<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------
For The Quarter Ended: December 31, 1998 Commission File Number 0-19672
-----------------
American Superconductor Corporation
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2959321
- --------------------------------- --------------------------------
(State or other jurisdiction (I.R.S. Employer
of organization or incorporation) Identification Number)
Two Technology Drive
Westborough, Massachusetts 01581
--------------------------------
(Address of principal executive offices, including zip code)
(508) 836-4200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 15,373,099
- ------------------------------------- -----------------------------------
Class Outstanding as of February 10, 1999
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
INDEX
-----------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets
December 31, 1998 and March 31, 1998 3
Consolidated Statements of Operations for the three months ended December 31,
1998 and 1997 and the nine months ended December 31, 1998
and 1997 4
Consolidated Statements of Cash Flows
for the nine months ended
December 31, 1998 and 1997 5
Notes to Interim Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Part II - Other Information 15
Signatures 16
</TABLE>
2
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $28,545,770 $1,842,142
Accounts receivable 3,559,226 2,991,635
Inventory 4,873,676 3,229,973
Prepaid expenses and other current assets 905,513 545,428
------------- ------------
Total current assets 37,884,185 8,609,178
Property and equipment:
Equipment 14,629,495 12,502,756
Furniture and fixtures 1,188,839 946,630
Leasehold improvements 2,057,560 1,980,090
------------- ------------
17,875,894 15,429,476
Less: accumulated depreciation (12,376,162) (11,006,576)
------------- ------------
Property and equipment, net 5,499,732 4,422,900
Long-term marketable securities 6,472,067 6,167,030
Net investment in sales-type lease 268,940 345,940
Other assets 488,034 6,167
------------- ------------
Total assets $50,612,958 $19,551,215
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $2,875,693 $3,333,462
Deferred revenue -- 187,285
Current portion of long-term debt -- 29,609
------------- ------------
Total current liabilities 2,875,693 3,550,356
Long-term debt (less current portion) -- 3,141,793
Commitments
Stockholders' equity:
Common stock, $.01 par value
Authorized shares-50,000,000; issued
and outstanding shares-15,368,633 and
11,756,793 at December 31, 1998 and
March 31, 1998, respectively 153,686 117,568
Additional paid-in capital 133,995,222 87,961,911
Deferred contract costs - warrants (1,100,731) (1,328,446)
Unrealized gain (loss) on investments 47,717 32,706
Cumulative translation adjustment (7,914) (32,798)
Accumulated deficit (85,350,715) (73,891,875)
------------- ------------
Total stockholders' equity 47,737,265 12,859,066
------------- ------------
Total liabilities and stockholders' equity $50,612,958 $19,551,215
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Contract revenue $2,237,522 $3,757,908 $6,854,899 $6,547,147
Product sales and prototype
development contracts 331,890 697,616 818,714 4,053,328
Rental/other revenue 14,412 437,422 100,148 783,069
----------- ----------- ------------ -----------
Total revenues 2,583,824 4,892,946 7,773,761 11,383,544
Costs and expenses:
Costs of revenue 2,772,464 4,705,482 8,293,914 10,511,021
Research and development 2,403,671 2,929,253 7,491,248 6,382,086
Selling, general and
administrative 1,646,254 742,281 4,977,920 3,724,315
----------- ----------- ------------ -----------
Total costs and expenses 6,822,389 8,377,016 20,763,082 20,617,422
Transaction fees -- (25,975) -- (136,273)
Interest income 479,558 182,194 1,528,361 676,771
Interest expense -- (51,382) (9,827) (187,918)
Other income (expense), net 3,091 2,145 11,947 (12,287)
----------- ----------- ------------ -----------
Net loss $(3,755,916) $(3,377,088) $(11,458,840) $(8,893,585)
=========== =========== ============ ===========
Net loss per common share
Basic $(0.24) $(0.29) $(0.76) $(0.76)
=========== =========== ============ ===========
Diluted $(0.24) $(0.29) $(0.76) $(0.76)
=========== =========== ============ ===========
Weighted average number of
common shares outstanding
Basic 15,367,619 11,695,238 15,052,153 11,638,198
=========== =========== ============ ===========
Diluted 15,367,619 11,695,238 15,052,153 11,638,198
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(11,458,840) $ (8,893,585)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization 1,369,586 1,566,847
Loss (gain) on disposals of property and equipment -- 24,569
Deferred contract costs-warrant 241,371 144,898
Stock compensation expense 173,312 90,841
