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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 1-11512
____________________
SATCON TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
__________________
DELAWARE 04-2857552
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
161 FIRST STREET, CAMBRIDGE, MASSACHUSETTS 02142
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
__________________
(617) 661-0540
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
__________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
TITLE OF CLASS
--------------
COMMON STOCK, $.01 PAR VALUE
----------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- ------
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [_]
As of December 2, 1996, 7,379,817 shares of the registrant's Common
Stock, $.01 par value, were issued and outstanding. The aggregate market value
of the registrant's voting stock held by non-affiliates of the registrant as of
December 2, 1996, based upon the closing price of such stock on the Nasdaq
National Market on that date ($7.328) was $31,944,474.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 1997 Annual Meeting of
Stockholders are incorporated by reference
into Part III of this Form 10-K
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1
PART I
ITEM 1. BUSINESS
GENERAL
SatCon Technology Corporation (the "Company" or "SatCon") was organized as a
Massachusetts corporation in February 1985 and reincorporated in Delaware in
1992. SatCon designs, develops and manufactures intelligent, electro-
mechanical products for aerospace, transportation, industrial, and utility
applications. SatCon's electro-mechanical products are being developed for a
wide variety of U.S. government and commercial markets. For the government,
SatCon's electro-mechanical systems provide low vibration and high power for
applications ranging from satellite attitude control to high speed drives for
shipboard systems. In the transportation segment SatCon is developing electric
and hybrid electric drive components, auxiliary power units, and advanced
steering, suspension, and braking systems. SatCon is working with major
equipment producers to develop process equipment drives, high speed and
precision machine tools, manipulators, and machinery isolation equipment.
SatCon's electro-mechanical systems may offer to the utility industry
advantages in power generation, energy storage, and power quality. In the
consumer market SatCon is developing freon-free compressors for refrigerators,
variable speed motors, and other long-life, high-efficiency machinery.
STRATEGY
The transition to a new generation of products being developed by SatCon is
being fueled by a combination of market demand for higher performance and
improved efficiency, and by the potential to satisfy these needs made possible
by advances in materials and electronics technologies. It is the Company's
strategy to accelerate leading edge developments by continuing to expand its
externally funded contract research and development from both government and
commercial sources. The Company believes that this funding can be used to
develop products which can be sold to government agencies and possibly
transition into viable commercial products. In most instances individual
components have multiple applications across these markets.
These product developments typically progress through a technology and concept
development phase and, if appropriate, into a prototype build phase. Once
demonstrated, the Company intends to leverage these prototype developments
into 'beta site' units that can be purchased by, or jointly developed with,
commercial customers for evaluation. Upon completion of beta site testing,
decisions by potential customers will determine the viability of continuing
into pre-production manufacturing and further testing and evaluation. In the
past two years, SatCon has been successful in developing relationships with
potential commercial customers for its technology and prototype demonstration
units. These relationships can provide a foundation for the Company's
continuing product development efforts while building a potential market base
for those products in production quantities.
To date, the Company has entered into discussions with such companies as
Delco-Remy, General Motors, TRW, Applied Materials, Westinghouse and Allied
Signal and intends to seek to form relationships that can utilize the sales,
marketing and distribution channels as well as manufacturing capabilities of
these organizations to further the commercialization of SatCon's technologies.
DEVELOPMENTS DURING 1996
General
During Fiscal 1996, the Company was involved in a number of activities
including the following:
The Company delivered five "beta-site" units of an integrated suspension and
motor system to Applied Materials, a manufacturer of semiconductor wafer
fabrication equipment, for evaluation. If this evaluation is successful, the
components could be used in a next-generation wafer processing system.
The Company also developed an alpha demonstration unit of it's flywheel
"Inertial Battery" intended for use as a replacement for lead-acid batteries
in uninterruptible power supply systems. Potential customers include
telecommunications companies such as cable television and telephony service
suppliers.
2
The Company also participated in several efforts with various commercial
customers to develop new products and product improvements including an
improved performance alternator for commercial vehicles; control electronics
for a commercial manufacturer of turbines that will provide power regulation
for a turbine being developed for potential applications in alternative fuel
vehicles; and flywheel integrated power and attitude control systems for
commercial satellite applications.
Organizational Developments
In September 1996, the Company further refined its organizational structure.
The Technology Division and Energy Systems Division remained relatively
unchanged with a new division, Tucson Space and Electro-Optics Division being
created. The Company also opened a sales office in the Detroit, Michigan area
to better service its automotive customers.
The TECHNOLOGY DIVISION, located in Cambridge, continues the research and
development work that has historically been conducted at SatCon. It will
concentrate on developing advanced technologies through "integrated product
teams" in motors and high speed drives, power electronics, magnetic bearings
and suspension systems, and propulsion systems. As technology developments
mature into potential products, product divisions may be created to further
advance the applications and marketing efforts. At the end of fiscal 1996,
SatCon had two such divisions.
The ENERGY SYSTEMS DIVISION, located in SatCon's Cambridge offices, is focused
on the product development and marketing of flywheel "Inertial Battery"
systems for such markets as utilities, cable television and
telecommunications, where uninterruptible power supplies (UPS) are critical to
maintaining service. Although these markets represent a major opportunity
base, other industrial users will be pursued as well. Power outages can be
costly to many major industries which experience downtime and lost throughput
whenever outages cause production line shut-down. SatCon's flywheel systems
may provide a cost effective alternative to battery systems which have limited
life and whose disposal is potentially hazardous to the environment.
The TUCSON SPACE AND ELECTRO-OPTICS DIVISION is located in Tucson, AZ and is
focused on two major product areas. The first is a flywheel energy storage
system to be used as a new integrated power and attitude control system for
satellites that eliminates chemical batteries and combines their function with
that of satellite steering. The second is electro-optic sensing systems for
applications such as earth mapping, mine hunting, commercial fishing and food
inspection devices.
FUNDED RESEARCH AND DEVELOPMENT
The Company continued its funded research and development with various U.S.
Government agencies during Fiscal 1996. Projects included a flywheel energy
storage system for NASA for use in future satellite applications; a
terrestrial based flywheel energy storage system for the Marine Corps;
potentially cost effective permanent magnet variable speed drives for
auxiliary applications on U.S. Navy Ships that can integrate high density
drive electronics with innovative permanent magnet motors for hydraulic pump
motors, circulating pumps and compressors; a lightweight, low volume
alternator and a high efficiency power electronics drive for the Army, and
several reaction mass actuator application programs for helicopters. SatCon
is also working with the Air Force to investigate the use of new specialty
shape memory alloys in air foil controls for greater fuel efficiency and with
several other agencies on the development of high power density electronics
modules called Power Electronic Building Blocks or PEBB's.
COMMERCIALIZATION
The Company intends to continue directing its commercialization efforts in the
following product areas:
Flywheel Energy Storage Systems
By integrating energy-storing flywheels made of high-strength materials with
high-power, permanent magnet motor/generators, SatCon has developed electro-
mechanical storage systems that management believes have the potential to
offer practical solutions for mobile and stationary applications. SatCon
flywheel systems are anticipated to provide extremely high power output and
energy storage in compact packages. They may be a long-lasting, light-weight,
and environmentally sound alternative to conventional batteries.
3
SatCon's Flywheel Energy Storage (FES) systems offer an alternative to lead-
acid batteries as uninterruptible power supplies for the telecommunications
industry, including cable television and telephone service providers, which
are required to maintain service during power outages. In addition these
systems can be used to provide backup for critical industrial processes and
machines, as power supplies for satellites and as energy recovery systems for
electric and hybrid electric vehicle drive trains.
While flywheels have been used for centuries, practical, compact systems are a
recent development. Their arrival coincides with the commercial availability
of high-strength-to-weight composite materials, high energy permanent magnets,
extremely efficient switching power supplies, and active electromagnetic
bearings.
During 1996, the Company made internal research and development investments in
this technology by designing and building an alpha demonstration unit of its
Inertial Battery 20C1000 series flywheel energy storage system for
uninterruptible power supply applications for the telecommunications market.
Motors and High Speed Drives
SatCon designs and builds high-performance motors and drives that capitalize
on advances in materials and semiconductor technology to achieve high power
density. SatCon designs are characterized by power densities as high as 7
hp/lb for the motors and 25 hp/lb for the drive electronics. Through the use
of high-performance materials and careful design of the magnetic circuits,
SatCon has demonstrated electric motor prototypes that are light weight and
have provided efficiencies in excess of 97 percent. SatCon's motor designs
are being evaluated for a wide variety of applications including electric
vehicles, shipboard motors and general industrial applications.
During 1996, the Company made internal research and development investments in
this product area by developing and demonstrating an advanced automotive
alternator that can provide more power at lower speeds. The issue with
current automotive alternators is the ability to match power requirements at
idle speeds. By addressing key limitations of current alternators, SatCon is
attempting to enter the automotive alternator market.
