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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
COMMISSION FILE NUMBER 1-11512
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SATCON TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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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 (Zip Code)
Offices)
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(617) 661-0540
(Registrant's Telephone Number, Including Area Code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
Title of Class
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COMMON STOCK, $.01 PAR VALUE
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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. [_]
The aggregate market value of the Registrant's Common Stock, $.01 par value
per share, held by non-affiliates of the Registrant was $29,524,529, based on
the last reported sale price of the Registrant's Common Stock on the Nasdaq
National Market as of the close of business on December 31, 1998 ($5.6875).
There were 9,018,549 shares of Common Stock outstanding as of December 31,
1998.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 1999 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
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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 itself and through its subsidiaries designs, develops,
manufactures and sells hardware and software systems relating to energy
storage, energy conversion and power management with an emphasis on
environmentally friendly approaches.
The Company's Technology Center, located at the Company's headquarters near
the Massachusetts Institute of Technology in Cambridge, Massachusetts, is the
technical engine that expands the technology base of the Company and drives
the development of new products. The range of products currently under
development at the Technology Center includes products applicable to military,
industrial automation, power management, distributed power, automotive,
electric vehicles, hybrid-electric vehicles, fuel cell power conversion,
medical diagnostics and food safety.
Acquired in January 1997, K&D MagMotor Corp., now called the MagMotor
Division ("MagMotor") provides key motor and magnetic assembly manufacturing
capabilities. MagMotor manufactures brush and brushless motors for industrial
automation products and electric vehicle applications. It also manufactures
magnetic levitation systems for semiconductor equipment manufacturers. These
systems operate in extreme conditions in ultra-clean environments and provide
high reliability, debris-free operation while increasing throughput and
decreasing down time.
Acquired in April 1997, SatCon Film Microelectronics, Inc. ("FMI") designs
and manufactures microelectronic circuits and inter-connect devices. Among its
products are standard and custom multi-chip modules for the communications,
industrial, military, medical and aerospace markets. FMI's product line
includes hybrid microcircuits, multi-chip modules, microwave pin diode drivers
and solid state relays. FMI also manufactures "thin film" microcircuits and
resistors in a variety of material coatings including beryllium oxide ("BeO")
free components. These custom and standard thin film products can be
integrated into structures or devices that have unique capabilities, such as
FMI's multi-chip modules, or devices requiring small, precise circuitry such
as cellular phones and wireless telecommunications devices. FMI has a line of
power electronic building block products that are currently used in aerospace
applications and have the potential to play a significant role in future
automotive, electric vehicles, hybrid-electric vehicles and fuel cell power
conversion applications.
Beacon Power Corporation ("Beacon") is currently marketing its flywheel-
based uninterruptible power systems to the telecommunications, cable broadband
providers and wireless telecommunications industry. Its product candidate, the
20C1000 Cable/Telecom Flywheel System, is a high-reliability, long-life, low-
maintenance, and environmentally safe alternative to lead acid batteries.
Field trials of this system are currently underway.
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 electronic technologies. It is the Company's
strategy to accelerate its technological developments by continuing to expand
its externally funded contract research and development from both government
and commercial sources and to acquire manufacturing capabilities to support
its product development efforts and product line expansion. The Company
believes that this funding can be used to develop products that can be sold to
government agencies and transitioned into viable commercial products. In most
instances, individual components have multiple applications across multiple
markets.
2
DEVELOPMENTS DURING 1998
During 1998 the Company initiated several actions in order to advance its
strategy of commercializing its products.
The Company completed the development and received a production order for
SatCon's Integrated Suspension and Motor system ("ISAM") product for the
semiconductor equipment industry that is manufactured at MagMotor. The ISAM
system is designed for semiconductor processing applications and can eliminate
unwanted debris, provide higher throughput potential and is easier to maintain
than existing mechanical systems. The production line is complete and the
Company plans to begin shipping these units in the first quarter of fiscal
year 1999.
FMI entered into a distribution agreement with Falcon Electronics, Inc. This
agreement provides the vehicle for FMI to sell and distribute a line of linear
regulators manufactured without the use of the hazardous BeO. In addition to
linear regulators, FMI is developing a new motor controller line based on the
SAT-32 Digital Signal Processor ("DSP") motor control technology that is
currently used in the Company's ISAM product. FMI also increased its
manufacturing capability in thin film, the foundation on which all of FMI's
hybrid microcircuits are built, with the installation of a unique direct laser
chrome mask maker.
SatCon developed a new brushless DC servo motor line designed to provide the
highest possible torque utilizing the smallest amount of space. This new
product line incorporates traditional SatCon technology to create higher power
density than traditional brushless motors. This product line will be
manufactured at MagMotor.
