American Superconductor Corp (AMSC) 2003 Q3 法說會逐字稿

Good morning and welcome to the American Superconductor fiscal year 2003 3rd quarter conference call. With us today is Greg Yurek President and CEO and Stan Piekos, Senior Vice President Corporate Development and CFO. I would now like to turn the call over to your host, Greg Yurek, please go ahead sir.

Thanks Susan and thanks for returning our business to Superconductors. I'm Greg Yurek and I have with me Stan Piekos, our Chief Financial Officer, and John Howe, our Vice President of Electric Industry Affairs.

Stan is going to give you the opening remarks on the Safe Harbor Guidance and then turn it back over to me. I'm going to make brief comments and pick out a few highlights from the earnings announcement that we made this morning and then provide most of the time for your questions, so I encourage you to put your questions in. Stan?

Thanks Greg and good morning. Let me provide the following guidance. In our attempt to share information with you to provide insight to help you understand our business plan, we may use statements containing our beliefs, plans and expectations which, constitute forward looking statements. There are a number of factors and uncertainties that may actual results to differ significantly. Please also refer to our SEC filings and in particular, management discussion analysis form on more information on those factors and uncertainties. Greg?

Thanks Stan. This morning we released an announcement of our earnings for the third quarter and an outlook going forward. It was a lengthy review and we decided to give you all of that information so can you read through that -- sort of the FOX news network approach, we report, you decide.

I think we were giving a lot of disclosure here you will want to dig through. We're not going to go through that again unless have you questions so I'm going to pick out a few highlights that we think are appropriate.

First, I'd like to start off on comments on the other announcement I made this morning; I apologize for putting out two announcements this morning, but the paper work for the order from Rayburn[ph] Country Electric in Texas did not get completed until last evening.

Obviously we delighted with this new order for two VAR systems. We also have a verbal order for three VAR systems from another utility -- but the paper work did not get done on that one by this morning, so we'll get back to you later this month when we get the details handled there. Together, these two orders handle approximately $5.9m in revenues that we expect to recognize this quarter by delivering the five systems to the customer sites during the current quarter. All of this revenue converts directly to cash, comprising of both inventory and product margin.

We will be working real hard to collect payment this quarter so that these orders do not only have a favorable impact on revenue line, but also on our cash position. If the cash is not collected, of course, from the customers this quarter, it will be collected next quarter, which will have the same favorable impact on our overall cash position going forward. Beyond the immediate and obvious favorable impacts these orders have on near term revenue and cash, they are also very important in signaling that utilities are starting to order equipment [indiscernible] reliability and power flow problems.

Last quarter, we stated we were actively bidding on $20m worth of business for utility power solutions. Recently we lost one of those order for $1m to Mitsubishi. Of course, we have now won $5.9m [indiscernible] business and we're actively working to close orders on remaining near term opportunities worth about $13m, in other words, the $13m being the delta between the $20m and the orders already left. While we believe we are in good position to learn more of this business and while the business opportunities for next year remains in the $50m dollar range, we will not able to deliver on additional orders this order because of timing issues.

In other words, more orders coming this quarter become backlogged for the next fiscal year for the power electronics system business unit. On the industrial sales front for our power electronic system business, we continue to see growth and activity, however, industrial customers remain cautious and we believe most of our near term sales for power electronic systems will be to utilities and transmission grid operators. I'd also like to make a few comments on the commercial launch of a new product, a Super VAR -- we introduced this last week.

Super bar valley is really a rotating machine that looks and operates just like a motor. It's the same platform that we're using for our HTS shift proportion and generators. Just operates in a different mode. This is a product that has been designed by our electric motors and generators business. Its purpose is to boost voltage on transmission grid and to avoid brown outs and black outs which have become all too common in many areas in the US and certainly abroad.

This product is a compliment to the VAR and [indiscernible] products being manufactured and sold by power electronics systems business. As you might expect, different power grid operators have different problems employ in order to solve them have you to have a tool box of solutions. It is very important to have, in addition to announcing the introduction of a new HTS product, the Super VAR, we also announced a launched customer for this new product.