Power Electronics
SatCon has developed proprietary, custom-built high-voltage hybrid modules
based on advanced power semiconductor technology at a fraction of the weight
of conventional packages. The high-density topology and innovative cooling
schemes utilized allow for higher throughput in smaller, lighter weight
packages. These electronics support SatCon's high-speed drive and flywheel
product development. This high-density topology and innovative cooling scheme
has created power throughput in excess of 1 Megawatt in a 65-pound package.
Magnetic Bearings and Suspension Systems
Improvements in magnetic materials and electronic control systems have led the
way to advances in electromagnetic bearings and suspension systems. SatCon has
participated in the development of such systems for spacecraft and ground-
based systems. SatCon's magnetic bearing systems feature innovative
electromagnetic and permanent magnet actuators and advance digital control
systems. These systems have been developed for both commercial and military
applications.
By injecting electromagnetic forces along a selected bearing axis in concert
with shaft rotation, the magnetic bearings can balance a dynamic machine,
resulting in smooth and quiet operation. Similar principles guide the
application of electromagnetic suspension systems. These automated systems
provide a significant reduction of structure-borne vibration transmittal,
providing either low-vibration machinery operation, low detection, or
vibration isolation. In addition, these systems provide lubrication-free
support for rotating, reciprocating, and stationary systems. Also, through
active electronic control, these systems provide quiet, smooth, and non-
contaminating machinery operation and isolation.
During 1996, the Company made internal investments in this product area by
building several beta site units of its magnetic actuation system for
semiconductor processing that can eliminate unwanted debris, provide higher
throughput potential, and is more easily maintained than existing mechanical
systems. This entry into the semiconductor processing equipment market may
represent SatCon's first step toward realizing the market potential for
electro-mechanical actuation systems.
Propulsion Systems
4
SatCon is developing commercial prototype prime propulsion and auxiliary power
units that combine advanced gas turbine drives with high-speed electrical
alternators. The result is compact, lightweight electrical power generation
that can operate on a variety of fuels. This system, called the Turbine
Alternator Unit ("TAU"), integrates a high-speed gas turbine and a highly
efficient, high-frequency AC induction alternator on the same shaft. With
innovative electrical, structural and thermal design, a TAU can operate at
high speeds, resulting in high power output with reduced system size.
These Turbine-Alternators, which are appropriate for a wide variety of primary
or auxiliary power applications, are expected to operate on a variety of fuels
and to offer attractive power-to-weight benefits compared to conventional
power generation options.
MARKETING/MARKETS
SatCon's objective is to capitalize on the technology developments from its
internal and contract research and development to be a leading supplier of a
new generation of intelligent, electro-mechanical products for aerospace,
transportation, industrial, and utility applications. These products, spawned
by a revolution in the size, weight and efficiency of machines, provide
competitive advantages in performance. Management believes the following list
to be representative of market opportunities as they exist today for the
Company's products.
Flywheel Energy Storage ("FES") Systems: Electromechanical storage in
SatCon's flywheel energy storage systems may replace batteries in a variety of
industries including uninterruptible power supplies for telecommunications
providers and industrial systems, power quality for utilities, and integrated
power and attitude control for satellites.
Motors and High Speed Drives: Management believes that SatCon's electric
motors, generators, and drives may offer advantages to a variety of industries
including automotive components, vehicle propulsion systems, industrial
drives, machine tools, satellites and consumer products.
Power Electronics: Lightweight, high power density electronics may offer
advantages to several markets and are key components in SatCon's system
products including motor and drive systems, electric and hybrid vehicles,
aerospace, industrial controls and power management, and a variety of military
subsystems.
Magnetic Bearings and Suspension Systems: SatCon's magnetic bearing and
suspension systems have the potential to be applied to a variety of
applications such as aircraft gas turbine engines, flywheel systems,
compressors, high speed machine tools, vibration isolators and computer chip
manufacturing processing equipment.
Propulsion Systems: Lightweight, low-cost, long-life turbine alternators may
offer advantages for a variety of applications including hybrid vehicle
primary propulsion, auxiliary power and portable power systems, and military
vehicle propulsion and remote power supplies.
COMPETITION
The Company is aware of direct and indirect competitors which employ magnetics
technology and have extensive research and development facilities in both
government and commercial markets. The Company believes its principal
competitors in government sponsored research and development include Aura
Systems, Inc., American Flywheel, U.S. Flywheel, and Unique Mobility, Inc. The
Company is aware of large companies, as well as smaller companies, entering
this market and expects competition to intensify either through direct
competition or via alternative technologies.
Although the Company is not as well capitalized as some of its competitors and
is more limited in terms of its facilities and number of personnel, its
strategy is to compete with larger companies on the basis of its technical
skills, proprietary know-how, access to university researchers in the greater
Boston area conducting ongoing research, and key personnel, many of whom are
experts in the field of magnetics technology.
The industries served by the Company are highly competitive and a number of
companies are involved in extensive research and development programs designed
to address the technological challenges which the Company is seeking to
address through its development programs. Many of these companies are larger
and better financed than the Company. As a result, there can be no assurance
that customers will not select technologies developed by or under development
by other companies or that potential customers will select the
5
Company's technologies to address both existing and potential markets.
Virtually all of the Company's revenues to date from commercial contracts have
been derived in connection with prototype development contracts. As a result,
the Company will need to develop technologies which address customers' needs
in a cost-effective and timely manner. There can be no assurance that the
Company will be successful in these efforts, that technologies developed by
other companies will not be selected, or that potential customers for the
Company's technologies will adopt the Company's technologies in a timely
manner, if at all.
PATENTS AND PROPRIETARY INFORMATION
The Company currently owns nine United States patents which expire between
2007 and 2013. The Company has twelve patent applications pending with the
U.S. Patent and Trademark Office.
As a qualifying small business, the Company has retained commercial ownership
rights to proprietary technology developed under various U.S. Government
contracts and grants, including Small Business Innovation Research ("SBIR")
contracts.
In addition to its patent rights, the Company also relies upon treatment of
its technology as trade secrets and upon confidentiality agreements, which all
of its employees are required to execute, assigning to the Company all patent
rights and technical or other information developed by the employees during
their employment with the Company. The Company's employees have also agreed
not to disclose any trade secret or confidential information without the prior
written consent of the Company. Notwithstanding these confidentiality
agreements, there can be no assurances that other companies will not acquire
information which the Company considers to be proprietary. Moreover, while the
Company intends to defend vigorously its patents against infringement by third
parties, there can be no assurance that the Company's patents will be
enforceable or provide the Company with meaningful protection from competitors
or that patent applications will be allowed. No assurance can be given as to
the issuance of additional patents or, if so issued, as to their scope.
Patents granted may not provide meaningful protection from competitors. Even
if a competitor's products were to infringe patents owned by the Company, it
would be very costly for the Company to pursue its rights in an enforcement
action, which would also divert funds and resources which otherwise could be
used in the Company's operations. Furthermore, there can be no assurance that
the Company would be successful in enforcing intellectual property rights or
that the Company may not infringe patent or intellectual property rights of
third parties, although the Company, to date, has not been required to defend
its patents or proprietary information against claims by third parties.
RESEARCH AND DEVELOPMENT
All of the Company's revenues during Fiscal year 1996 are attributable to
research and development activities funded by commercial customers and U.S.
Government agency sponsors. Under the agreements funded by the U.S.
Government, the government retains a royalty-free license to use the
technology developed for government purposes and the Company retains exclusive
rights to the technology for commercial and industrial applications. In
addition to the research and development conducted under contract, the Company
expended $893,628 on internally funded research and development in 1996. This
is primarily related to continued development of drive train components for
hybrid electric vehicles in the automotive industry as well as further
development of flywheel energy storage systems for the cable industry.
GOVERNMENT REGULATION
The Company has entered into certain U.S. Government contracts which require
compliance with applicable U.S. Government regulations. The Company's
contracts with the U.S. Government consist primarily of research and
development contracts, many of which are awarded under the SBIR Program. The
research and development contracts are generally subject to competitive
bidding and extensive regulation and are generally subject to cancellation at
the U.S. Government's sole discretion. In addition, the Company has been
awarded certain classified U.S. Government contracts. Certain of the Company's
employees and directors have been required to obtain security clearance from
the federal government.
As a party to a number of contracts with the U.S. Government and its agencies,
the Company must comply with extensive regulations, including regulations with
respect to bid proposals and billing practices. As research and development
contracts are generally subject to cancellation at the U.S. Government's sole
discretion, should the
6
U.S. Government or its agencies conclude that the Company has not adhered to
federal regulations, any contracts to which the Company is a party could be
canceled and/or could prohibit the Company from bidding on future contracts,
which would have a material adverse effect on the Company. All payments to the
Company for work performed on contracts with agencies of the U.S. government
are subject to adjustment upon audit by the U.S. Government Defense Contract
Audit Agency, the General Accounting Office, and other agencies. The Company
could be required to disgorge any payments received from U.S. Government
agencies if it is found to have violated federal regulations.
The commercialization of the Company's technologies for use in various
industries may also be affected by federal and state legislative and
regulatory changes affecting such industries.
