%, through
December 31, 1995, secured by leased equipment -- 197,352
Subordinated convertible debentures issued in 1993,
principal of $1,337,492 and $1,500,000 plus accrued
interest at 10% per annum aggregating $305,425 and
$192,534 at December 31, 1995 and 1994,
respectively, due January 1997 1,642,917 1,692,534
-----------------------
Total 2,442,917 2,792,857
Less amount due within one year 554,311 1,100,323
-----------------------
$1,888,606 $1,692,534
=======================
</TABLE>
The note payable to ABB Power T&D Company, Inc. (ABB) is payable at the earlier
of the time of delivery of SSD unit #107 on a third party's order to the Company
or June 1997. ABB has the option of extending the due date if collateral of like
kind and like value to SSD unit #107 is provided to ABB by the Company. SSD unit
#107 is included in work-in-process with a carrying value of $383,050 at
December 31, 1995.
The subordinated convertible debenture holders are also preferred stockholders
of the Company. The debentures are secured by all intellectual property rights
held by the Company. The debentures plus accrued but unpaid interest convert to
Series F preferred stock upon the first closing of a private placement of the
Series F preferred stock of not less than $2,500,000. The conversion price is
equal to the price paid by Series F purchasers. There is a mandatory redemption
of the principal and accrued but unpaid interest on the debentures upon the
closing of an initial public offering which results in more than $5,000,000
proceeds to the Company. The debenture purchasers also received 600,000 common
stock warrants exercisable at $2.50 per share (see Note 5).
9
<PAGE> 32
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
Subsequent to December 31, 1995, the Company issued $1,200,000 of convertible
debentures at 10%, maturing January 31, 1997. Under the terms of the convertible
debentures, the Company received $600,000 in February 1996 and the remaining
$600,000 will close, subject to Board of Directors approval, no earlier than
March 15, 1996. The proceeds from the issuance will be used for general
corporate purposes. Holders of the 1996 convertible debentures also received one
common stock warrant for each $2.50 of convertible debenture principal amount.
The exercise price of the warrants is generally indexed to the price per common
share of certain common stock issuable in 1996. The warrants have a term of five
years. Other terms of the 1996 convertible debentures are similar to the 1993
convertible debentures.
Also, subsequent to December 31, 1995, the holders of the 1993 convertible
debentures extended the maturity date from July 1996 to January 31, 1997.
Accordingly, the 1993 convertible debentures are classified as a long-term
liability at December 31, 1995.
4. PREFERRED STOCK
Preferred stock consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Preferred stock, voting, $.01 par value, 4,000,000
shares authorized:
Preferred Series A, 451,860 shares designated,
issued and outstanding, aggregate liquidation
preference of $1,569,525 at December 31, 1995 $ 4,519 $ 4,519
Additional paid-in capital - Preferred Series A 899,201 899,201
Preferred Series B, 472,250 shares designated,
issued and outstanding, aggregate liquidation
preference of $3,060,020 at December 31, 1995 4,723 4,723
Additional paid-in capital - Preferred Series B 1,884,277 1,884,277
Preferred Series C, 500,067 shares designated,
issued and outstanding, aggregate liquidation
preference of $4,420,170 at December 31, 1995 5,000 5,000
Additional paid-in capital - Preferred Series C 2,995,402 2,995,402
Preferred Series D, 200,000 shares designated,
issued and outstanding, aggregate liquidation
preference of $2,046,548 at December 31, 1995 2,000 2,000
Additional paid-in capital - Preferred Series D 1,498,000 1,498,000
Preferred Series E, 777,777 shares designated,
490,491 shares issued and outstanding, aggregate
liquidation preference of $5,785,161 at December 4,905 4,905
31, 1995
Additional paid-in capital - Preferred Series E 4,401,494 4,401,494
Preferred Series F, 1,500,000 shares designated,
no shares issued and outstanding -- --
---------------------------
Total preferred stock $11,699,521 $11,699,521
===========================
</TABLE>
10
<PAGE> 33
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. PREFERRED STOCK (CONTINUED)
The Company's articles of incorporation provide that merger or consolidation of
the Company, except where the Company is the surviving entity, will be
considered a liquidation for purposes of the liquidation preference if the
Company's shareholders, as defined, own less than 50 percent of the shares of
the surviving entity.