T V A wants the first pot owe type on their grid this fall and their so eager to move forward with this product that they agreed to help finance the development and test of the product. They also gave us a forward order on the first five production units -- after satisfying operation. The first units are going to be rated at about 10 mega bars each. The pricing is in the range of $850,000 to $950,000 each.

So this order has a value of over $4m, plus the value of this financing from T V A from this product development work. We're engaged in operation with other -- tremendous addition to the AMSC family of products.

One other area I wanted to comment on briefly is the navy's request for proposal for a 25 mega watt shift propulsion motor -- there has been a lot of speculation on whether AMSC would win a contract from the navy research for design, development of a 25 mega watt, HTS shift propulsion motor.

I'll tell what you I can today about the status of this contract. AMSC submitted on September 2nd a full proposal based on their specific needs. They requested not only a proposal for 25 mega watt motor, but also options for a 36.5 megawatt motor and 26 megawatt generators.

We responded with a proposal with AMSC as the prime contractor, leading a strong team of subcontractor and supplied bids on three all three pieces of equipment. If the navy decides to funds the delivery of all three pieces of equipment and if AMSC wins this contract, the value of this contract to AMSC will be over $100m over a four or five year period of time.

This contract would be a cost plus C kind of contract and profitable for prime contractor. If we win this contract, we expect AMSC electric motors and generator business to be profitable and cash flow positive in our fiscal year starting April 1st, 2003.

Let me finally comment on revenues and cash burn. While there were timing issues on many of the new orders and contracts we expected earlier in the year, which lead to lower revenues in the third quarter, many of those orders and contracts are now in hand. The detailed in the earnings announcement this morning, we now have contracts worth $9.4m.

We expect to ship products to customers and recognize revenues of contracts this quarter and thus we expect our revenue for the year ending March 31, 2003 to be at least $19.5m that consists of $10.1m in revenue recognized through December 31, 2002 plus the additional $9.4m of this quarter. Of course, we are going to work very hard to collect the cash payments from the customers on the orders that shipped this quarter. If we accomplish this goal, then our cash burn for this quarter will be near zero. In any case, we have provided guidance on our cash position as of June 30, 2003, which is unusual, but we provided guidance to reflect our cash receipts that are delayed, of course, will have a favorable impact for the incorporations cash position next quarter.

Our revenue for the last fiscal year was about $11.1m we guided previously that revenue for this year would be in the range of $20m to $28m. The higher end of this rage depended on closing orders and contracts no later than January 2003, some will not occur until this month or next. We actually guided in our earning announcements released today that our earning revenues likely to be in the range $19.5m to $20.5m as of March 31, 2003, which does depend on the closing of certain additional orders.

That is the higher number, the $20.5m depending on closing of certain order says that can still add to our top line this fiscal year. Note, of course, that new orders and contracts that have been delayed now become part of the backlog for the next fiscal year and beyond.

I want to add one last final highlight here which we got into the earning announcement this morning and that is financing options that we're continuing to explore for bringing in additional cash to provide a cushion from a working capital point of view and in order to finance accelerated sale of our second generation HTS wire technology, which has come on faster than we earlier expected.

Prospects for raising additional cash looking good but I can't get into details at this time. Debt financing is certainly a option given appraisal of wiring plant that came in at $36m We're not fans of debt financing here at AMSC, but we keep this option open as a possibility. We're looking at many other options and we will keep you informed as our plans come together. I want you at this point to turn this back over to you for questions and we'll do our best to answer those for you.

Thank you at this time if do you have a question, please press star one on your touch tone phone and press pound to with draw your question. Once again, if you do have a question, please press star one your phone now. We'll take our first question from Eric Prouty from Adam Harkness & Hill. Please go ahead.

What question on your estimated revenue and loss for the Q4 coming up here? I'm doing my math correctly, we're looking at loss somewhere in the 44 to 60-cent range for March on about the $9.5m plus in revenue your expecting. I guess what rest of do you need to be at to be profitable to the bottom line would you estimate?

That depends on the product mix we've got. But in general, with the mix of business we're seeing we're $100m dollar annual is ballpark

One follow up on the navy contract. What would be the expected impact -- sounds like the 15 to 20 million for the first year. That's actually true AMSC. What in general would be the profitability from an operating stand point of a contract such as this.

If we are chosen to negotiate a contract, then you get into that negotiation, including the profit level. These will typically run in the 7% to 10% range.