MANUFACTURING AND SUPPLIERS
To date, the Company has manufactured all of its prototype products at its
facility in Cambridge, Massachusetts. The Company anticipates investing in
manufacturing equipment to further develop the manufacturing capabilities at
this facility. If the Company is successful in obtaining market penetration of
its products, the Company will be required to deliver large volumes of quality
products or components to its customers on a timely basis at reasonable costs
to the Company. The Company intends to seek to supplement its manufacturing
capabilities by establishing relationships with manufacturing organizations to
deliver large volumes of its products until such time as the Company can
develop its own manufacturing expertise and capacity. No assurance can be
given that the Company will be able to successfully establish relationships
with third party manufacturing organizations, or if such relationships are
established, that they will be successful.
The principal materials and supplies used by the Company are available from
several commercial sources, and the Company does not depend on any single
source for a significant portion of its materials or supplies. Component parts
of the Company's active control systems are readily available.
BACKLOG
The Company's backlog consists primarily of research and development
contracts. At September 30, 1996, the backlog was approximately $7,400,000
for work to be performed in the Fiscal year ending September 30, 1997. Many
of the Company's contracts may be canceled at any time with limited or no
penalty. Also, contract awards may be subject to funding approval from the
U.S. Government and commercial entities, which involves political, budgetary,
and other considerations over which the Company has no control. The Company's
backlog at September 30, 1995 was approximately $10,000,000. At September 30,
1996, the Company also had $10,000,000 in conditional purchase orders and
letters of intent for flywheel energy storage systems.
SIGNIFICANT CUSTOMERS
Chrysler accounted for approximately 38% of the Company's Fiscal 1996 sales.
See "Footnote L" of Notes to Financial Statements. The Company's revenues
from Chrysler decreased by approximately $3.9 million from 1995 to 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EMPLOYEES
At September 30, 1996, the Company employed a total of 102 people; 98 on a
regular full-time basis, one on a regular part-time basis, and three student
interns. Many of the Company's employees are affiliated with large
universities located in the greater Boston area. Seventy-eight persons are
employed in engineering, 23 in administration and 7 in marketing
and sales. None of these employees are represented by a union. The Company
believes that its relations with its employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's office and laboratory space is 45,820 square feet located at 161
First Street, Cambridge, Massachusetts, under a primary lease expiring on
October 31, 1998. The Company leases an additional 8,343 square feet located
at 6245 East Broadway Boulevard, Suite 350, Tucson, Arizona, under a primary
lease expiring on March 31, 2001. The Company believes its facilities are
adequate for its current needs and that
7
adequate facilities for expansion, if required, are available in the immediate
areas. See "Footnote F" on Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the Fiscal year covered by this report through the solicitation of
proxies or otherwise.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market ("NNM")
under the trading symbol "SATC." As of December 2, 1996 there were
approximately 190 shareholders of record.
For the periods reported below, the following table sets forth the range of
high and low bid quotations for the Common Stock as reported by NNM. Such
quotations represent interdealer quotations without adjustment for retail
markups, markdowns or commissions and may not represent actual transactions.
As of December 2, 1996 the closing price for the Company's Common Stock, as
quoted in the Wall Street Journal, was $7.328.
FISCAL YEAR 1996 FISCAL YEAR 1995
------------------------ ------------------------
BID BID
------------------------ ------------------------
HIGH LOW HIGH LOW
------------ ---------- ------------ ----------
First Quarter... $11.375 $7.750 $13.000 $ 8.250
Second Quarter.. $12.750 $6.250 $11.000 $ 8.625
Third Quarter... $12.750 $8.625 $15.125 $ 8.875
Fourth Quarter.. $ 9.250 $7.000 $15.125 $10.375
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since its
inception and has no intention of paying any cash dividends to its
stockholders in the foreseeable future. The Company intends to reinvest
earnings, if any, in the development and expansion of its business. Any
declaration of dividends in the future will be at the election of the Board of
Directors and will depend upon the earnings, capital requirements and
financial position of the Company, general economic conditions, requirements
of any bank lending arrangements which may then be in place and other
pertinent factors.
9
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended September 30,
1996, 1995, 1994, 1993, and 1992 has been derived from the financial
statements of the Company which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. This information should be read in conjunction with
the financial statements and notes thereto set forth elsewhere in this Report.
STATEMENT OF OPERATIONS DATA:
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------- ----------- ---------- -----------
Revenue................................. $ 9,384,588 $11,475,427 $18,016,987 $5,306,680 $2,465,767
------------- ----------- ----------- ---------- ------------
Cost of Sales........................... 3,940,674 6,522,768 11,281,239 2,652,533 897,099
Selling, General and Administrative
Expenses........................... 8,023,441 5,483,194 4,655,769 2,363,370 1,510,612
Research and Development................ 893,628 1,937,241 461,068 119,663 9,472
------------- ----------- ----------- ---------- ------------
Total Operating Expenses........... 12,857,743 13,943,203 16,398,076 5,135,566 2,417,183
Interest Income/(Expense), Net.......... 463,840 451,034 409,337 119,100 (47,324)
------------- ----------- ----------- ---------- ------------
Income/(loss) Before Income Taxes....... (3,009,315) (2,016,742) 2,028,248 290,214 1,260
Provision/(benefit) for Income Taxes.... (144,479) (806,697) 803,356 101,288 290
------------- ----------- ----------- ---------- ------------
Net Income/(loss)....................... $(2,864,836) $(1,210,045) $ 1,224,892 $ 188,926 $ 970
============= =========== =========== ========== ============
Earnings/(loss) per Common and Common
Equivalent Share....................... $(.39) $(.17) $.17 $.03 -
============= =========== =========== ========== ============
Weighted Average Shares Outstanding..... 7,285,756 7,079,855 7,347,098 5,628,641 3,892,132
BALANCE SHEET DATA:
AT SEPTEMBER 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ----------
Total Assets................. $17,182,455 $19,792,966 $22,274,534 $8,430,630 $1,320,501
Total Long Term Obligations.. $ 0 $ 0 $ 0 $ 11,229 $ 45,929
Total Liabilities............ $ 1,083,287 $ 1,040,251 $ 2,768,493 $1,241,426 $ 997,570
Working Capital.............. $11,011,170 $15,615,645 $18,172,529 $6,715,989 $ 33,350
Stockholders' Equity......... $16,099,168 $18,752,715 $19,506,041 $7,189,204 $ 322,931
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
SatCon Technology Corporation (the "Company" or "SatCon") was organized as a
Massachusetts corporation in February 1985 and reincorporated in Delaware in
1992. SatCon designs, develops, and manufactures intelligent, electro-
mechanical products for aerospace, transportation, industrial, and utility
applications. SatCon's electro-mechanical products are being developed for a
wide variety of U.S. government and commercial markets. For the government,
SatCon's electro-mechanical systems provide low vibration and high power for
applications ranging from satellite attitude control to high speed drives for
shipboard systems. In the transportation segment, SatCon is developing
electric and hybrid electric drive components, auxiliary power units, and
advanced steering, suspension, and braking systems. SatCon is working with
major equipment producers to develop process equipment drives, high speed and
precision machine tools, manipulators, and machinery isolation equipment.
SatCon's electro-mechanical systems may offer to the utility industry
advantages in power generation, energy storage, and power quality. In the
consumer market, SatCon is developing freon-free compressors for
refrigerators, variable speed motors, and other long-life, high-efficiency
machinery.
It is the Company's strategy to accelerate leading edge developments by
continuing to expand its externally funded contract research and development
from both government and commercial sources. The Company can then leverage
this funding to develop products which the Company believes can both be sold
to government agencies and transition into high volume commercial products.
Recent changes in the Small Business Innovative Research program provide a new
mechanism to pursue government Phase III pre-production programs on a sole
source non-competitive basis. In most instances, individual components have
multiple applications across these markets.
This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Factors Affecting Future Results."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Percentage of
Revenues for certain items in the Company's Statement of Operations for each
period:
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1995 1994
--------- -------- -----------
Revenues................................ 100.0% 100.0% 100.0%
Cost of sales........................... 42.0 56.8 62.6
Selling, general and administrative
expenses............................... 85.5 47.8 25.8
Research and development expenses....... 9.5 16.9 2.6
Total operating expenses (excluding
cost of sales)......................... 95.0 64.7 28.4
Operating income/(loss)................. (37.0) (21.5) 9.0
Interest income/(expense) net........... 4.9 3.9 2.3
Income /(loss) before income taxes...... (32.1) (17.6) 11.3
Provision/(benefit) for income taxes.... (1.5) (7.0) 4.5
Net income/(loss)....................... (30.6) (10.6) 6.8
11
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1995
Revenues. The Company's revenues decreased $2,090,839, or 18.2%, from 1995 to
1996. The decrease is primarily due to a decrease in revenue of approximately
$3,945,253 from contracts with Chrysler Corporation for the development of
drive train components as part of the Patriot Hybrid Vehicle Program. During
the year, Chrysler Corporation announced the cancellation of the Patriot
Hybrid Vehicle Program. Chrysler has announced that it intends to transition
technologies utilized in the Patriot Program to their Hybrid Electric Vehicle
(HEV) program being sponsored by the U.S. Government's Super Car Initiative.