Changes in operating asset and liability accounts :
Accounts receivable (567,591) (2,138,892)
Inventory (1,643,703) 156,522
Prepaid expenses and other current assets (360,085) (163,837)
Accounts payable and accrued expenses (457,769) (2,194,240)
Notes payable-line of credit -- (875,000)
Deferred revenue (187,285) (1,936,449)
------------ ------------
Total adjustments (1,432,164) (5,324,741)
Net cash used by operating activities (12,891,004) (14,218,326)
Cash flows from investing activities:
Notes receivable -- (14,312)
Repayment of notes receivable -- 53,190
Purchase of property and equipment (net) (2,421,534) (1,484,015)
Purchase of long-term marketable securities (290,026) (3,000,000)
Sale of long-term marketable securities -- 11,111,354
Net investment in sales-type lease 77,000 (413,006)
Decrease (increase) in other assets (481,867) 36,152
------------ ------------
Net cash provided (used) by investing activities (3,116,427) 6,289,363
Cash flows from financing activities:
Net repayments on line of credit -- (556,088)
Principal payments-note payable (3,171,402) 4,693
Net proceeds from issuance of common stock and warrants 45,882,461 10,112,071
------------ ------------
Net cash provided by financing activities 42,711,059 9,560,676
Net increase (decrease) in cash and cash equivalents 26,703,628 1,631,713
Cash and cash equivalents at beginning of period 1,842,142 584,804
Effect of SI's excluded results -- (7,844)
------------ ------------
Cash and cash equivalents at end of period $28,545,770 $ 2,208,673
============ ============
Supplemental schedule of cash flow information:
Cash paid for interest $ 119,789 $ 134,252
Noncash issuance of common stock $ 173,312 $ 90,841
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------
1. Nature of Business:
------------------
American Superconductor Corporation (the "Company"), 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.
The Company derives a substantial portion of its revenue from research and
development contracts. A significant portion of this contract revenue
relates to development contracts with two stockholders, Pirelli Cavi E
Sistemi S.p.A. and Electricite de France.
2. Basis of Presentation:
---------------------
The accompanying consolidated financial statements are unaudited, except
for those dated as of March 31, 1998, and have been prepared in accordance
with generally accepted accounting principles. Certain information and
footnote disclosure normally included in the Company's annual consolidated
financial statements have been condensed or omitted. The interim
consolidated financial statements, in the opinion of management, reflect
all adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of the results for the interim periods ended December 31,
1998 and 1997 and the financial position at December 31, 1998.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
It is suggested that these interim consolidated financial statements be
read in conjunction with the audited consolidated financial statements for
the year ended March 31, 1998 which are contained in the Company's Current
Report on Form 10-K covering the year ended March 31, 1998.
Included in "Costs of Revenue" are research and development expenses
related to externally funded development contracts of approximately
$1,801,000 and $2,766,000 for the three months ended December 31, 1998 and
1997, respectively, and approximately $5,165,000 and $5,162,000 for the
nine months ended December 31, 1998 and 1997, respectively.
Certain prior year amounts have been reclassified to be consistent with
current year presentation.
6
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------------------------------------------------------
3. Net Loss Per Common Share:
-------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" effective December 28, 1997. SFAS No. 128
requires presentation of basic earnings per share ("EPS") and, for
companies with complex capital structures, diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS includes dilution and is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares include the effect
of the exercise of stock options. For the three months ended December 31,
1998 and 1997, common equivalent shares of 71,656 and 287,070 were not
included for the calculation of diluted EPS as they were considered
antidilutive. For the nine months ended December 31, 1998 and 1997, common
equivalent shares of 203,849 and 214,809 were also not included for the
calculation of diluted EPS as they were also considered antidilutive. The
Company has restated net loss per share for all periods presented in the
accompanying consolidated financial statements to reflect net loss per
share on both a basic and a diluted basis.