Each share of preferred stock is convertible into one share of common stock at
the option of the holder, subject to certain antidilutive adjustments. The
preferred shareholders are entitled to preference payments in liquidation
aggregating the respective cost per share for each series of preferred stock
plus 8% per annum for each year in which dividends are not declared and paid or
set aside for preferred stock; this 8% feature aggregates to $5,173,883 and
$3,923,408 at December 31, 1995 and 1994, respectively.
5. STOCK OPTION PLAN AND WARRANTS
The Superconductivity, Inc. 1988 Stock Option Plan provides for grants of
options to officers and certain other key employees of the Company to purchase
in the aggregate up to 750,000 shares of the Company's common stock reserved for
this purpose. Options are granted at prices estimated to be fair market value at
the date of grant and are generally exercisable in equal annual installments
over a four-year period beginning one year after date of grant. The options
expire ten years from date of grant or three months after an employee terminates
employment.
The types of options granted under the Plan may be either incentive stock
options meeting certain Internal Revenue Code requirements or nonstatutory stock
options which are not intended to meet those requirements.
11
<PAGE> 34
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
5. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
A summary of the status of the Company's stock option plans follows:
<TABLE>
<CAPTION>
Number of Exercise Price
Options Per Option
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1988 30,000 $ .10
Granted - 1989 99,750 .10 - .25
------- -----------
Outstanding at December 31, 1989 129,750 .10 - .25
Granted - 1990 64,400 .25 - 1.00
------- -----------
Outstanding at December 31, 1990 194,150 .10 - 1.00
Granted - 1991 25,750 .10 - 1.00
Canceled (2,500) 1.00
------- -----------
Outstanding at December 31, 1991 217,400 .10 - 1.00
Granted 59,523 1.00 - 2.50
Canceled (1,350) 1.00 - 2.50
------- -----------
Outstanding at December 31, 1992 275,573 .10 - 2.50
Granted 276,200 2.50
Exercised (37,886) .25 - 2.50
Canceled (14,039) .25 - 2.50
------- -----------
Outstanding at December 31, 1993 499,848 .10 - 2.50
Granted 62,000 5.00
Exercised (11,250) .25 - 1.00
Canceled (6,250) 1.00 - 2.50
------- -----------
Outstanding at December 31, 1994 544,348 .10 - 5.00
Granted 51,000 5.00
------- -----------
Outstanding at December 31, 1995 595,348 $.10 - 5.00
======= ===========
Exercisable at December 31, 1995 333,833 $.10 - 5.00
======= ===========
</TABLE>
As explained in Note 3, the Company issued warrants in 1993 to the convertible
debenture holders to purchase 600,000 shares of common stock at $2.50 per share
and, subsequent to December 31, 1995, issued additional warrants to debenture
holders. The Company also issued warrants in 1993 to consultants to purchase
10,000 shares of common stock at $9.00 per share. These warrants are exercisable
at any time and expire in 1998.
12
<PAGE> 35
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
5. STOCK OPTION PLAN AND WARRANTS (CONTINUED)
In connection with certain research agreements with utility companies, the
Company issued warrants in 1990 to purchase 50,000 shares of common stock. The
warrants are exercisable at any time in whole or in part at $5.00 per share and
expire on December 31, 1996. During 1995, warrants issued in 1989 for 200,000
shares of common stock were exercised at $2.50 per share and warrants for 50,000
shares of common stock expired on December 31, 1995.
As of December 31, 1995, 1,360,480 shares of authorized, but unissued common
stock are reserved for issuance in accordance with the warrants and stock option
plans described above.