The Company expects involvement with Chrysler in this effort; however as of
December 20, 1996, no contractual agreement has been entered between SatCon
and Chrysler Corporation relating to the HEV program. The Company can give no
assurance that it will receive additional work related to the HEV program.
The Company has not to date recorded any revenues associated with the Chrysler
HEV Program. This decrease in revenue was partially offset by increased
revenues of approximately $2,355,000 related to work on various government
development contracts.
Cost of Sales. Cost of sales decreased $2,582,094, or 39.5%, from 1995 to
1996. The decrease is primarily due to a decrease in work during 1996 on
contracts with Chrysler Corporation for the development of drive train
components as part of the Patriot Hybrid Vehicle Program. As a percentage of
revenue, cost of sales decreased from 56.8% for 1995 to 42.0.% for 1996. The
decrease in cost of sales, as a percent of revenue, was primarily due to a
decrease in direct material and subcontract costs and an increase in direct
labor costs directly related to the shift from work on the Chrysler Patriot
Program, which had high material costs, as a percentage of revenue, to work on
several labor intensive research and development contracts funded by the U.S
Government which typically have higher margins.
Selling, General and Administrative. Selling, general and administrative
expenses increased $2,540,247, or 46.3%, from 1995 to 1996, a change as a
percentage of revenue from 47.8% in 1995 to 85.5% in 1996. Approximately
$500,000 is attributable to the establishment of the Company's Space Division
in Tucson, Arizona. Approximately $600,000 was expensed in establishing the
Company's Flywheel Energy Storage Division. Cambridge facilities expense
increased approximately $277,000 due to the exercise of an option in the
Company's lease for additional space. The Company now occupies the entire
building at 161 First Street, Cambridge, Massachusetts. Depreciation expense
increased approximately $373,000 due to purchases of computer, laboratory,
inspection, test, and manufacturing equipment during fiscal 1995 and 1996.
Marketing expenses increased approximately $500,000 in efforts to broaden the
customer base in anticipation of the cancellation of the Patriot Program.
Research and Development. Research and development expenses decreased
$1,043,613, or 53.9% from 1995 to 1996. As a percentage of revenue, internal
research and development decreased from 16.9% in 1995 to 9.5% in 1996. The
decrease in research and development spending is primarily the result of a
reallocation of engineering resources from internally funded research and
development to construction of a pre-production flywheel, additional marketing
efforts and development efforts on contracts from the U.S. Government and
commercial contracts. Virtually all of 1996 revenues were for sponsored
research and development. As a small business under government contracts,
SatCon retains commercial rights to work developed. For commercial contracts,
intellectual property is negotiated on a case-by-case basis.
Net Income/(Loss). As a result of decreased revenues and increased investment
in marketing, facilities, and associated fringe costs, the Company realized a
net loss of $2,864,836 in 1996 versus a net loss of $1,210,045 in 1995.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1994
Revenues. The Company's revenues decreased $6,541,560, or 36.3%, from 1994 to
1995. The decrease is primarily due to a decrease in revenue of approximately
$5,700,000 from contracts with Chrysler Corporation for the development of
drive train components as part of the Patriot Hybrid Vehicle Program. During
the year, performance testing began of first generation drive train components
to identify possible design improvements to be incorporated in subsequent
units. This testing resulted in a delay in revenue from
12
the Patriot Program. At the close of the fiscal year the Company continued to
support Chrysler in these test and design improvement efforts on a time and
materials basis. In addition, the company realized a decrease in revenue of
approximately $2,700,000, due to the completion of a contract with Itek
Optical Systems for design work for a U.S. Government program. These decreases
in revenue were partially offset by increased revenues of approximately
$1,800,000 related to work on various commercial and government development
contracts.
Cost of Sales. Cost of sales decreased $4,758,471, or 42.2%, from 1994 to
1995. The decrease is primarily due to a decrease in work during 1995 on
contracts with Chrysler Corporation for the development of drive train
components as part of the Patriot Hybrid Vehicle Program. As a percentage of
revenue, cost of sales decreased from 62.6% for 1994 to 56.8% for 1995. The
decrease in cost of sales as a percent of revenue was primarily due to a
decrease in direct material and subcontract costs as a percentage of cost of
sales related to a shift in efforts on the Patriot Program from material
procurement and subcontract production to assembly and test of first
generation drive train components. This decrease is partially offset by an
increase in material procurement and subcontract production cost for long lead
time parts for second generation drive train components for the Patriot
Program.
Selling, General and Administrative. Selling, general and administrative
expenses increased $827,425, or 17.8%, from 1994 to 1995, a change as a
percentage of revenue from 25.8% in 1994 to 47.8% in 1995. This increase is
primarily the result of the addition of business support personnel (marketing,
engineering, and administrative) added to support the Company's transition to
a supplier of products to commercial markets. This increase was partially
offset by a decrease in costs related to contract employees and consultants
replaced by permanent employees. In addition, depreciation expense increased
primarily due to the purchases of computer, laboratory, inspection and test,
and manufacturing equipment during fiscal year 1994 and 1995.
Research and Development. Research and development expenses increased
$1,476,173, or 320.2% from 1994 to 1995. As a percentage of revenue, internal
research and development increased from 2.6% in 1994 to 16.9% in 1995. The
increase in expenditures is primarily associated with projects to develop
technology for products for the automotive and other commercial markets. The
majority of the increase is associated with projects related to the develop of
three pre-production prototype systems. The systems developed and built
include a flywheel energy storage system aimed at stationary uninterruptable
power supply markets, an advanced replacement alternator for automotive
applications, and an advanced actuation system for semiconductor processing
equipment. The Company continues to increase efforts in the pursuit of
commercial product opportunities capitalizing on the Company's Active Motion
Control technology base.
Net Income/(Loss). As a result of decreased revenues and increased selling,
general and administrative and research and development expenses, the Company
realized a net loss of $1,210,045 in 1995 versus a net income of $1,224,892 in
1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents was $3,770,925 as of September 30,
1996, an increase of $1,582,938 from September 30, 1995. Cash used in
operating activities was $3,072,434 during 1996, as compared to cash provided
by operating activities of $5,751,991 during 1995. The cash used in operations
was primarily the result of a net increase of approximately $972,675 in
accounts receivable and unbilled contract costs due primarily to extended
billing and payment terms with two commercial customers. The remainder of the
cash used by operating activities is primarily a result of an increase in
other assets, a decrease in prepaid expenses, an increase in accrued expenses
and payroll, and the net loss net of income tax benefit for the period.
Cash provided by investing activities as of September 30, 1996, was
$4,450,724. The cash provided relates primarily to the sale and maturity of
approximately $8,407,185 of marketable securities to fund operations prior to
collection of outstanding invoices. The cash provided was partially offset by
purchases of marketable securities of approximately $1,450,000 and capital
expenditures of approximately $2,293,305. The capital expenditures primarily
relate to the purchase of inspection equipment, furniture and fixtures,
leasehold improvements, computer equipment, and sales and demonstration
equipment.
13
The Company has a $3,000,000 bank line of credit. Borrowings under the line
will be unsecured and charged interest at prime rate. The line of credit
expires January 31, 1997. The Company has entered into negotiations to
replace this line of credit. No funds have as yet been advanced under this
facility. The Company is required to maintain certain covenants including
certain financial ratios as described in the line of credit agreement.
The Company anticipates that its existing cash resources, cash flow from
operations and the continued availability of its bank line of credit will be
sufficient to fund its operations through September 30, 1997, provided it
meets its operating plan and remains in compliance with its credit agreement,
although no funds have as yet been advanced. The Company is currently in
default of its line of credit facility with the bank. However, the Company has
received a written waiver of this default for the year ended September 30,
1996. The Company's ability to finance its operations will be dependent on its
ability to renegotiate its bank line of credit for a continued availability of
borrowing thereunder. There can be no assurance that the Company will be
successful in renegotiating its line of credit. To the extent cash flow from
operations is insufficient to fund the Company's activities, it may be
necessary to raise additional funds through equity or debt financing. The
Company's ability to generate cash from operations depends upon, among other
things, revenue growth, its credit and payments terms with vendors, and
collections of accounts receivable. The Company's ability to borrow under this
facility is dependent upon satisfying certain financial covenants, among other
things, and there can be no assurances that the Company will remain in
compliance. If such sources of cash prove insufficient, the Company will be
required to make changes in its operations or to seek additional debt or
equity financing. There can be no assurances that cash generated from
operations and borrowings under its credit facility will be sufficient to meet
its operating requirements, or if required, that additional debt or equity
financing will be available on terms acceptable to the Company.