4. Cost-Sharing Agreements:
-----------------------
The Company received funding under a government cost-sharing agreement with
the Department of Energy of approximately $473,000 and $394,000, for the
three months ended December 31, 1998 and 1997, respectively, and $1,293,000
and $1,198,000 for the nine months ended December 31, 1998 and 1997,
respectively. This funding was used to directly offset research and
development and selling, general and administrative expenses.
5. The Offering:
------------
On April 22, 1998 the Company completed a public offering of 3,504,121
shares of its common stock and received net proceeds (before deducting
offering expenses) of $46,114,000, of which approximately $3,142,000 was
used to retire the Company's subordinated notes.
7
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------------------------------------------------------
6. Comprehensive Loss:
------------------
The Company has adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" which requires that an entity include in
total comprehensive income certain amounts which were previously recorded
directly to stockholders' equity.
The Company's comprehensive loss was as follows:
<TABLE>
<CAPTION>
Three Months Ended December 31 Nine Months Ended December 31
------------------------------ -------------------------------
1998 1997 1998 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
Net loss $(3,755,916) $(3,377,088) $(11,458,840) $(8,893,585)
Other comprehensive income (23,605) 14,784 39,895 159,849
----------- ----------- ------------ -----------
Total comprehensive loss $(3,779,521) $(3,362,304) $(11,418,945) $(8,733,736)
=========== =========== ============ ===========
</TABLE>
Other comprehensive income represents changes in foreign currency
translation and unrealized gains and losses on investments.
7. Accounting for Derivative Instruments and Hedging Activities:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
its fair value. The Statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance. Statement 133 cannot be applied
retroactively. Statement 133 must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in hybrid contracts that
were issued, acquired or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998).
The Company's management believes the impact of adopting Statement 133 on
its financial statements will be immaterial.
8
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1998
Results of Operations
- ---------------------
American Superconductor Corporation's revenues during the three months ended
December 31, 1998 were $2,584,000 compared to $4,893,000 for the same period a
year earlier. Revenues for the prior-year quarter ended December 31, 1997
included $2,400,000 of contract revenue resulting from the Electricite de France
and ABB ("ABB/EDF") contract to develop high temperature superconductor (HTS)
wire for power transformers. Two thirds of the revenue, or $1,600,000,
recognized on that contract during the December 1997 quarter related to work
performed in the June and September 1997 quarters which had not been recognized
as revenue earlier as the contract had not yet been finalized. Revenues recorded
on the ABB/EDF contract in the December 1998 quarter were $575,000. Contract
revenue in the quarter just ended was positively affected by the continuation of
work on a research contract with the Electric Power Research Institute ("EPRI")
and by increased work on eleven Phase II Small Business Innovation Research
("SBIR") grants.
For the nine months ended December 31, 1998, revenues were $7,774,000 as
compared to $11,384,000 for the comparable period in 1997. Revenues from the
Company's Power Quality ("PQ") Solutions business unit declined $3,397,000 in
the nine months ended December 31, 1998 from the same period in the prior year,
which included the shipments of a large PQ DC(TM) SMES system and a PQ VR(TM)
SMES system. There were no SMES system shipments in the first nine months of
fiscal 1999. Additionally, revenues for the nine-month period ended December 31,
1998 decreased due to lower prototype development contract revenues and planned
reductions in payments under the company's two research and development
contracts with Pirelli and ABB/EDF, which were partially offset by increased
contract revenue on the Phase II SBIR grants and the EPRI contract.
For the three months ended December 31, 1998, the Company also recorded funding
of $473,000 under a government cost-sharing agreement with the Department of
Energy ("DOE"). Funding under this cost-sharing agreement for the three months
ended December 31, 1997 was $394,000. For the nine months ended December 31,
1998, funding under this government cost-sharing agreement was $1,293,000
compared to $1,198,000 for the comparable period in 1997. 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 revenues.
