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) 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. 3 SUPERCONDUCTIVITY, INC. Middleton, Wisconsin FINANCIAL STATEMENTS and REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS For the Years Ended December 31, 1996 and 1995 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 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) mail@sgcps.com 6 SUPERCONDUCTIVITY, INC. Middleton, Wisconsin BALANCE SHEETS December 31 The accompanying notes are an integral part of the financial statements. 2
1996 1995 ---------- ---------- ASSETS 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 ========== ========== 7 3
1996 1995 ----------- ----------- LIABILITIES 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 =========== =========== 8 SUPERCONDUCTIVITY, INC. Middleton, Wisconsin STATEMENTS OF OPERATIONS For the Years Ended December 31 The accompanying notes are an integral part of the financial statements. 4
1996 1995 ----------- ----------- 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) =========== =========== 9 SUPERCONDUCTIVITY, INC. Middleton, Wisconsin STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31 The accompanying notes are an integral part of the financial statements. 5
Preferred Stock Common Stock ----------------------- ----------------------- Retained Par Additional Par Additional Earnings Value Paid-In Capital Value Paid-In Capital (Deficit) Total ----- --------------- ----- --------------- --------- ----- 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) ======= =========== ====== ======== ============ =========== 10 SUPERCONDUCTIVITY, INC. Middleton, Wisconsin STATEMENTS OF CASH FLOWS For the Years Ended December 31 The accompanying notes are an integral part of the financial statements. 6
1996 1995 ----------- ----------- 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 =========== =========== 11 7
1996 1995 ----------- ----------- 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. 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: 8
1996 1995 ---------- ---------- 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 ========== ========== 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 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: 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
1996 1995 -------- -------- 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 ========== ========== 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: 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
1996 1995 ----------- ----------- 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 =========== =========== 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 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: 13
1996 1995 ------- ----------- Pro forma net loss $(2,999,422) $(2,399,763) =========== =========== A summary of the status of the company's stock option plans follows: Number of Exercise Price Options Per Option --------- -------------- 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 ======= =========== 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: 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:
Number of Options Remaining Contractual Exercise Price Outstanding Life of Options Outstanding -------------- ----------- --------------------------- $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 14
1996 1995 ---------- ----------- 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) ---------- ----------- $ -- $ -- ========== =========== 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: 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
Temporary Tax Difference Effect ----------- ---------- 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 =========== ========== 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 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 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 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. 24 Superconductivity Inc. (A Development Stage Company) Balance Sheets 2
DECEMBER 31 1995 1994 ---------------------- 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 ====================== 25 3
DECEMBER 31 1995 1994 ------------------------- 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 ========================= 26 Superconductivity, Inc. (A Development Stage Company) Statements of Operations See accompanying notes. 4
MARCH 22, 1988 YEAR ENDED DECEMBER 31 (INCEPTION) ------------------------- TO DECEMBER 31, 1995 1994 1995 ------------------------- -------------- 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) ========================= ============ 27 Superconductivity, Inc. (A Development Stage Company) Statements of Shareholders' Equity See accompanying notes. 5
Deficit Preferred Stock Common Stock Accumulated ------------------------ ---------------------------- During Par Additional Additional Development Value Paid-in Capital Par Value Paid-in Capital Stage Total ------------------------ --------------------------------------------------------- 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) ======================== ========================================================= 28 Superconductivity, Inc. (A Development Stage Company) Statements of Cash Flows 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
MARCH 22, 1988 (INCEPTION) TO YEAR ENDED DECEMBER 31 DECEMBER 31, 1995 1994 1995 ----------- ----------- -------------- 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 ============================ ============ 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: 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
1995 1994 ----------------------- 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 ======================= 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 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: 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
1995 1994 ----------------------- 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 ======================= 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: 10
1995 1994 --------------------------- 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 =========================== 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 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: 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
Number of Exercise Price Options Per Option --------- -------------- 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 ======= =========== 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: 13
1995 1994 ---------------------------- 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) ---------------------------- $ -- $ -- ============================ 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: 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
Temporary Tax Difference Effect ---------------------------- 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 ============================ 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 38 UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS AT MARCH 31, 1997 (ASC) AND DECEMBER 31, 1996 (SI) See accompanying notes to unaudited pro forma combined condensed financial information.
ASC SI March 31, December 31, Pro Forma 1997 1996 Combined ------------ ------------ ----------- 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 ============ ============ =========== 39 UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED MARCH 31, 1997 (ASC) AND DECEMBER 31, 1996 (SI) See accompanying notes to unaudited pro forma combined condensed financial information.
ASC SI Combined ------------ ----------- ------------ (Year-ended (Year-ended 3/31/97) 12/31/96) 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 ============ =========== ============ 40 UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED MARCH 31, 1996 (ASC) AND DECEMBER 31, 1995 (SI) See accompanying notes to unaudited pro forma combined condensed financial information.
ASC SI Combined ------------ ----------- ------------ (Year-ended (Year-ended 3/31/96) 12/31/95) 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 ============ =========== ============ 41 UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED MARCH 31, 1995 (ASC) AND DECEMBER 31, 1994 (SI) See accompanying notes to unaudited pro forma combined condensed financial information.
ASC SI Combined ------------ ----------- ------------ (Year-ended (Year-ended 3/31/95) 12/31/94) 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 ============ =========== ============ 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. 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 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.
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
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) mail@sgcps.com