Okay great. In the $15m to $20 m, that would be -- I guess AMSC portion of the contract for -- anticipate in that first year the moneys that would go out to other sub contractors.

Yeah, this is all on AMSC top line.

Okay. We subcontracted somebody else. We charge a fee on that.

Right.

So fact our profitability number is off actual top line what happened that number would be $15m or $20m. We get the X percent of what in terms of profitability including fee for sub contracting it out.

Great. It seems like your doing a little trimming back from the operation and back office stand point. Could you give us a little indication going out where you expect us to remain on G levels.

Just to be clear on that, the realignment we did a couple weeks okay was a true realignment. It does have a very positive impact on cost structure clearly and we'll continue to look at ways of taking out cost of all of our operations as we go forward.

Do understand, for example -- by the way, let me clarify further, when I say realignment, I'm talking here about moving away from R&D activities in our first-generation which is now commercial product to product engineering and manufacturing of sales. So people that have you to get to you this point really not contributors so you have you to do realignment around that.

We also moved a number of people with engineering and product manufacturing experience over to second-generation. So realignment and some trimming went along with it. So 21 people were let go and the cost savings next year will be $1.6m. So that's a little bit more detail on that so Eric, do recognize if we're fortunate enough to win this navy contract we will in fact be hiring people -- with the proper skills that meet the needs that was navy contracts and other contracts we're expect nothing our H G A wire businesses as well. Stan, I don't know if you have detail you can share right now in terms of the rest of Eric's question.

We can speak to Eric in trends. If you look at R&D, you have you to look at the company funds. P&L and what we do in the break out the R&D that goes into you have to look at the total thing.

In general, since our cut back on the development side that started a year ago, we made a major -- restructuring of operations at the end of last fiscal year, R&D is down about a million dollars. It's now focused, truly strategic programs, like second-generation wire. We got the SG&A structure in place to support power electronic systems and we got a partner there too in the marketplace, as you know.

Just commenting to on the leverage and the profitability, if you look the power electronic systems, year over year on three month basis, a power electronic system revenues for this three month period compared last year were up a million; The bottom line for bottom systems improved a million and-a-half.

If you look at nine months it's even more dramatic. Power electronic systems revenues were up four -- $3.6m in the loss of down $4.5m. So can you see the cost structure actions we have taken here by bringing in sales that are not commercialized. We have a system on out there that we done to evolve and give our planners more [indiscernible] we're doing fine.

Okay thanks Greg and Stan.

Thank you we'll take our next question from David Kurzman from H C Wainwright; Please go ahead.

Thanks. Good morning. Quick question on the integration of NST. How is that going? What did you guys end up getting? What do you see the major benefits as being.

Well, there's no integration involved here. What we did was we bought all the assets for the superconductor -- we paid for that with 546,000 shares of AMSC's stock; in terms of what we got, we shut down the whole plant over there by the way. N K G holding to be care of the redundancy with the people, so there's no people involved. We sold some of the equipment for cash, we got all of their silver stocks, which we sold for cash.

We picked out the pieces of equipment we wanted and shipped them over to Devons net cost were essentially zero to us on a cash basis because of the cash receipt from selling the silver and some of the equipment.

So what we did was eliminate a competitor in the marketplace. On a very positive note, we have a very direct relationship with NKT cables which is also owned by N K G holdings. You may know NKG cables recently formed a joint venture with Southwire called Oltera; 25 people focused on HTS cables and we believe based on our performance of our wires and pricing of our wires that we'll be the preferred supplier of wirer to both -- certainly cables and -- but also open channels to other customers that NST has develop immediate the marketplace. So that's a primary benefit for us.

There was actual any written agreement that you would be the preferred supplier.

No there, is no written agreement. You also have to perform in the marketplace NKG holding is fifth largest shareholder at this point in time.

If I do a little bit of back of the envelope math, -- I'm just trying to make sure I've got the backlog correct; We've got the two VAR to Rayburn, five super VAR to CVA, and the VAR that the [indiscernible] made, that's already gone right.

Well, what backlog are you talking about.

Your total commercial product backlog.

Well, I think what -- we haven't given you a bag log number for going forward.