The Company's total costs and expenses for the three months ended December 31,
1998 were $6,822,000 compared to $8,377,000 for the same period in the prior
year. Costs for the prior-
9
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1998
year quarter ended December 31, 1997 included $1,600,000 in costs related to
work performed in the June and September 1997 quarters on the ABB/EDF contract.
Total costs and expenses for the first nine months of the current fiscal year
were $20,763,000, compared to $20,617,000 for the same period last year.
Adjusted research and development ("R&D") expenses, which include amounts
classified as costs of revenue and amounts offset by cost sharing funding, were
$4,449,000 in the third quarter compared to $5,898,000 a year earlier. Costs for
the prior-year quarter ended December 31, 1997 included $1,600,000 in costs
related to work performed in the June and September 1997 quarters on the ABB/EDF
contract. For the nine-month period ended December 31, 1998, adjusted R&D
expenses increased to $13,323,000 from $12,161,000 for the same period a year
earlier. The increase for the nine months ended December 31, 1998 was due to the
continued scale-up of the Company's internal research and development
activities. A portion of the R&D expenditures related to externally funded
development contracts has been classified as costs of revenue (rather than as
R&D expenses). These R&D expenditures that were included as costs of revenue
during the three and nine-month periods ended December 31, 1998 were $1,801,000
and $5,165,000, respectively, compared to $2,766,000 and $5,162,000 for the same
periods last year. Additionally, R&D expenses that were offset by cost sharing
funding were $244,000 and $203,000 for the third quarter of fiscal years 1999
and 1998, respectively. For the nine months ended December 31, 1998, this amount
was $667,000 as compared to $617,000 for the comparable period in the previous
year. Net R&D expenses (exclusive of amounts classified as costs of revenue and
amounts offset by cost sharing funding) were $2,404,000 in the three months
ended December 31, 1998 compared to $2,929,000 for the same period last year.
For the nine months ended December 31, 1998 these amounts increased to
$7,491,000 from $6,382,000 for the same period a year earlier.
Adjusted selling, general and administrative ("SG&A") expenses, which include
amounts classified as costs of revenue and amounts offset by cost sharing
funding, were $2,489,000 for the quarter ended December 31, 1998 compared to
$2,393,000 for the same period the prior year. On a year-to-date basis, adjusted
SG&A expenses were $7,671,000 compared to $6,851,000 for the same period a year
earlier. These increases were primarily due to increased salaries and related
expenses incurred to support corporate development and marketing activities and
future planned growth, as well as increases in directors' compensation. The SG&A
amounts offset by cost-sharing funding were $229,000 and $191,000 in the third
quarter of fiscal years 1999 and 1998, respectively. For the nine months ended
December 31, 1998, this amount was $626,000 compared to $580,000 for the
comparable period in 1997. In addition, certain SG&A expenditures related to
externally funded development contracts have been classified as costs of revenue
(rather than as SG&A expenses). Such indirect costs included in costs of revenue
during the three-month periods ended December 31, 1998 and 1997 were $614,000
and $1,460,000, respectively. This decrease is primarily due to the lower
contract revenue in the three-month
10
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1998
period ended December 31, 1998, resulting in less SG&A expense being classified
as cost of revenue. For the nine-month periods ended December 31, 1998 and 1997,
these costs were $2,067,000 and $2,547,000, respectively. This decrease is
related to a smaller amount of SG&A expense being allocated to cost of revenue
as a result of lower prototype development revenue. Net SG&A expenses (exclusive
of amounts classified as costs of revenue and amounts offset by cost sharing
funding) for the quarter ended December 31, 1998 were $1,646,000 compared to
$742,000 for the same period the prior year. On a year-to-date basis, net SG&A
expenses were $4,978,000 compared to $3,724,000 for the same period a year
earlier.
