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I've listened several times to the latest conf call in an effort to garner as much insight as possible from the call. I wanted to be sure I wasn't missing something that could have caused the sharp decline in price and to assure myself that the future remained as bright as I originally thought. My conclusions are as follows:
1. The drop in price has no basis in any fundamental change in AMSC's prospects. It is probably more a result of a short term shortfall in SMES sales which is related to the lack of budgeted capital by the utilties vs lack of demand for the product. It appears they have a solution in hand for that problem.
2. The future for AMSC looks brighter than ever. The Wisconsin SMES is performing as planned, the HTS cable is manufactured and on schedule for cutover in Detroit this summer. The 1000 HP motor is successful. The 33,000 HP motor design in under contract. They've teamed with the two leading ship propulsion manufactures and see ship propulsion as a killer app.
3. Most importantly, Yurek expressed a very convincing dedication to achieving profitablity by product line which seems achievable
We have some key milestones coming up in the near future which will provide a good measure of how effective a CEO he is. I bought more and will continue to add as he completes the established milestones. Sorry for such a long post but there's a lot there. Note that I did not include any reference to the financials since these are readily availble elsewhere.
Also, note that this is not an investment for the weak at heart. There are big risks, not the least of which is the new plant and how well they are able to make it a cost effective operation. The potential is enormous and the risks worth taking in my opinion.

Notes from AMSC Conf Call
Greg Yurek summarized AMSC's business in three categories
1. Generation
2. Delivery
3. Use

AMSC's goal is to become a primary supplier in each category.

UTILITIES. They are in discussion with several major Generator manufacturers and have just received an order from one for HTS wire. They plan to accelerate their investment in a sub scale prototype generator to be complete within one year. They plan on spending $3,000,000 in R&D on this effort and plan to have profitable revenue growth from generators in 2004. Greg noted that this is 6 years ahead of the time forecasted by the US Dept of Energy. He noted that the manufacturers see a significant competitive advantage to the use of HTS wire and are eager to be the first mover.
DISTRIBUTED GENERATION. This market includes alternative sources of distributed power generation such as flywheels, batteries, micro turbines, solar cells, fuel cells. AMSC's role will be in the supply of Power Modules for control of power quality, frequency, power density and cost. The modules have been used exclusively in the SMES products (300 to date) but they are working with several manufacturers and expect to have modules in Beta sites within the next 6-9 months. They're searching for a GM and are adding sales people. They will outsource the manufacture of these 250 KW programmable modules. They're projecting sales of over 1000 next year at a sales price of between $5,000 and $15,000 each and expect to be in the black next FY. They expect explosive growth beyond that. Note that they have received their first commercial order for $200,000 this year. And are targeting $4-5 million for this coming year.
This market includes power line cable, substation SMES, Transformers, and switching devices.
Pirelli has completed the fabrication of 1200' of HTS cable and is preparing to ship to Detroit Edison. The Detroit installation and cutover is on target for cutover this summer. Pirelli also expects to complete demo in Europe in 2001. They said that the completion of the Detroit installation will open the gateway for commercial HTS cable within the next few years. AMSC and Pirelli engineers are actively talking with a number of utilities and expect another Beta site to be announced this year. The key challenge is the ability to supply cable from the new factory. They expect it to be up and running in the 2nd half of 2002 with a ramp up in demand in 2004. The goal is to achieve profitable growing revenue and cash flow by March 2004.
The Wisconsin installation results are now in and are listed on the AMSC site. The results are very positive and it's doing what it's supposed to. Sales of DSMES are up from $64,000 in the first 9 months of FY99 to $8,900,000 in the first 9 months of FY2000. The projection is for an additional $3.5 – 7.0 million this coming qtr and for $32 – 45 million with net profit margins on the order of 15-20% in FY2001. Greg noted that the GE and AMSC salesmen and engineers are in very active negotiations with a number of utilities for sales this year. The utilities have not budgeted the capital for this year and they are like deer frozen in the headlights. They are working out solutions that will permit the utilities to expense the units via leasing arrangements with third party leasing companies (such as GE Capital?). During questioning Greg responded to a question about the market size for SMES in utilities by identifying that there are 33,000 substation in the US alone and that the value of the prospects they were working on was in the 100's of millions of dollars.
When the questioner tried to pin him down about how much for this year he asked if he could address the question separately and gave no further answer. It was clear from his remarks that GE and AMSC both believe this market is ready, they see SMES as an immediate solution to a serious problem. His remarks about the power crisis was quite illuminating in that he put the blame for the recent blackouts in California on the grid and the regulators as opposed to lack of sufficient power plants. SMES solves the grid problems and offers the potential to increase grid capacity, eliminate low voltage problems and voltage stability. When questioned about why this message wasn't getting through he indicated that they did have a VP who used to be a Regulator and was now doing some heavy duty lobbying within the industry to get the message out. Surprisingly, he also said that AMSC had one of the best Transmission planning groups in the country and better than most utilities. They are actively involved with many major utilities and are intimately aware of exactly what problems are occurring in all the hot spots. They are in constant contact with their counterparts at the utilities. Greg noted that in the US, many utilities are facing severe potential blackout problems this summer but that in the Southern Hemisphere, where it's winter, they face similar problems but have time to put solutions in place now. Financing is a big hurdle but there are ways around it.