FACTORS AFFECTING FUTURE RESULTS
The Company's future results remain difficult to predict and may be affected
by a number of factors which could cause actual results to differ materially
from the forward-looking statements contained in this Annual Report on Form
10-K and presented elsewhere by management from time to time. These factors
include business conditions within the automotive, telecommunications,
industrial machinery and semiconductor industries and the world economies as a
whole, and competitive pressures that may impact research and development
spending. The Company's revenue growth is dependent on technology developments
and contract research and development for both the government and commercial
sectors and no assurance can be given that such investments will continue or
that the Company can successfully obtain such funds. In addition, the
Company's future growth opportunities are dependent on the introduction on new
products that must penetrate automotive, telecommunications, industrial, and
computer market segments. No assurance can be given that new products can be
developed, or if developed, will be successful; that competitors will not
force prices to an unacceptably low level or take market share from the
Company; or that the Company can achieve or maintain profits in these markets.
Because of these and other factors, past financial performances should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
Company's stock price frequently experiences significant volatility.
14
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which encourages companies to
recognize compensation expense in the income statement based on the fair value
of the underlying common stock at the date the awards are granted . However,
it will permit continued accounting under APB Opinion 25, "Accounting for
Stock Issued to Employees," accompanied by a disclosure of the pro forma
effects on net income and earnings per share had the new accounting rules been
applied. The statement is effective for Fiscal 1997. The Company plans to
account for stock based compensation in accordance with APB Opinion 25.
EFFECTS OF INFLATION
The Company believes that inflation over the past three years has not had a
significant impact on the Company's sales or operating results.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
PAGE
----
Report of Independent Accountants......................................... 17
Financial Statements:
Balance Sheets as of September 30, 1996 and 1995........................ 18
Statements of Operations for the Years Ended September 30, 1996,
1995, and 1994....................................................... 19
Statements of Changes in Stockholders' Equity for the Years Ended
September 30, 1996, 1995, and 1994................................... 20
Statements of Cash Flows for the Years Ended September 30, 1996,
1995, and 1994....................................................... 21
Notes to Financial Statements........................................... 22
Schedule II; Valuation and Qualifying Accounts for the Years Ended
September 30, 1996, 1995, and 1994................................... 32
Index to Exhibits....................................................... 38
16
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying balance sheets and financial statement
schedule of SatCon Technology Corporation as of September 30, 1996 and 1995, and
the related statements of operations, changes in stockholder's equity, and cash
flows for each of the three years in the period ended September 30, 1996. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 SatCon Technology
Corporation as of September 30, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1996 in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 3, 1996
17
SATCON TECHNOLOGY CORPORATION
BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 3,770,925 $ 2,187,987
Marketable securities (Note B)........................................... 3,435,743 10,386,288
Accounts receivable, net of allowance of $130,900 in 1996 and 1995....... 2,881,790 2,076,002
Unbilled contract costs, net of allowance of $432,500 in 1996 and
$66,500 in 1995 (Note C)............................................ 1,563,254 1,396,367
Prepaid expenses and other assets........................................ 442,745 609,252
---------------- ----------------
Total current assets................................................ 12,094,457 16,655,896
Property and equipment, net (Note D).......................................... 4,347,784 2,772,018
Other assets.................................................................. 740,214 365,052
---------------- ----------------
Total assets........................................................ $17,182,455 $19,792,966
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 605,048 $ 624,955
Accrued payroll and payroll related expenses............................. 183,747 153,989
Other accrued expenses................................................... 294,492 88,025
Deferred income taxes (Note H)........................................... - 173,282
---------------- ----------------
Total current liabilities........................................... 1,083,287 1,040,251
Commitments (Note F).......................................................... - -
STOCKHOLDERS' EQUITY
Preferred stock; $.01 par value, 1,000,000 shares authorized; none issued
(Note J)................................................................... - -
Common stock, $.01 par value, 10,000,000 shares authorized; 7,359,074 and
7,166,601 shares at September 30, 1996 and 1995, respectively, issued
and outstanding (Note I)................................................... 73,591 71,666
Additional paid-in capital.................................................... 18,487,209 18,284,486
Retained earnings/(loss)...................................................... (2,421,697) 443,139
Unrealized losses on marketable securities, net of tax effect (Note B)........ (39,935) (46,576)
---------------- ----------------
Total stockholders' equity.......................................... 16,099,168 18,752,715
---------------- ----------------
Total liabilities and stockholders' equity..................... $17,182,455 $19,792,966
================ ================
The accompanying notes are an integral part of the financial statements.
18
SATCON TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenue................................. $ 9,384,588 $11,475,427 $18,016,987
------------ ------------ ------------
Cost of sales........................... 3,940,674 6,522,768 11,281,239
Selling, general and administrative
expenses............................... 8,023,441 5,483,194 4,655,769
Research and development expenses....... 893,628 1,937,241 461,068
------------ ------------ ------------
Total operating expenses................ 12,857,743 13,943,203 16,398,076
------------ ------------ ------------
Operating income/(loss)................. (3,473,155) (2,467,776) 1,618,911
Interest income, net.................... 463,840 451,034 409,337
------------ ------------ ------------
Income/(loss) before income taxes....... (3,009,315) (2,016,742) 2,028,248
Provision/(benefit) for income taxes.... (144,479) (806,697) 803,356
------------ ------------ ------------
Net income/(loss)....................... (2,864,836) (1,210,045) 1,224,892
============ ============ ============
Earnings/(loss) per common and common
equivalent share....................... $ (.39) $ (.17) $ .17
============ ============ ============
Weighted average shares outstanding..... 7,285,756 7,079,855 7,347,098
The accompanying notes are an integral part of the financial statements.
19
SATCON TECHNOLOGY CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
UNREALIZED
LOSS ON TOTAL
COMMON COMMON ADDITIONAL PAID-IN RETAINED EARNINGS MARKETABLE STOCKHOLDERS'
SHARES STOCK CAPITAL (LOSS) SECURITIES (1) EQUITY
--------- -------- ------------------ ----------------- -------------- -------------
Balance, September 30, 1993.... 5,153,633 $51,536 $ 6,709,376 $ 428,292 $ - $ 7,189,204
Net income..................... - - - 1,224,892 - 1,224,892
Sale of common stock........... 1,715,505 17,155 11,050,723 - - 11,067,878
Exercise of stock options...... 144,588 1,446 158,488 - - 159,934
Change in unrealized losses
on marketable securities(1).... - - - - (135,867) (135,867)
--------- ------- ----------------- ------------ -------------- -------------
Balance, September 30, 1994.... 7,013,726 70,137 17,918,587 1,653,184 (135,867) 19,506,041
Net loss....................... - - - (1,210,045) - (1,210,045)
Exercise of stock options...... 152,875 1,529 365,899 - - 367,428
Change in unrealized losses
on marketable securities(1).. - - - - 89,291 89,291
--------- ------- ----------------- ------------ -------------- -------------
Balance, September 30, 1995.... 7,166,601 71,666 18,284,486 443,139 (46,576) 18,752,715
Net Loss....................... - - - (2,864,836) - (2,864,836)
Exercise of stock options...... 192,473 1,925 202,723 - - 204,648
Change in unrealized losses
on marketable securities(1).. - - - - 6,641 6,641
--------- ------- ----------------- ------------ -------------- -------------
Balance, September 30, 1996.... 7,359,074 $73,591 $18,487,209 $(2,421,697) $ (39,935) $16,099,168
========= ======= ================= ============ ============== =============
________
(1) Net of tax effect
The accompanying notes are an integral part of the financial statements.
20
SATCON TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------
1996 1995 1994
------------- ------------ ------------
Cash flows from operating activities:
Net income/(loss).............................................. $(2,864,836) $(1,210,0 45) $ 1,224,892
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization............................... 820,991 352,143 306,935
Reserve for unbilled........................................ 390,500 - 100,000
Changes in operating assets and liabilities:
Accounts receivable..................................... (905,787) 3,020,582 (4,089,438)
Prepaid expenses and other assets....................... 222,821 (61,958) (149,388)
Unbilled contract costs................................. (557,386) 5,290,655 (6,146,396)
Other assets............................................ (221,772) 88,856 4,328
Accounts payable........................................ (19,907) (754,935) 701,238
Accrued expenses and payroll............................ 236,225 (166,610) 76,399
Income taxes payable.................................... - - (12,997)
Deferred income taxes................................... (173,283) (806,697) 803,356
------------- ------------ ------------
Total adjustments................................................... (207,598) 6,962,036 (8,405,963)
------------- ------------ ------------
Net cash provided by/(used in) operating activities................. (3,072,434) 5,751,991 (7,181,071)
------------- ------------ ------------
Cash flows from investing activities:
Purchases of marketable securities............................. (1,450,000) (9,465,938) (34,466,181)
Sales and maturities of marketable securities.................. 8,407,185 6,148,814 30,396,663
Patent & trademark expenditures................................ (156,843) (245,140) (32,386)
Deferred financing fees........................................ (56,313) (277,764) -
Capital expenditures........................................... (2,293,305) (999,415) (1,127,947)
------------- ------------ ------------
Net cash provided by/(used in) investing activities................. 4,450,724 (4,839,443) (5,229,851)
------------- ------------ ------------
Cash flows from financing activities:
Repayment of short-term borrowings............................. - - (5,000)
Proceeds from exercise of stock options........................ 204,648 367,428 159,934
Payments under capital lease obligations....................... - - (35,929)
Proceeds from issuance of common stock......................... - - 11,067,878
------------- ------------ ------------
Net cash provided by financing activities........................... 204,648 367,428 11,186,883
------------- ------------ ------------
Net increase/(decrease) in cash..................................... 1,582,938 1,279,976 (1,224,039)
------------- ------------ ------------
Cash at beginning of period......................................... 2,187,987 908,011 2,132,050
------------- ------------ ------------
Cash and cash equivalents at end of period.......................... $ 3,770,925 $ 2,187,987 $ 908,011
============= ============ ============
The accompanying notes are an integral part of the financial statements.