What we have given here is bag log number for this quarter and that backlog number five VARs sales, it does not include anything on super bar[ph]; Just the five VAR sales that we have going on this quarter two [inaudible] and two to another one we're not able to name now.

It includes the existing contracts, for example the 5-megawatt shift propulsion motor contract; It includes a number of wire sales and some other government contracts we already established and have announced in the past. So it does include the sale to Nordex. That is still to be recognized this quarter as well.

Okay. Any update from your friends in Detroit in terms of how that final cable is going? It's supposed to be energized by year-end, wasn't it?

Not really. We talked about this back in the summer and said it's basically a dead duck over in Detroit. Some of the people in Detroit and -- we were trying to run one of the cables out there as an experiment to see what they could additionally learn. As we said back there June or July, we don't expect anything to come out of that.

I read your press release and it would it would be energized by year end, but I hear what you're saying though.

In terms of right ex, in that relationship, can you tell us how that was structured? Are there dedicated sales people so forth and so on.

Distribution channel for us into Asia/Pacific region and their actively engage said primarily at this stage with semiconductor manufactures, I think you probably than is one area of the word where we expect growth in semiconductor fabs going forward. So I think that's as much as I can say.

Okay thanks.

Thank you we'll take your next question from Peter Patterson with Patterson Investment Advisors, please go ahead.

Greg, Stan, Mary, good morning.

Good morning.

We just heard from the f e r c they are looking for 15 percent return on investment for utilities. I'm looking forward to joining the ISO. I was wondering if you had any thoughts there. This is maybe geared toward John. What do we need to energize that segment.

I think one of the key things in the first transition policy statement is they had a very explicit couple of paragraphs indicating that they favor and want to encourage the use of new technologies that do not involve the need for new right of way.

So all the other incentives for joins ISO and new construction their all well and good, but I think the key out of that policy statement was express encouragement for new technology approaches we think given some of the statements out governor's association in the past year and now out of fur, people are beginning to realize we won't be able to solve these problems by putting up a lot of extensive over head transition line. We have to look at more creative approaches and I think at this point we are well positioned.

You think that's not to break the log jam.

I think it's a significant step, yes. The other key development that is the coming into place across the company is the institution of locational pricing of power. Now as compared with the past, if a region's utility does not have adequate transition line to deliver power reliability, then that utility or that customers directly, are going to start to bear a direct cost penalty. So there is a -- some make progress on standard market design, which would become universal across the country.

I might add here that the President Bush submitted his statement to conscience and include the $47m for super conductivity. And I Department of Energy is taking the lead in establishing solution of national transmit grit and so forth E so they upped the bottom last year to 27 medication dollars and come back in with a proposal for 27 million. So policy makers and the leaders in the country are taking this quite seriously now.

That's very encouraging thank you.

Thank you we'll take our next question from David Kurzman from H C Wainwright. Please go ahead.

Just wanted to ask one other question I forgot to ask before. In terms of the potential navy large 100 million type of contract over four to five years when would you expect that to start? Would that be a summer thing, fall thing fiscal 04.

This quarter.

This quarter very good thank you.

Although I might add here that is we -- first of all we have not said anything about wining that contract yet.

Number one, but if we were to win that contract, and announce it this quarter, we have not included any of that in any backlog, we don't have an order there. I want to be real clear about that.

Great.

Thank you. Once again if you do have a question please press star one on your phone. We'll take our next question from Peter Patterson.

Greg, hi. One follow up question. Several years ago we heard from a relationship with kiss wire I'm wonder if there's anything developing there.

We mentioned in the earnings announcement this morning as an update we did get an order from kiss wire to supply most of the wire from Korean national program this year 2003. So that is been developing and we're starting to see some fruits of from that effort.

Thank you very much.

I might add this call is open to questions to anybody out there it's not restricted in any way.

Thank you we'll take our next question from Robert Smith from Center for Investment Performance.

Good morning center for performance. I came do this call around 11:15 after being serenaded for 18 minute so I missed your overview in the beginning but I have the press release.

With respect to second-generation wire you had couple news release necessary October. If you were to give us an update from that point forward to this point was there anything you might be able to sea about that?

My second question involves what kind of exploratory efforts have you made for additional financing? I think you're thinking along those lines and. Is there any approach been indicated by you guys at this point in time?