Interest income was $480,000 in the quarter ended December 31, 1998 compared to
$182,000 for the same period in the previous year. For the nine months ended
December 31, 1998 and 1997, these amounts were $1,528,000 and $677,000,
respectively. These increases primarily reflect the additional cash balances
available for investment as a result of the Company's public offering of
3,504,121 shares of common stock on April 22, 1998. The Company received net
proceeds (after the underwriters discount but before deducting offering
expenses) of $46,114,000 from this offering.
Interest expense was $0 in the quarter ended December 31, 1998 compared to
$51,000 for the same period in the previous year. For the nine-months ending
December 31, 1998 and 1997, these amounts were $10,000 and $188,000,
respectively. These decreases primarily reflect the Company's retirement of all
long-term debt following the completion of the public offering.
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 and commercialization efforts.
The Company expects to be 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.
Please refer to the "Future Operating Results" section of the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998 for a discussion of certain factors that may affect the Company's
future results of operation and financial condition.
11
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1998
Liquidity and Capital Resources
- -------------------------------
At December 31, 1998, the Company had cash, cash equivalents and long-term
marketable securities of $35,018,000 compared to $8,009,000 at March 31, 1998.
This increase was primarily due to the public offering of 3,504,121 shares of
common stock on April 22, 1998. The Company received net proceeds (after the
underwriters discount but before deducting offering expenses) of $46,114,000 as
a result of this offering. The principal uses of cash during the nine months
ended December 31, 1998 were the funding of the Company's operations, the
acquisition of capital equipment, primarily for research and development and
manufacturing, and the retirement of long-term debt.
The Company believes that several years of further development will be necessary
before HTS wires and related products are available in significant quantities
for commercial power applications. The Company believes, based on its current
business plan, that its current cash and marketable securities should be
sufficient to fund the Company's operations for at least the next three years.
However, the Company may need additional funds sooner than anticipated if the
Company's performance deviates significantly from its current business plan or
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, or available under
terms acceptable to the Company.
To date, inflation has not had a material impact on the Company's financial
results.
Year 2000 issues
- ----------------
The Company is currently addressing a universal problem commonly referred to as
"Year 2000 Compliance," which relates to the ability of computer programs and
systems to properly recognize and process date sensitive information before and
after January 1, 2000. Many computer programs and systems recognize dates using
two-digit year data (rather than four-digit data), and therefore may be unable
to determine the correct century for the year. Failure to properly recognize and
process date information may cause such programs and systems to fail to operate
or to operate with errorenous results.
The Company has analyzed and continues to analyze its internal information
technology ("IT") systems ("IT systems") to identify any computer programs that
are not Year 2000 compliant and implement any changes required to make such
systems Year 2000 compliant. The Company believes that its critical IT systems
currently are capable of functioning without substantial Year 2000 compliance
problems. The Company has identified only a few non-critical, but important, IT
systems that must be replaced due to Year 2000 concerns, and the Company already
has plans to replace these IT systems with Year 2000 compliant systems providing
increased functionality.
12
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1998
The Company believes such IT systems will be Year 2000 capable in a time frame
that will avoid any material adverse effect on the Company. Also, the Company
does not believe that the expenditures related to replacing or upgrading any of
its IT systems to make them Year 2000 compliant will have a material adverse
effect on the financial condition of the Company. The Company has evaluated its
critical equipment and critical systems that contain embedded software and the
Company believes that all of its critical Non-IT systems are capable of
functioning without substantial Year 2000 compliance problems.
A substantial portion of the current products being developed, manufactured
and/or sold by the Company (e.g. HTS wire and related products) contain no
computer programs and as such pose no significant Year 2000 compliance concerns.
The Power Quality Division's SMES units currently being manufactured contain
computer programs that may be susceptible to Year 2000 compliance problems. The
Company is in the process of upgrading and testing these computer programs to
insure Year 2000 compliance, and believes that all changes will be in place in
the second calendar quarter of 1999 on both currently manufactured equipment and
units that have been previously sold. However, the Company's products are often
used by its customers in systems that contain third party products. Therefore,
even though the Company's current products may be Year 2000 compliant, the
failure of such third party products to be Year 2000 compliant, or to properly
interface with the Company's current products, may result in a system failure.