6. LICENSE AGREEMENTS
The Company had a license agreement which expired in October 1995 for technology
relating to products to be manufactured and sold by the Company. Under this
license, the Company was required to pay a royalty on product sales at the rate
of 3.5% of the net selling price, as defined, once product sales exceeded $1
million in a single calendar year, with a minimum annual royalty of $50,000. The
royalty fee was $19,972 and $111,064 in 1995 and 1994, respectively.
7. CUSTOMER RENTAL AGREEMENTS
The Company has various rental agreements for its SSDs. The leases are
cancelable by the lessees under various circumstances. Minimum aggregate future
rentals, assuming there are no cancellations, are $380,700 in 1996.
8. INCOME TAXES
The components of the Company's net deferred taxes consisted of the following at
December 31:
<TABLE>
<CAPTION>
1995 1994
----------------------------
<S> <C> <C>
Deferred tax assets $ 6,326,000 $ 5,345,000
Less valuation allowance (6,155,000) (5,221,000)
----------------------------
Net deferred tax assets 171,000 124,000
Deferred tax liability (171,000) (124,000)
----------------------------
$ -- $ --
============================
</TABLE>
13
<PAGE> 36
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the net
deferred tax asset and their approximate tax effects were as follows at December
31, 1995:
<TABLE>
<CAPTION>
Temporary Tax
Difference Effect
----------------------------
<S> <C> <C>
Inventory, depreciation, deferred revenue and $ 1,538,000 603,000
Net operating loss carryforward 11,794,000 4,625,000
Research tax credit carryforward -- 927,000
----------------------------
$13,332,000 $6,155,000
============================
</TABLE>
The net operating and research tax credit carryforwards expire beginning in
2003. Under provisions of the Tax Reform Act of 1986, the utilization of the
carryforwards may be limited as a result of future significant changes in
ownership.
9. LEASE
The lease for the Company's operating facilities expires December 31, 1998, and
is cancelable by the Company or the lessor on December 31, 1996 or 1997, upon
notice during March of the year preceding the cancellation date. Rent expense,
$113,283 and $109,984 in 1995 and 1994, respectively, is subject to an annual
adjustment based on the change in the Consumer Price Index; rent expense for
1996 will be $116,682. The Company also pays for maintenance, certain insurance
coverage and real estate taxes.
10. EMPLOYEE RETIREMENT 401(K) PLAN
The Company has a 401(k) employee savings plan which covers all full-time
employees who have completed six months of service and are at least 21 years
old. Any contributions by the Company are discretionary (none in 1995 or 1994).
11. PROVISION FOR IMPAIRMENT
Effective January 1, 1996, the Company will adopt FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which requires that impairment losses on long-lived assets be
used in operations when events and circumstances indicate that the assets might
be impaired and
14
<PAGE> 37
Superconductivity, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
11. PROVISION FOR IMPAIRMENT (CONTINUED)
the fair value of those assets is less than the carrying amount of those assets.
During 1995, events and circumstances indicated that certain items of power
electronics equipment in the Company's SSD units in work-in-process inventories
($768,302) and leased equipment ($406,840) were impaired. This power electronics
equipment did not meet the required performance specifications. Although the
Company is working with the supplier to correct the specifications, management
believes the cost of specification correction exceeds the cost of replacement
equipment. As a result, the Company recorded a provision of $1,175,142 to adjust
the carrying value of the assets to their estimated fair value and classified
the charge as part of costs of revenue.