21
SATCON TECHNOLOGY CORPORATION
Notes to Financial Statements
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
SatCon Technology Corporation (the "Company" or "SatCon") was organized as a
Massachusetts corporation in February 1985 and reincorporated in Delaware in
1992. SatCon designs, develops and manufactures intelligent, electro-
mechanical products for aerospace, transportation, industrial, and utility
applications. SatCon's electro-mechanical products are being developed for a
wide variety of U.S. government and commercial markets. For the government,
SatCon's electro-mechanical systems provide low vibration and high power for
applications ranging from satellite attitude control to high speed drives for
shipboard systems. In the transportation segment SatCon is developing electric
and hybrid electric drive components, auxiliary power units, and advanced
steering, suspension, and braking systems. SatCon is working with major
equipment producers to develop process equipment drives, high speed and
precision machine tools, manipulators, and machinery isolation equipment.
SatCon's electro-mechanical systems may offer to the utility industry
advantages in power generation, energy storage, and power quality. In the
consumer market SatCon is developing freon-free compressors for refrigerators,
variable speed motors, and other long-life, high-efficiency machinery.
It is the Company's strategy to accelerate leading edge developments by
continuing to expand its externally funded contract research and development
from both government and commercial sources. The Company can then leverage
this funding to develop products which the Company believes can both be sold
to government agencies transition into high volume commercial products. Recent
changes in the Small Business Innovative Research program provide a new
mechanism to pursue government Phase III preproduction programs on a sole
source non-competitive basis. In most instances, individual components have
multiple applications across these markets.
Revenue Recognition
The Company performs research under cost type, fixed price, and time and
material contracts and sells product prototypes. Revenue is recognized on the
percentage-of-completion method based on the proportion of costs incurred to
total estimated costs for each contract. Revenues recognized in excess of
amounts billed are classified in current assets as unbilled contract costs.
Certain contracts contain provisions for performance incentives. Such
incentives are included in revenues when realization is assured. If a current
contract estimate indicates a loss, a provision is made for the total
anticipated loss.
All payments to the Company for work performed on contracts with agencies of
the U.S. Government are subject to audit and adjustment by the Defense
Contract Audit Agency. Adjustments are recognized in the period made.
22
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and highly
liquid investments with a maturity of three months or less when acquired. At
September 30, 1996, $67,632 of cash and cash equivalents is reserved as
collateral for a letter of credit drawn for the deposit on a facility lease.
Marketable Securities
The Company accounts for marketable securities in accordance with the
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and re-evaluates such determination at
each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for
sale. Securities available for sale are carried at fair value, based on
quoted market prices, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholders' equity except for unrealized
losses determined to be permanent in nature. Such unrealized losses are
included in the determination of net income in the period in which management
determines the decline to be permanent. The Company is not actively involved
in the purchase and sale of investments classified as trading. At September
30, 1996, the Company had no investments that qualified as trading or held to
maturity.
The amortized cost of debt securities classified as available for sale is
adjusted for amortization of premiums and accretion of discounts to maturity
or, in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization and interest are included in interest income.
Realized gains and losses are included in other income or expense. The cost
of securities sold is based on the specific identification method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the asset's estimated useful life. Effective
October 1, 1994 the estimated useful lives of property and equipment are as
follows:
ESTIMATED LIVES
-------------------
Computer equipment and software.................. 3 Years
Electronic laboratory and shop equipment......... 5 Years
Mechanical laboratory and shop equipment......... 10 Years
Sales and demonstration equipment................ 3 - 10 Years
Furniture and fixtures........................... 10 Years
Leasehold improvements........................... Lesser of the life
of the lease or the
useful life of the
improvement
Previously, the estimated useful lives of property and equipment were three
years. These changes were made to better reflect the estimated periods during
which such assets will remain in service.
When assets are retired or otherwise disposed of, the cost and related
depreciation and amortization are eliminated from the accounts and any
resulting gain or loss is reflected in other income.
Intangibles
The Company periodically reviews the propriety of carrying amounts of its
intangible assets as well as the amortization periods to determine whether
current events and circumstances warrant adjustment to the carrying value or
estimated useful lives. At each balance sheet date, management evaluates
whether there has been a permanent impairment in the value of intangibles by
assessing the carrying value of intangibles
23
against anticipated future cash flows from related operating activities.
Factors which management considers in performing this assessment include
current operating results, trends and prospects and, in addition, demand,
competetion and other economic factors.
Other intangibles, which consist of patents and trademarks are being amortized
on a straight-line basis over 7 years.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
and disclosure of contingencies at the date of the financial statements.
Actual results could differ from these estimates.
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires a
balance sheet approach for accounting for income taxes. Under SFAS 109,
deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the basis of assets and liabilities using
statutory rates. The Company has, as required under the Internal Revenue
Code, switched from the cash to accrual method for tax reporting purposes.
Earnings/(loss) Per Common and Common Equivalent Share
Earnings/(loss) per common and common equivalent share is based upon the
weighted average number of common shares outstanding during each year,
adjusted to include the dilutive effects of stock options and warrants. For
the current year ended September 30, 1996 common share equivalents have not
been included because their effect would have been antidilutive. For all
periods presented, fully diluted earnings per share is not materially
different from primary earnings per share.
Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist principally of cash equivalents, investments in marketable
securities, trade accounts receivable, and unbilled contract costs.
The Company's trade accounts receivable and unbilled contract costs are
primarily from sales to U.S. Government agencies and two commercial customers.
The Company does not require collateral and has not historically experienced
significant credit losses related to receivables or unbilled contract costs
from individual customers or groups of customers in any particular industry or
geographic area.
The Company deposits its cash and invests in short-term investments and
marketable securities primarily through one regional commercial bank and one
investment company. Credit exposure to any one entity is limited by Company
policy.
Reclassifications
Certain prior year balances have been reclassified to conform to current year
presentations.
B. MARKETABLE SECURITIES
At September 30, 1996, debt securities have been categorized as available for
sale and as a result are stated at fair value.
24
As of September 30, 1996 marketable securities consist of the following:
GROSS
SECURITY AMORTIZED AGGREGATE BALANCE SHEET UNREALIZED
CATEGORY COST BASIS FAIR VALUE CARRYING VALUE GAIN/(LOSS)
-------- ------------- ------------- --------------- ----------
Corporate debt securities............... $ 693,867 $ 648,874 $ 648,874 $(44,993)
Debt securities issued by U.S.
Government and its agencies............ 700,000 681,038 681,038 (18,962)
Debt securities issued by states of the
U.S. and political subdivisions of the
states................................. 1,950,825 1,951,198 1,951,198 373
Mortgage-backed securities.............. 157,609 154,633 154,633 (2,976)
------------- -----------
$3,435,743 $(66,558)
============= ===========
The contractual maturities of debt securities available for sale at September
30, 199 are as follows:
AGGREGATE AMORTIZED
FAIR VALUE COST BASIS
------------ ------------
Due within one year..................... $ 1,951,197 $ 1,950,824
Due after one year through five years... 681,038 700,000
Due after five years through 10 years... 326,875 347,124
Due after 10 years...................... 476,633 504,353
------------ ------------
$ 3,435,743 $ 3,502,301
============ ============
Gross unrealized holding losses at September 30, 1996 were $66,558 and are
included on the balance sheet as a separate component of stockholder equity
net of tax effect. Proceeds from sales and maturities of marketable securities
during Fiscal 1996 were $8,407,185. Gross realized losses from the sale of
securities classified as available for sale during Fiscal 1996 and 1995 were
$1,461 and $58,360, respectively. For the purpose of determining gross
realized gains and losses, the cost of securities sold is based upon specific
identification.
C. UNBILLED CONTRACT COSTS
Unbilled contract costs include retention arising from contractual provisions
of $111,745 and $153,617 at September 30, 1996 and 1995, respectively. It is
anticipated that substantially all of these unbilled retention amounts will be
collected during the Fiscal year ending September 30, 1997. Unbilled contract
costs are net of advance billings of $95,062 and $85,361 at September 30, 1996
and 1995, respectively.