The Company is investigating each of its significant vendors, suppliers,
financial service organizations, service providers and customers to confirm that
the Company's operations will not be materially adversely affected by the
failure of any such third party to have Year 2000 compliant computer programs.
This is being undertaken by a process that includes questionnaires, interviews,
on-site visits and other available means. The Company expects to complete this
process by the end of the first calendar quarter of 1999. Regardless of the
responses that the Company receives from such third parties, the Company is
establishing contingency plans to reduce the Company's exposure resulting from
the non-compliance of third parties. First, the Company plans to build
inventories of critical and/or important components prior to January 1, 2000,
and thereby decrease the Company's dependence on suppliers that are not Year
2000 compliant. Second, the Company plans to review delivery schedules with its
major customers, commencing in the third calendar quarter of 1999. Such review
should enable customers to accept ordered products after January 1, 2000, even
if their internal computer systems are not operating properly.
The Company estimates that, through December 31, 1998, it has spent less than
$50,000 to remediate Year 2000 issues in its IT systems, and the Company
estimates that it will spend less than an additional $100,000 to remediate Year
2000 issues in its IT systems. Additionally, the Company has accelerated into
fiscal 1999 the planned replacement of its E-mail software and
13
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1998
financial systems software because such software has potential Year 2000
problems. For the development and deployment of SMES system computer programs to
remedy Year 2000 problems, the Company has spent, through December 31, 1998,
approximately $10,000 and estimates it will spend an additional $10,000 to
complete such program development and deployment. All of such expenditures are
included in the budgets of the various departments of the Company tasked with
various aspects of the Year 2000 project. No IT projects have been deferred due
to the Company's Year 2000 efforts.
Finally, the Company is in the process of developing contingency plans to be
implemented as part of its efforts to identify and correct any Year 2000
compliance problems. Such plans are expected to be completed by the end of the
third calendar quarter of 1999.
The Company does not currently believe that any of the foregoing will have a
material adverse effect on its financial condition or its results of operations.
However, the process of evaluating the Company's products and third party
products and systems is ongoing. Although not expected, failures of critical
suppliers, critical customers, critical IT systems, critical non-IT systems, or
products sold by the Company (including any delay in the deployment of SMES
computer program upgrades) could have a material adverse effect on the Company's
financial condition or results of operations. Year 2000 Compliance has many
issues and aspects, not all of which the Company is able to accurately forecast
or predict. There is no way to assure that Year 2000 Compliance will not have
adverse effects on the Company, some of which could be material. Many of the
Company's statements related to Year 2000 are forward-looking statements and
actual results could differ materially from those anticipated above.
14
<PAGE>
AMERICAN SUPERCONDUCTOR CORPORATION
PART II
OTHER INFORMATION
-----------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) On November 2, 1998, the Company filed a Current Report on
Form 8-K which reported, under Item 5 (Other Events), the
adoption by the Corporation of a shareholder rights plan.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN SUPERCONDUCTOR CORPORATION
2/12/99 /S/ Gregory J. Yurek
- ------------------------------- ------------------------------------
Date Gregory J. Yurek
Chairman of the Board, President and
Chief Executive Officer
2/12/99 /S/ Thomas M. Rosa
- ------------------------------- ------------------------------------
Date Thomas M. Rosa
Chief Accounting Officer, Corporate
Controller and Assistant Secretary
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,546
<SECURITIES> 6,472
<RECEIVABLES> 3,559
<ALLOWANCES> 0
<INVENTORY> 4,874
<CURRENT-ASSETS> 37,884
<PP&E> 17,876
<DEPRECIATION> 12,376
<TOTAL-ASSETS> 50,613
<CURRENT-LIABILITIES> 2,876
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 47,583
<TOTAL-LIABILITY-AND-EQUITY> 50,613
<SALES> 332
<TOTAL-REVENUES> 2,584
<CGS> 382
<TOTAL-COSTS> 2,772
<OTHER-EXPENSES> 4,050
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,756)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,756)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