15
<PAGE> 38
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
AT MARCH 31, 1997 (ASC) AND DECEMBER 31, 1996 (SI)
<TABLE>
<CAPTION>
ASC SI
March 31, December 31, Pro Forma
1997 1996 Combined
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 576,914 $ 7,890 $ 584,804
Accounts receivable 2,518,331 552,242 3,070,573
Notes receivable 383,607 383,607
Inventory 1,054,141 1,886,515 2,940,656
Prepaid expenses and other current assets 329,721 15,623 345,344
------------ ------------ -----------
Total current assets 4,862,714 2,462,270 7,324,984
Property and equipment:
Equipment 8,064,091 2,073,630 10,137,721
Furniture and fixtures 733,794 733,794
Leasehold improvements 1,732,215 1,732,215
------------ ------------ -----------
10,530,100 2,073,630 12,603,730
Less: accumulated depreciation (7,268,315) (1,567,439) (8,835,754)
------------ ------------ -----------
Property and equipment, net 3,261,785 506,191 3,767,976
Long-term marketable securities 15,446,106 15,446,106
Other assets 42,028 42,028
------------ ------------ -----------
Total assets $ 23,612,633 $ 2,968,461 $26,581,094
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable-line of credit $ 530,000 $ 530,000
Accounts payable and accrued expenses $ 2,208,192 2,075,420 4,283,612
Deferred revenue 1,519,678 1,519,678
Current portion of long-term debt 673,428 673,428
------------ ------------ -----------
Total current liabilities 2,208,192 4,798,526 7,006,718
Long-term debt (less current portion) 3,073,663 3,073,663
Stockholders' equity:
Accumulated deficit (42,137,761) (17,118,958) (59,256,719)
Other stockholders' equity 63,542,202 12,215,230 75,757,432
------------ ------------ -----------
Total stockholders' equity 21,404,441 (4,903,728) 16,500,713
------------ ------------ -----------
Total liabilities and stockholders' equity $ 23,612,633 $ 2,968,461 $26,581,094
============ ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
<PAGE> 39
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED MARCH 31, 1997 (ASC) AND DECEMBER 31, 1996 (SI)
<TABLE>
<CAPTION>
ASC SI Combined
------------ ----------- ------------
(Year-ended (Year-ended
3/31/97) 12/31/96)
<S> <C> <C> <C>
Revenues:
Contract revenue $ 5,296,970 $ 1,570,474 $ 6,867,444
Prototypes and prototype
development contracts 1,877,517 1,059,050 2,936,567
Rental revenue 545,130 545,130
Other revenue 201,416 201,416
------------ ----------- ------------
Total revenues 7,174,487 3,376,070 10,550,557
Costs and expenses:
Costs of revenue 7,507,626 3,069,750 10,577,376
Research and development 7,708,759 768,606 8,477,365
Selling, general and
administrative 2,818,320 1,472,180 4,290,500
------------ ----------- ------------
Total costs and expenses 18,034,705 5,310,536 23,345,241
Transaction fees (710,105) (710,105)
Interest income 1,171,969 5,417 1,177,386
Interest expense (356,366) (356,366)
Non-operating professional fees (669,627) (669,627)
Other income (expense), net (23,777) (23,777)
------------ ----------- ------------
Net loss $(10,422,131) $(2,955,042) $(13,377,173)
============ =========== ============
Net loss per common share $ (1.09) $ (1.14) $ (1.28)
============ =========== ============
Weighted average number of
common shares outstanding 9,560,818 2,592,165 10,414,159
============ =========== ============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
<PAGE> 40
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996 (ASC) AND DECEMBER 31, 1995 (SI)
<TABLE>
<CAPTION>
ASC SI Combined
------------ ----------- ------------
(Year-ended (Year-ended
3/31/96) 12/31/95)
<S> <C> <C> <C>
Revenues:
Contract revenue $ 4,764,548 $ 2,761,758 $ 7,526,306
Prototypes and prototype
development contracts 2,366,351 2,366,351
Rental revenue 595,700 595,700
Other revenue 276,069 276,069
------------ ----------- ------------
Total revenues 7,130,899 3,633,527 10,764,426
Costs and expenses:
Costs of revenue 7,331,390 4,221,626 11,553,016
Research and development 5,341,437 363,057 5,704,494
Selling, general and
administrative 3,319,451 1,218,716 4,538,167
------------ ----------- ------------
Total costs and expenses 15,992,278 5,803,399 21,795,677
Interest income 1,579,035 6,133 1,585,168
Interest expense (214,671) (214,671)
Other income (expense), net (37,529) (37,529)
------------ ----------- ------------
Net loss $ (7,319,873) $(2,378,410) $ (9,698,283)
============ =========== ============