The substation market also provides opportunities for the Power Module for high power switching. Not much emphasis was placed on this particular market.

There are two categories AMSC is addressing. First is the PQSMES or Power Quality SMES. This is a 5MW or greater unit that is directed at commercial users such as Semiconductor Fab plants. They are in active discussions with several customers and expect to have a Beta site within the next 6-9 months.
The second category is motors. They have completed the testing of a 1000 HP motor under contract with the US Navy and have received a follow on contract for the development of a 33,000 HP ship propulsion motor. They are also funding the development of their own 5000 HP motor that will be a proprietary design. It will be ½ the size and weight of a conventional copper wound motor at 40% less cost. They expect to have a prototype this summer.
They have teamed up with Litton Shipbuilding on the US Navy electric propulsion proposal to the Navy and with Alston, the leading supplier of shipboard propulsion systems. Alston will be the subcontractor for the stator coils and do the final assembly and test. Sea trials for the Navy are expected to occur in 2003. Greg sees ship propulsion as the Killer app for electric motors that will include naval vessels, cruise ships and cargo ships. They will offer a step function change in size, weight, fuel efficiency and cost of operation, providing more space for crew, cargo, munitions, profits, etc. He noted that for each motor, their will be an HTS generator as well as Power Modules. He expects the market for the motors alone to be a $2 -4 billion market by 2010. The Generators and Power Modules will add to that.

Q. What is the projected cash burn rate.
A. We currently have $165 million in Treasury and Money market. We plan on accomplishing all the goals with not more than $65 million, leaving a cash position of a min of $100 million.
Q. Is there sufficient inventory to sell $7 m worth of SMES this quarter?
A. Yes
Q. What about PQSMES for Data Centers.
A. Not focusing on that area yet. The need there will be for cable to bring in the power more than PQSMES. AMSC's focus is on the Fab plants.
Q. Is the leasing option making a difference with the utilities?
A. Yes. Definitely.
Q. Over the years you keep coming up with great new ideas on things you want to pursue and profitably keeps getting pushed forward. How comfortable are you with your estimate of profitability or do you have other things you are contemplating doing that will throw a monkey wrench into that?
A. Good question. We're absolutely dedicated to achieving profitably, In SMES we expect to be profitable this quarter and every quarter thereafter. Power Electronics we are targeting $10,000,000 sales and in the black by end of year. Overall corporate profitability by March 31, 2003. Overall profit for each and every business by FY 2004.
Q. I recently went to a utility lunch where they said HTS is way to expensive and too far out. We'll never use that stuff. How much time will you have to spend on educating them, how long will it take and how expensive will it be?
A. In 1991 in our IPO we said our target was to have HTS in the ground working at a utility by 2000. We missed it by a quarter. We've used that intervening time to do a lot of education. Good news is that when our joint Pirelli/AMSC team shows up at a utility, they know about HTS. We met last week with a Northeast utility who said we can't solve our cable problems any other way expect HTS and we don't care what it costs. Obviously there are utilities who are still unaware, but we're going after the low hanging fruit first and build our business going forward on that basis.
Q. What utilities are your targets?
A. First big urban centers, than suburbs around those centers. In 15 –20 years we go after the long distance transmission.

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