You didn't miss anything on second generation. We didn't comment on that. So, see we announced [indiscernible] of October. And we continued to make good progress and in fact the results have been surprisingly good. So, I guess I did comment on the finances point of view, we need to seek options for financing accelerated sale of second-generation wire, so we continue to milestones and we're pleased with T we're bringing additional government contracts to our cost of developing this next generation wire technology.

If we can do it, this has the potential to having price performance ratios two to five times lower than what we're going to be doing with our first-generation wire, but let's not get to too anxious about this; I want to be consistent about this. We're saying the first-generation wire is clearly the work horse here for the industry for next three or four years employ the choir coming out of Devons and now shipping and selling to customers remains the highest performance HTS wire anywhere.

It's been well accepted. I think you are going to see announced three cable project necessary the U.S. in 2003 or so around the world, it's all first-generation wires going into those cables. GE and now their competitors are stepping up saying they will do large utility generators. We are doing a lot on second generation. Including the shifting of quite a few engineering and manufacturing people from first-generation over to second-generation coded conductor effort.

So we're taking it very seriously and we're examining or options for bringing in additional financing to support that. Also to make sure that we have enough cushion on the working capital through the next fiscal year as well. Our plan as we end up with cash in the bank as of March 31, 2004, five to seven million, clearly given the way the economy has been uncertain over last three years; I think nobody would want to depend on that.

So I'm looking at various options, debt financing as you said earlier on the call; We are not fans on that; You have to pay the piper[ph] later on and that hits the P&L and we don't like that.. I want to keep that asset as free and clear for as long as we can. Sometime we will do debt financing for working capital, but there are other options as I mentioned on previous call, including strategic partners and so forth. So we're looking at all at options available to our company and we have a positive feeling about our opportunities.

When the first step be the sale lease back of the plant.

No that's again debt financing in the sense that it's your P&L every day and every months and every quarter. So we had offered to do that, letter offers to do that. Details -- once again we're putting that at the bottom of our list.

Okay has any exploratory talks been started with say EDS or [indiscernible] or some of the big Players.

As far as I'm going to go on that is we're looking at all of our options and have been in fact and to continue the process.

Okay, I'm not going to push that. Thanks very much. Good luck.

Thank you we'll take our next question from Jan Gruber from Gruber McCain Capital Management.

Good morning. Follow up questions on financing. Are you guys liking at pipe or equity financing. Clearly have you to do something soon. What are you looking at? .

I'm not going to go into details but we're looking at every option that's available to us. Certainly private investment or pipes as they're called. There are many kinds of pipes.

We're looking at all of those in conjunction in addition to debt financing and strategic partners that might take a position here -- equity position. A whole volume of options available to us.

Thank you.

Thank you. We'll take our next question from Al Salvin from Vector Debt Wiler Company; Please go ahead.

Good morning on the financial side please I'd like clarification. You have the VAR or I don't know if your old plant system -- the super magnetic storage -- can you clarify give us some idea where these things bit and relative pricing and also in the pricing front of your relative profitability of them.

So, let me make the list here to make it here. In our product portfolio new is the -- super conducting magnetic storage that's clearly product that we have sold already and it's in our product line.

We have dynamic VAR, which is VAR, and then we have now the new product we're introduced super VAR. It's not a power electronics solution, it looks like a motor and operates like a motor expect it's designed to generate these bares this reactive power; so there's three different products. So if I had only a hammer in thigh tool box, every problem looks like a nail.

When you go to customers you find out sometimes they need only reactive power. Some of those need reactive power on localized basis. VAR would be the solution in that case. Sometimes they need local solution you had also need real electrical energy and that comes from a superconductor storage device.

n other cases they're trying to support an entire grid on a continuous baize. Not instantaneous basis. That would be continuous rotating machine called super VAR. So really you need to show up with this product set employ the DVOR come out of our power electronic super VAR come out of generator business at this point in time employ. The profitability and margins on these are all quite similar as well; the pricing is quite similar as well. The Super VAR seems to be a little lower priced per unit.

Okay but they're all currently viable -- they are all tools that can fit in a particular -

Let's be clear these they are commercial products. We just announced five more DVOR today. And super VAR is a product we're introducing. Same rotating machine that we're using for ship propulsion motors.