Net loss per common share $ (0.77) $ (0.98) $ (0.94)
============ =========== ============
Weighted average number of
common shares outstanding 9,470,931 2,422,777 10,268,509
============ =========== ============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
<PAGE> 41
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED MARCH 31, 1995 (ASC) AND DECEMBER 31, 1994 (SI)
<TABLE>
<CAPTION>
ASC SI Combined
------------ ----------- ------------
(Year-ended (Year-ended
3/31/95) 12/31/94)
<S> <C> <C> <C>
Revenues:
Contract revenue $ 3,162,872 $ 3,433,305 $ 6,596,177
Prototypes and prototype
development contracts 1,107,374 1,107,374
Rental revenue 866,480 866,480
Other revenue 22,749 22,749
------------ ----------- ------------
Total revenues 4,270,246 4,322,534 8,592,780
Costs and expenses:
Costs of revenue 4,396,572 3,596,887 7,993,459
Research and development 4,634,017 714,855 5,348,872
Selling, general and
administrative 2,856,812 1,067,368 3,924,180
------------ ----------- ------------
Total costs and expenses 11,887,401 5,379,110 17,266,511
Interest income 1,868,606 4,205 1,872,811
Interest expense (212,191) (212,191)
Other income (expense), net (23,093) (23,093)
------------ ----------- ------------
Net loss $ (5,771,642) $(1,264,562) $ (7,036,204)
============ =========== ============
Net loss per common share $ (0.62) $ (0.53) $ (0.69)
============ =========== ============
Weighted average number of
common shares outstanding 9,380,787 2,383,410 10,165,406
============ =========== ============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
<PAGE> 42
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
(1) Effective immediately prior to the Merger, each share of SI preferred
stock was converted into one share of SI common stock. Accordingly the pro
forma combined per share amounts are calculated on the combined weighted
average of ASC common shares and SI common and preferred shares
outstanding for all periods presented, based on SI common and preferred
shareholders receiving 0.3292 shares of ASC common stock for each SI
common and preferred share.
(2) There were no material transactions between ASC and SI during any of the
periods presented.
(3) Total transaction costs incurred by ASC and SI as of March 31, 1997 in
connection with the Merger were $2,168,000. Of this amount $710,000 has
been included in ASC's net loss for the year ended March 31, 1997 and an
additional $1,458,000 was recorded by SI in the quarter ended March 31,
1997 (not included in this pro forma combined condensed financial
information). These costs related principally to legal and financial
advisory services.
<PAGE> 43
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN SUPERCONDUCTOR CORPORATION
- -----------------------------------
(Registrant)
/s/
- -------------------------------------------------------
Ramesh L. Ratan
Executive Vice President, Corporate Development, and
Chief Financial Officer
June 23, 1997
- -------------
Date
<PAGE> 44
Exhibit Index
-------------
No. Description
- --- -----------
2* Agreement and Plan of Merger dated as of March 7, 1997 by and
among ASC, ASC Merger Corp. and SI.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Smith & Gesteland LLP.
* Previously filed.
<PAGE> 1
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 an Form 8-K/A dated June 19, 1997, filed by American Superconductor
Corporation with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
June 19, 1997
<PAGE> 1
[LOGO]
S M I T H & G E S T E L A N D, L L P
Partners In Your Success - Since 1948
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Nos. 33-44962, 33-44963, 33-64832, 33-74418, 33-86108, and 33-86106)
pertaining to various employee and director stock option plans of American
Superconductor Corporation of our report dated February 7, 1997, with respect to
the financial statements of Superconductivity, Inc., included in American
Superconductor Corporation's Current Report on Form 8-K/A dated June 19, 1997,
filed with Securities and Exchange Commission.
Madison, Wisconsin /s/ Smith & Gesteland, LLP
June 19, 1997 -------------------------------
SMITH & GESTELAND, LLP
- --------------------------------------------------------------------------------
Certified Public Accountants and Business Consultants * Post Office Box 1764 *
Madison , WI 53701-1764
(tel) 608/836-7500 * (fax) 608/836-7505 * (e-mail) [email protected]