The Technology Center continued to participate in several funded research
and development efforts with various commercial customers to develop product
improvements and new products. These efforts include an improved performance
alternator for commercial vehicles, control electronics for power regulation
of a turbine for alternative fuel vehicles, and an open frame, submersible
propulsor, capable of operation at ocean depths of up to 20,000 feet. In
addition, the Technology Center is developing low-cost, high-efficiency drive
trains for electric and hybrid-electric vehicles, a thermal management scheme
for induction motors, an electric motor drive system for Navy ships, high
speed motor drives for high efficiency rooftop air conditioning systems, a
flywheel integrated power system and a high temperature magnetic bearing for
advanced gas turbine engines. The Company is also working 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:
Power Electronics
SatCon has developed proprietary 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.
FMI has also developed a new hermetic amplifier product line that is
manufactured without the use of hazardous BeO. In addition to the amplifiers,
FMI is developing a new motor controller line based on the SAT-32 DSP motor
control technology that is currently used in the ISAM product.
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. Through the use of high performance materials and careful design of
the magnetic circuits, SatCon has demonstrated electric motor prototypes that
are lightweight
3
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.
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 advanced 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 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.
The Company is also developing a high-temperature magnetic bearing for gas
turbine engines.
Flywheel Energy Storage Systems
By integrating energy storing flywheels made of high strength materials with
high power, permanent magnet motor/generators, the Company has developed
electromechanical storage systems that the Company believes have the potential
to offer practical solutions for mobile and stationary applications. SatCon's
flywheel systems are anticipated to provide extremely high power output and
energy storage in compact packages. They may be a long-lasting, lightweight,
and an environmentally friendly alternative to conventional batteries. 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.
On May 20, 1997, the Company formed Beacon through a strategic partnership
with Duquesne Enterprises, a subsidiary of DOE, Inc., to manufacture and
distribute SatCon's flywheel energy storage systems. Duquesne Enterprises made
an initial investment totaling $5,000,000 into SatCon to fund flywheel product
development. Beacon assumed the activities of SatCon's Energy Systems Division
which was formed in October 1995 to focus on the product development and
marketing of flywheel "Inertial Battery" systems for such markets as
utilities, cable television and telecommunications, where un-interruptible
power supplies (UPS) are critical to maintaining service. On October 23, 1998,
Beacon completed a $4,750,000 private placement of equity securities with
Perseus Capital, L.L.C., Dusquene Enterprises and Micro Generation Technology
Fund, L.L.C. Beacon will utilize the proceeds from the private placement to
complete the commercialization of the 20C1000 Cable/Telecom Flywheel System.
Beacon's focus is limited to providing flywheel energy storage products for
stationary terrestrial applications.
Beacon's 20C1000 Cable/Telecom Flywheel System offers an alternative to lead
acid batteries as an un-interruptible power supply for the telecommunications
industry, including cable television and telephone service providers, which
are required to maintain service during power outages.
Electro-Optic and Sensor Inspection Systems
SatCon is developing a commercial real-time optical biosensor having
extraordinary sensitivity for biological and chemical detection. The effort is
focused initially on the detection of microbial pathogens of interest to the
food industry. These pathogens include E. Coli 0157:H7 and Salmonella found in
meat and poultry, vegetables, fruit, juices and milk. The detection technique
is based on a novel technique using ultra-high resolution interferometry
measurements and, if successful, will result in the first commercial sensor
capable of the detection of small numbers of microbes without the need for
initial biological amplification.
4
MARKETS
SatCon's objective is to capitalize on its technological developments from
its internal and contract research and development projects to become a
leading supplier of a new generation of intelligent, electromechanical and
electro-optic products for aerospace, transportation, industrial, utility and
food processing applications. These products, enabled by a revolution in the
size, weight and efficiency of machines, provide competitive advantages in
performance.
COMPETITION
The Company is aware of direct and indirect competitors that employ similar
technology and have extensive research and development facilities in both
government and commercial markets. The Company is aware of large companies, as
well as small companies, entering the markets in which the Company competes
and expects competition to intensify either through direct competition or the
development of 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 and proprietary know-how. The Company also has access to university
researchers in the greater Boston area, many of whom are experts in the fields
of magnetic and electro-optic technologies. The Company continues to pursue
strategic alliances with investment and commercial partners.
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 Company's
technologies to address both existing and potential markets. Accordingly, the
Company will need to develop technologies that 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 16 United States patents that expire between 2007
and 2015. The Company has 12 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 relies upon the treatment of
its technology as trade secrets and uses confidentiality agreements to assign
to the Company all rights to patents, technical, or other information
developed by 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 assurance that other
companies will not acquire information that the Company considers 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 an application for a patent will be allowed. No
assurances can be given as to the issuance of additional patents or, if
issued, as to their scope. Patents granted may not provide meaningful
protection from competitors. Even if a competitor's products were to infringe
upon 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
5
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 upon patent or intellectual property
rights of third parties. To date, the Company has not been required to defend
its patents or proprietary information against claims by third parties.