So we're taking the same product base or platform here and operate nothing a different way to produce these VAR's. Point number one, I lot my train of thought. -- sorry. The rest of your question.

I think you basically covered it. They're all still viable for different.

The super VAR we just introduced last week -- of course we have to go through the demonstration phase or the beta phase employ so -- they really want to get super VAR on their grid so they're pulling us pretty hard here and partially helping us fund the super VAR development for the beta side and then they gave us forward order. So that's not a commercial product now. We're coming along with these new product offerings.

Thank you.

Sure.

Thank you once again if you have a question, please press star one on your touchtone phone now. We're take our next question from Steve Crougar from Foresight Investing.

Good morning. I wonder if you could clarify what the value proposition is on the super VAR, what kind of benefit to you expect way and how do we compare that to total cost to install buy and maintain it.

That's a good question. We will get TVA any utility transmission grid traitor. We're in discussion with them now employ the program they have today is they have to upgrade the grid; very clear; you know that from reading your newspaper; you don't have to be a utility guy to see that. They need to do this. They need to up more transmission line. That's not easy.

They're not getting permission to do this from the citizens whose backyard these transmission lines would go. Bay the wires these are expensive to put you up. So weigh super VAR does is it goes right into existing substations and hooks up to the grade in that multiple substation and supplies support.

Why is that important? For one thing utilities have out there are transmission lines, a lot of them but they copyright use them to full capacity. The reason is they have voltage problem necessary the grid employ we see that as brown outs or brining of the lights or black outs. They don't have must voltage support in the grade and they can get unstable support and the lights go out.

If they have a super VAR in the grid or other solutions like there, they can actually support voltage on the grade to higher levels and put more power more existing power lines and go up to the thermal limit where the wires start melting. They're no way near that today.

The super VAR allows transmission operators to put more power to their existing wire at a fraction of what it would cost to put up new line. So it's a solution that DVOR goes in today like in ray burn Texas -- to increase power flows to their grid without having to invest in more expensive generation or putting up new transmission line.

First of all they have to have the generating capacity to want to put more power through the transmission lines.

We have a lot of transmission capacity in this country.

So that's not an issue the bottle neck is the transmission.

We have a lost generation capacity.

Could you quantify somehow the equivalent -- what equivalent amount of dollar would utility have to spend in additional transmission lines compared to the additional amount of transmission capacity for the super V O R would give them? How do we quantify that?

I'll give you at least one example. And that is our original installation of six [indiscernible] units in five substations Wisconsin. They're keeping those grids going and probably going to order another one in fact. They could have solved their power flow problems by put nothing two doubt circuits in that grid. It would have cost them $12m to do that. Our solution cost them $5m, so less than half the cost of solving their problem.

So there is a very direct case. I want to ask John to talk about -- without going into specific names a case where last summer a utility had to put in next generation what it cost them and what it might cost them for DVOR.

Well, this is a case where the utility in question had to procure some short term emergency power that ended up costing several million dollars just to stand by for a period of a few months and we are in discussions regarding possible placement of the VAR units which could solve that period for a period of several years.

Defer the need for transmission construction, give utilities additional planning options and probably in terms of carrying cost would be about some place between 130th to 150th the cost of the solution implied last year.

I think what's happening is the utility is starting to recognize this proposition employ it's really quite significant and we're starting to see them loosen up a little bit. We truly provide a cost effective alternative to putting up for lines. .

So, the lines today have laid a the ret Cal. utility it is load the lines to some percentage of that because of the instability of the load that sloshes around on the transmission grid.

That can be as low as 40% to 60% of the thermal limit believe it or not. So there's a lot of capacity there if you can put something into the grid that stabilizes it. That's what super VAR will do in the future.

Lowed 60 -- theoretical capacity, what can they bring that to if they want it on the appropriate configuration of super VAR.

Right really from our detailed analysis of various grids so forth can you get up to 90% to 95% of thermal limit.

Have you done a calculation to tell you what-how many super VAR. What would be the total available market if every utility in the country did that?

I got to figure the -- one if 10.

There's 300 north America only.

North America.

So 3300 units of some one of the three products it is kind of like the total available market.