25
D. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
------------------------
1996 1995
------------ -----------
Machinery and equipment................. $3,118,538 $2,534,511
Sales and demonstration Units........... 1,885,274 292,500
Furniture and fixtures.................. 219,204 188,559
Computer software....................... 385,987 259,045
Leasehold improvements.................. 315,327 256,410
------------ -----------
5,924,330 3,531,025
Less accumulated depreciation and
amortization 1,576,546 759,007
------------ -----------
$4,347,784 $2,772,018
============ ===========
Depreciation expense for the years ended September 30, 1996, 1995, and 1994
was $817,539, $343,775, and $301,724, respectively.
For Fiscal 1996 and 1995 there was no equipment under capital lease.
E. NOTES PAYABLE
In January 1995 the Company established a $3,000,000 line of credit with
Citizen's Bank replacing the existing $1,500,000 line established on December
8, 1993. Borrowings under the line will be unsecured and charged interest at
the bank's prime rate. The line of credit expires January 31, 1997. The
Company has entered into negotiations to replace this line of credit. No funds
have been as yet advanced under this facility. The Company is required to
maintain certain covenants including certain financial ratios as described in
the line of credit agreement. The Company received a waiver in December 1996
of certain financial covenants for the period ended September 30, 1996.
F. COMMITMENTS AND CONTINGENCIES
The Company's office and laboratory space is 45,820 square feet located at 161
First Street, Cambridge, Massachusetts, under a primary lease expiring on
October 31, 1998. The monthly payment is $42,002 plus its pro rata share of
operating expenses and real estate taxes. Effective April 1996, the Company
occupies 8,343 square feet located at 6245 East Broadway Boulevard, Suite 350,
Tucson, Arizona, under a primary lease expiring June 30, 2001. The monthly
payment is $10,430 including its pro rata share of operating expenses. The
Company believes its facilities are adequate for its current needs and that
adequate facilities for expansion, if required, are available in the immediate
areas.
Future minimum annual rentals under all lease agreements at September 30,
1996 are as follows:
FISCAL OPERATING
YEAR LEASES
---- -----------
1997.......................... $1,090,624
1998.......................... 1,062,210
1999.......................... 1,062,740
2000.......................... 1,060,221
2001.......................... 1,063,085
----------
$5,388,880
==========
Total rental expense including operating expenses and real estate taxes for
operating leases amounted to $1,000,802, $725,750, and $507,816
respectively, for the years ended September 30, 1996, 1995 and 1994.
26
In fiscal year 1996 the Company had a dispute of contractual terms in the
amount of $344,000. Management believes that the financial statements properly
reflect the ultimate impact of this matter.
G. EMPLOYEE BENEFIT PLAN
The Company offers a 401(k) Employee Benefit Plan (the "401(k) Plan"). Under
the 401(k) Plan, any employee who has completed one year of service and has
attained the age of 21 years is eligible to participate. Under the terms of
the 401(k) Plan, an employee may defer up to 15% of his or her compensation
through contributions to the 401(k) Plan. Prior to October 1, 1995 the Company
made discretionary contributions on behalf of the participating employees. The
Company made a matching contribution to the 401(k) during fiscal year 1996 in
the amount of $128,458. The Company did not make a voluntary contribution to
the Plan during Fiscal 1995, however, a profit-sharing contribution was made
during Fiscal 1994 of $102,529. Amounts contributed to the 401(k) Plan are
subject to a six year vesting schedule.
H. INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
---------- ----------- ----------
Current Payable:
Federal........................... $ 9,775 $ 4,000 -
State............................. - - -
---------- ----------- ----------
9,775 4,000 -
Deferred tax expenses/(benefit):
Federal........................... $(116,485) $(603,233) $600,673
State............................. (37,769) (207,464) 202,683
---------- ----------- ----------
(154,254) (810,697) 803,356
---------- ----------- ----------
$(144,479) $(806,697) $803,356
========== =========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of September 30, the
components of the net deferred tax asset is as follows:
1996 1995
------------- -------------
Accrual to cash adjustment.............. $(2,351,252) $(3,526,878)
Federal Net Operating Loss.............. 3,180,017 2,853,791
State Net Operating Loss, net of
federal benefit......................... 539,304 500,457
Tax effect of unrealized losses on
marketable securities................... 26,632 31,051
Credits................................. 268,143 235,141
Other................................... (1,515) (235,793)
Valuation Allowance..................... (1,661,329) -
------------- -------------
Net Deferred Income Taxes............... - $ (142,231)
============= =============
A deferred tax asset of $31,051 is included in other assets as of September
30, 1995.
27
The provision for income taxes differs from the Federal statutory rate due to
the following:
YEARS ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
Tax at statutory rate................. (34.0)% (34.0)% 34.0 %
State taxes - net of federal benefit.. (0.8)% (6.8)% 6.6 %
Other................................. 2.1 % 0.8 % (1.0)%
Change in valuation allowance......... 27.9 % - -
-------- -------- ---------
Effective tax rate.................... (4.8)% (40.0)% 39.6 %
======== ======== =========
At September 30, 1996 the Company had Net Operating Loss Carryforwards of
$9,352,991 and $8,601,334 for federal and state income tax purposes,
respectively, of which $949,568 relates to deductions attributable to the
exercise of non-qualified stock options and employees early disposition of
stock acquired through incentive stock options. The federal net operating
losses expire beginning September 30, 2006 through 2011. The state net
operating losses expire beginning September 30, 1996 through 2001. The use of
these losses may be limited due to ownership change limitations under Section
382 of the Internal Revenue Code of 1986.
Research and experimental credit carryforward at September 30, 1996 was
$169,837 for federal income tax purposes.
I. STOCK OPTIONS
Under the Company's 1986 Stock Option Plan, both qualified and nonqualified
stock options may be granted to certain officers and key employees. Options
under the 1986 Plan become exercisable as vested over four years, and expire
December 31, 1996. At September 30, 1996 and 1995, all of the 553,196 stock
options available for grant under the Company's 1986 Stock Option Plan had
been granted.
In June 1992, the Company adopted its 1992 Stock Option Plan which provides
for the grant to employees, officers, directors and consultants of qualified
and nonqualified stock options to purchase up to 450,000 shares of the
Company's Common Stock. At September 30, 1996 and 1995, 440,866 and 447,196,
respectively, of the 450,000 stock options available for grant under the
Company's 1992 Stock Option Plan had been granted.
In February 1994, the Company adopted its 1994 Stock Option Plan which was
subsequently adopted by the Company's stockholders in June 1994. The Plan
provides for the grant to employees, officers, directors, and consultants of
qualified and nonqualified stock options to purchase up to 300,000 shares of
the Company's Common Stock. At September 30, 1996 and 1995, 277,092 and
276,100, respectively, of the 300,000 stock options available for grant under
the Company's 1994 Stock Option Plan had been granted.
During fiscal year 1996, the Company adopted its 1996 Stock Option Plan which
provides for the grant to employees, officers, directors, and consultants of
qualified and non qualified stock options to purchase up to 300,000 shares of
the Company's Common Stock. At September 30, 1996, none of the 300,000 stock
options available for grant under the Company's 1996 Stock Option Plan had
been granted.
The 1986, 1992, 1994, and 1996 Stock Option Plans (collectively the "Plans")
are subject to the following provisions:
The aggregate fair market value (determined as of the date the option is
granted) of the Common Stock that any employee may purchase in any calendar
year pursuant to the exercise of incentive stock options may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him or her, more than 10% of the
total combined voting power of all classes of stock of the Company shall be
eligible to receive any incentive stock options under the Plans unless the
28
option price is at least 110% of the fair market value of the Common Stock
subject to the option, determined on the date of grant. Nonqualified options
are not subject to this limitation.
Incentive stock options are issuable only to employees of the Company, while
nonqualified options may be issued to nonemployee directors, consultants, and
others, as well as to employees of the Company. Options granted under the
Stock Option Plans may not be granted with an exercise price less than 100% of
fair value of the Company's Common Stock, as determined by the Board of
Directors on the grant date.
Options under the Plans must be granted within 10 years from the effective
date of the Plan. Incentive stock options granted under the Plans cannot be
exercised more than 10 years from the date of grant except that incentive
stock options issued to 10% or greater stockholders are limited to five year
terms. All options granted under the Plans provide for the payment of the
Company's exercise price in cash, or by delivery to the Company of shares of
Common Stock already owned by the optionee having fair market value equal to
the exercise price of the options being exercised, or by a combination of such
methods of payment. Therefore, an optionee may be able to tender shares of
Common Stock to purchase additional shares of Common Stock and may
theoretically exercise all of his stock options with no additional investment
other than his original shares.
The Plans contain antidilution provisions authorizing appropriate adjustments
in certain circumstances. Shares of Common Stock subject to options which
expire without being exercised or which are canceled as a result of the
cessation of employment are available for further grants.