In the U.S.

In the U.S. thanks very much.

Thank you we will take next question from Joseph Gerard from Gerard Funds please go ahead.

Two questions. Recently I listened to two spokesman for major utilities out here on the west coast ho have commented that the -- their grids are very old and their operating wait past life time. You were talking about solutions to having to on place lines as a more economical alternative. Assaulting that these major grades have to be replaced and the utilities can finance this work, is there a role for AMSC in that sort of construction.

The answer is yes because the next question is now that you gone up to the transmission grid, the wires are going to melt which is the next step and what are you going to do there. That's where the super conductor come in, the HTS cables that we're working with utilities on now. That allows us to increase the power flow and go well beyond the thermal units. So it's the next step from the process but not sequentially because we're literally out there working today with a number of utilities on defining both demonstration and commercial for these high temperature super-conducting cable. One happens to be on the west coast by the way, so this is not too far off in our future. I think you will quite clearly hear this year, probably next quarter about two or three -- actually there should be three demonstration projects where HTS cable is going in the U.S. in the next couple years. So not withstanding the big disappointment of HTS cable in Detroit, the industry is moving forward and very impressive things are going to be happening about in the next quarter or so.

With the utilization of that cable, it would seem to me that the potential is huge. As time goes on as to a market. The revenues should be huge, I would think.

That's right. You use a lot of wear in a circuit mile of cable. That takes something like 210 miles of wire. You start multiplying the miles going from urban retrofit in cities to regional transmission between cities, these are literally some of the solutions we're looking on the on the now. You get a lot of miles of cable and a lot of miles of wire that have to go into it. If you look at our projection and our business models going out over the next 5 to 10 years, we're going to need financing for plants 5 to 10 years from now.

The second question is goes to ship propulsion. Assuming that AMSC is awarded the Navy contract and you go in forward and manufacture and deliver the devices, I assume this is more of a test by the Navy as to the feasibility and the cost factors involved. I noted with interest on the Internet yesterday that the budget being sent to Congress by the defense budget allocates a substantial portion for ship construction. I would assume that this method of propulsion -- this propulsion utilizing your architecture would tend to want to utilize your mechanism for propulsion.

That's right.

Is that a valid assumption?

Let me just comment here. Don't forget that we're under a Navy contract now to build and demonstrate a 5-megawatt 230 RPM ship propulsion motor. As we said in the earnings release, that motor is now assembled with our subcontractor in England. It's now under factory test. We expect it to be on the Navy's dock in July of 2003 for the test with the Navy. We also intend to be selling commercialize 5-megawatt 230 RPM motors. This is a standard size that is now used extensively in commercial cruise and cargo ships around the world today. So we didn't pick that 5-megawatt number for the fun of it. You are right it's a -- we are working with naval architects who now say I have new set of options here for designing hull forms for higher speed, special efficiency to carry more cargo and passengers. This is having a very direct impact on the way that ship builders design there systems, and we'll have more to say not too long for now.

Thank you.

Thank you once again if you have any final questions, please press star one on your phone now. We'll take a next question from Jess Steinerman from Jonas Worldwide Investments.

Assuming we get the Navy contracts, what will be the cash position in March of '04.

Assuming we get the contracts -- again that's a profitable contract and we expect that unit of electric motors and generators to be profitable off that -- using the Navy's number $15m to $20m for the first year. But the amount of cash it generates out of that project is not going to be that much. So this business unit -- you want to think of this business use as being self-sustaining in developing these products like ship propulsion motors, Super VAR product. Generating a little bit of cash but don't think about it as sustaining the growth of this company going forward at least not in the next one or two years. Going beyond that, if I look at 10 year business plan, which are things we update every year, this is an extremely good business going forward and will generate plenty of cash but don't look at it to support the company off the Navy contract. Self sustaining during this period of time. That's the name of the game.

Thank you.

Thank you. We'll take our next question from Joshua Lang, Private Investor.

I have two questions. One is -- what can you tell us about the competitors for the Navyship motor and the second one is ---as to the super VAR -- what is it that's -- why is HTS wire critical to this product? As you describe it you describe a mechanical product presumably ordinary -- would serve as well.

On the first part, I'm not at liberty to comment on ho the competitors have been, but I will tell you there were three competitors for this contract. I'm just sorry I'm not at liberty to name names here. Since we started the conference call, Dave Paratore, VP and GM of the Electric Motors and Generators Unit has joined us so I'm going to ask him to answer the second question.

With respect to the wire, what HTS wire allows you the ability from the inherent test wear to give you over load capacity that you can't get from conventional copper-machines? You can support the rated load of machine in both technically speaking -in both the leading and lagging mode. So where with a conventional machine --- you can only get 30 to 40 percent of the rated in one of those directions, you can get 100 percent with HTS machine. In addition you can get an overload capacity of up to 8 times the rated machine, depending on where the fault in the transmission line is and you can't do that with conventional lines because the copper doesn't allow to you to handle that kind of capacity. So it allows you to make a machine that supports a bigger requirement than you have on size the machine for because that was over load capacity.

By the way, these are running on a continue basis and the HTS provides higher efficiency which has been one of the advantages of superconductors so you get a direct benefit in terms of efficiency and cost.

Thank you. Could I go back to the first question even if you can't disclose the names of the other three people, are they in the same business as you or in other lines of business. For example being a motor manufacture.

Yeah, they're -- three major corporations that I would say generally not considered to be competitors of ours.

Right. So they might in fact use you in -- just from the point of view of supplying the HTS wire.

If they're going to make an HTS machine, there's only one place I know where you can buy the wire.

Okay.

We'll take one more question.

Thank you we'll take final question from Brian Ronin, a Private Investor.

Hi. I'm been involved with this company for about eight years and been waiting for this day to come to a positive exponential move and I'm listening to you guys on the finance side talking about not wanting to use debt. So you want to dilute my ownership in this custody bee issuing a form of stock is what it sounds like to me. I don't know why you're afraid of using debt?

It's on the bottom of our list because we have an appraisal of $36m on the plant there. But let me see if I can get a better deal with -- you can to cover it on the P&L every day and quarter. Let me see if I can do better potentially with a strategic partner. That might provide us with greater overall value. I have been a share holder for 15 years. I want to make sure we're doing the best for all of us share holders in terms of return. I want thank you for being persistent. I'm in the same boat as you and want to get the maximum return.

What percentage would you sell in a strategic alliance?

I can't answer that question now because it's too premature. Again you want to minimize dilution myself here. We've created a tremendous amount of value if you look at various business units. It might not be a bad idea to monetize some of that the value creation. So I think a bunch of options are open to us. Let us explore those. We've got smart people on our board here.

How much money do you this you want?

I can't comment on that at this time. Again our plan says we have $5m to $7m in cash left in March 04. And again, in today's world, that doesn't seem like a enough of a cushion so we have to build a bit of working capital. How much and when do we want to invest in that scale of opportunities. How fast do we want to accelerate that to get to the benefits. The thing about second-generation, if we can make that work and bring it on line faster than we thought, I can tell from our analysis of the market that we can open up deeper and broader market. As a shareholder we will never think about dilution at that point in time because our lines will be expanded so much further.

Here is what I look at. Your market cap is $100m. If you need $30m hypothetically, then you got to dilute me by 20 percent to just raise $30m. I don't know what strategic alliance or bargain you're going to get but I don't want to sell them a piece of this company that cheap. I'd rather you issue debt.

I agree with you 100 percent. So we're in full agreement on all of these points and our job is to go out there and look at these options and come back with plans to the board of directors and implement the best plan for our share holders.

It seems to me you guys think debt is the last thing on your mind where I almost think some form of debt, convertible or something that does not dilute me as much, but I don't want to give away my eight years of sticking this thing for nothing.

I absolutely agree so I total agree with you. You need to realize is you dig down into the detail of debt offering today in today's world it's pretty onerous. You would not be happy with those as well.

What do you think you would borrow at?

Let us work this out these options. We're simply telling you you're exploring our options. We will get this done and do the best for all our shareholders. Thank you all for participating today. We're moving forward -- there a change of momentum in direction here. We have a lot of hard work ahead of us here but clearly from the kind of backlog we built up from this quarter, based on real orders in hand, we're moving in the right direction and we'll keep you informed.

Thank you for your participation on today's conference. Call ended at 12:06 p.m.--- 0