The following is a summary of stock option activity:
NUMBER OF OPTIONS
-----------------------
EXERCISE PRICE
NON RANGE
QUALIFIED QUALIFIED PER OPTION
------------ ----------- ---------------
Outstanding at September 30, 1993........ 225,034 654,493 $ 0.25-$ 9.25
Granted............................. 51,000 102,500 $ 9.50-$12.88
Exercised........................... - (131,183) $ 0.25-$ 5.00
Canceled............................ - - -
------------ ----------- ---------------
Outstanding at September 30, 1994........ 276,034 625,810 $0.25-$ 12.88
Granted............................. 10,200 146,000 $ 9.25-$13.38
Exercised........................... (25,500) (127,375) $0.25-$ 10.50
Canceled............................ - (666) $ 10.50
------------ ----------- ---------------
Outstanding at September 30, 1995........ 260,734 643,769 $ 0.25-$13.38
Granted............................. - 20,000 $ 7.75-$10.50
Exercised........................... (121,677) (64,096) $ 0.25-$10.50
Canceled............................ - (25,338) $ 9.25-$13.25
------------ ----------- ---------------
Outstanding at September 30, 1996........ 139,057 574,335 $ 0.25-$13.38
============ ===========
All outstanding option vest at various rates over periods up to four years and
expire at various dates from December 31, 1996 to December 26, 2005.
In addition to options granted pursuant to the Plans, the Company in March
1992 issued non-qualified options to purchase up to 33,500 shares of Common
Stock to certain of its professional advisors. These options are exercisable
at a price of $5.25 per share and expire in March 1997. At September 30, 1996,
21,110 options had been exercised.
In connection with its initial public offering in November 1992, the Company
also issued to the underwriter warrants to purchase up to (i) 150,000 shares
of Common Stock at an exercise price of $8.25 per share and (ii) 150,000
shares of Common Stock at an exercise price of $11.55 per share. At September
30, 1996, none of these warrants had been exercised.
29
J. PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred Stock,
$.01 par value. The Preferred Stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting
rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. No Preferred Stock is currently outstanding and
the Company has no present plans for the issuance thereof. However, the
issuance of any such preferred Stock could affect the rights of the holders of
Common Stock, and therefore, reduce the value of the Common Stock. In
particular, specific rights granted to future holders of Preferred Stock could
be used to restrict the Company's ability to merge with or sell its assets to
a third party, thereby preserving control of the Company by present owners.
K. RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which encourages companies to
recognize compensation expense in the income statement based on the fair value
of the underlying common stock at the date the awards are granted . However,
it will permit continued accounting under APB Opinion 25, "Accounting for
Stock Issued to Employees," accompanied by a disclosure of the pro forma
effects on net income and earnings per share had the new accounting rules been
applied. The statement is effective for fiscal year 1997. The Company plans to
account for stock based compensation in accordance with APB Opinion 25.
L. SIGNIFICANT CUSTOMERS
Significant customers, defined as those customers whose gross sales account
for 10% or more of total gross sales in a Fiscal year, were as follows:
YEARS ENDED SEPTEMBER 30,
--------------------------
1996 1995 1994
-------- ------ ------
U.S. Government:
Classified Defense Contract..... -- -- 14.98%
N.A.S.A......................... 18.16% 13.30% 4.66
U.S. Department of Defense...... 33.62 6.97 4.13
-------- ------ ------
51.78 20.27 23.77
Commercial:
Automotive...................... 38.17 72.90 75.76
-------- ------ ------
Other.............................. 10.05 6.83 0.47
-------- ------ ------
100.00% 100.00% 100.00%
======== ====== ======
30
M. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and Income Taxes Paid
Cash paid for interest and income taxes were as follows:
YEARS ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
Interest............... $ 330 $1,277 $ 2,499
======== ======== ========
Income taxes........... $36,900 $8,620 $32,140
======== ======== ========
Non-Cash Transaction
During Fiscal year 1996 plant equipment with the fair market value of
$100,000 was received in exchange for the relief of $100,000 of accounts
receivable.
31
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
CHARGED TO BALANCE
BALANCE AT PROFIT AND DEDUCTIONS AT END
BEGINNING LOSS OR FROM OF
OF PERIOD INCOME RESERVES PERIOD
------------- ------------ ----------- ----------
Year Ended September 30, 1994:
Allowance for Doubtful Accounts............... $ 80,000 $ 100,000 ($49,100) $ 130,900
Reserve for Unbilled Contract Costs........... $ 66,500 - - $ 66,500
Year Ended September 30, 1995:
Allowance for Doubtful Accounts............... $130,900 - - $ 130,900
Reserve for Unbilled Contract Costs........... $ 66,500 - - $ 66,500
Year Ended September 30, 1996:
Allowance for Doubtful Accounts............... $130,900 - - $ 130,900
Reserve for Unbilled Contract Costs........... $ 66,500 $ 390,500 ($24,500) $ 432,500
Deferred tax valuation allowance.............. - $1,661,329 - $1,661,329
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information with respect to directors required under this item is
incorporated herein by reference to the information set forth under the
section entitled "Election of Directors" in the Company's Proxy Statement for
the 1997 Annual Meeting of Stockholders to be held February 26, 1997, (the
"1997 Proxy Statement"). Information relating to certain filings of Forms 3,
4, and 5 of the Company is contained in the 1997 Proxy Statement under the
caption "Compliance with Section 16 Reporting Requirements."
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to the
section entitled "Compensation of Executive Officers" in the 1997 Proxy
Statement.
The sections entitled "Compensation Committee Report on Executive
Compensation" and "Comparative Stock Performance Graph" in the 1997 Proxy
Statement are not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" in the
1997 Proxy Statement.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements:
Balance Sheets as of September 30, 1996 and 1995
Statements of Operations for the Years Ended September 30, 1996, 1995, and
1994
Statements of Changes in Stockholders' Equity for the Years Ended September
30, 1996, 1995, and 1994
Statements of Cash Flows for the Years Ended September 30, 1996, 1995, and
1994
Notes to Financial Statements.
2. Financial Statement Schedule:
Schedule II; Valuation and Qualifying Accounts
All other financial statement schedules not listed have been omitted
because they are either not required, not applicable, or the information
has been included elsewhere in the financial statements or notes thereto.
3. Exhibits.
35
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
---------- ----------------------
3.1 (1) - Certificate of Incorporation
3.2 (1) - Bylaws
4.1 (1) - Specimen certificate for Common Stock $.01 par value
4.2 (1) - Warrant Agreement between the Company and Continental
Stock Transfer and Trust Company (including specimen
warrant certificate)
10.1 (1) - Employment Agreement dated July 1, 1992 between the
Company and Mr. Eisenhaure
10.2 (1) - Employment Agreement dated July 1, 1992 between the
Company and Mr. Turmelle
10.3 (1) - Employment Agreement dated July 1, 1992 between the
Company and Mr. Stanton
10.4(1)(*) - 1986 Stock Option Plan
10.5(1)(*) - 1992 Stock Option Plan
10.6(2)(*) - 1994 Stock Option Plan
10.7(1) - Lease dated October 1993 between the Company and
Gunwyn/First Street Limited Partnership
10.8(3) - Line of Credit Agreement dated January 13, 1995 between
the Company and First NH Bank
10.9(1) - Subcontract No. 9770-A-0012 dated October 5, 1992 between
the Company and Itek Optical Systems, as amended
10.10(*) - 1996 Stock Option Plan
10.11 - Amendment to Credit Agreement between the Company and
First NH Bank, dated March 13, 1996
11 - Statement re Computation of Earnings Per Share
23 - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule
________________
(*) Management contract or compensatory plan or arrangement filed as an
exhibit to this Annual Report pursuant to Items 14 (a) and 14 (c) of
Form 10-K.
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 Filed on July 7, 1992.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the period covered by this report.
36
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
---------- ----------------------
3.1 (1) - Certificate of Incorporation
3.2 (1) - Bylaws
4.1 (1) - Specimen certificate for Common Stock $.01 par value
4.2 (1) - Warrant Agreement between the Company and Continental
Stock Transfer and Trust Company (including specimen
warrant certificate)
10.1 (1) - Employment Agreement dated July 1, 1992 between the
Company and Mr. Eisenhaure
10.2 (1) - Employment Agreement dated July 1, 1992 between the
Company and Mr. Turmelle
10.3 (1) - Employment Agreement dated July 1, 1992 between the
Company and Mr. Stanton
10.4(1)(*) - 1986 Stock Option Plan
10.5(1)(*) - 1992 Stock Option Plan
10.6(2)(*) - 1994 Stock Option Plan
10.7(1) - Lease dated October 1993 between the Company and
Gunwyn/First Street Limited Partnership
10.8(3) - Line of Credit Agreement dated January 13, 1995 between
the Company and First NH Bank
10.9(1) - Subcontract No. 9770-A-0012 dated October 5, 1992 between
the Company and Itek Optical Systems, as amended
10.10(*) - 1996 Stock Option Plan
10.11 - Amendment to Credit Agreement between the Company and
First NH Bank, dated March 13, 1996
11 - Statement re Computation of Earnings Per Share
23 - Consent of Coopers & Lybrand L.L.P.
27 - Financial Data Schedule
________________
(*) Management contract or compensatory plan or arrangement filed as an
exhibit to this Annual Report pursuant to Items 14 (a) and 14 (c) of
Form 10-K.
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 Filed on July 7, 1992.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the period covered by this report.
38