RESEARCH AND DEVELOPMENT
Approximately $7,966,000 or 51% of the Company's revenue during fiscal year
1998 were 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. The rights to technology developed under contracts funded by
commercial customers are negotiated on a case by case basis.
The Company expended approximately $346,000, $2,489,000 and $894,000 on
internally-funded research and development during fiscal year 1998, 1997 and
1996. Beacon's 20C1000 Cable/Telecom Flywheel System and the introduction of
SatCon's ISAM product accounted for the majority of the fiscal year 1998 and
1997 internally-funded costs. The development of drive train components for
hybrid electric vehicles in the automotive industry as well as further
development of the flywheel energy storage systems for the cable industry
accounted for the majority of fiscal year 1996 internally-funded costs.
GOVERNMENT REGULATION
The Company has entered into certain U.S. Government contracts that 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.
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 bidding on proposals and billing practices. These
research and development contracts are generally subject to cancellation at
the U.S. Government's sole discretion. In the event that the 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.
The Company could be prohibited 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 also 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
During fiscal year 1997, the Company acquired MagMotor, a manufacturer of
custom electric motors, and FMI, a manufacturer of custom integrated circuits.
The Company is in the process of transitioning the production of key
components of its products to these manufacturing companies. In addition, the
Company intends to continue to acquire manufacturing capabilities to support
its product development efforts and product line expansion. 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. When
necessary, 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.
6
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.
BACKLOG
The Company's backlog consists primarily of research and development
contracts and orders for multi-chip modules and hybrid products. At September
30, 1998, the backlog was approximately $10,000,000 for work to be performed
and products to be shipped during the fiscal year ending September 30, 1999
and beyond. 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, 1997 was approximately
$10,500,000.
SIGNIFICANT CUSTOMERS
The U.S. Department of Defense accounted for approximately 22.2% of the
Company's fiscal year 1998 revenue.
EMPLOYEES
At September 30, 1998, the Company employed a total of 151 people; 146 on a
regular full-time basis, 3 on a regular part-time basis and 2 student interns.
In addition, at September 30, 1998, Beacon employed 20 people on a regular
full-time basis. Some of the Company's employees are affiliated with large
universities located in the greater Boston area. Approximately 57 persons are
employed in engineering, 63 in manufacturing, 23 in administration and 8 in
sales and marketing. None of these employees are represented by a union. The
Company believes that its relations with its employees are satisfactory.
ITEM 2. PROPERTIES
The Company leases 45,820 square feet of office and laboratory space at 161
First Street, Cambridge, Massachusetts under a primary lease expiring on
October 31, 2003 and 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 also leases approximately 14,757 square feet of
manufacturing space at 530 Turnpike Street, North Andover, Massachusetts under
a primary lease expiring on July 31, 2002 and approximately 17,000 square feet
at 121 Higgins Street, Worcester, Massachusetts under a primary lease expiring
on March 31, 2003.
Effective November 5, 1997, the Company entered into an agreement to sub-
lease 8,930 square feet at 161 First Street to a third party and effective
July 15, 1998, the Company entered into an agreement to sub-lease an
additional 3,952 square feet at 161 First Street to the same third party.
The Company believes its facilities are adequate for its current needs and
that adequate facilities for expansion, if required, are available.
ITEM 3. LEGAL PROCEEDINGS
On October 15, 1997, the Company received a letter from the Department of
the Air Force stating that it may terminate for default a contract between the
Air Force and the Company for development of a satellite component, unless
perceived performance problems were cured. In the event of an actual default,
the Company could be liable for extra costs incurred by the Government in
developing the component. The Company has had several discussions with the Air
Force in order to resolve this issue. The Company informed the Air Force
contracting officer of its belief that a termination for default is not
warranted.
On December 15, 1997, the Air Force issued a "Show Cause Notice" to the
Company requiring the Company to demonstrate to the Air Force why the contract
should not be terminated "for cause." On December 31, 1997, the Company
responded to the Air Force's "Show Cause Notice," explaining its view that the
Company should not be terminated for cause.
7
On December 12, 1997, FMI filed suit against Albert R. Snider for breach of
certain representations made by Mr. Snider, including statements of inventory
balances, in the Asset Purchase Agreement dated as of April 3, 1997, between
FMI and Mr. Snider relating to the purchase by SatCon of the business of FMI.
The suit was filed in the United States District Court in Boston,
Massachusetts. This lawsuit was dismissed because settlement discussions
between the Company and Mr. Snider were ongoing. However, those settlement
discussions were unsuccessful and the lawsuit was reinstated on July 17, 1998.
Mr. Snider filed counterclaims seeking, among other things, payments allegedly
due from the Company under a promissory note. Mr. Snider's motion for partial
summary judgement in the promissory note counterclaim was denied by the
District Court on October 15, 1998. The parties have recently initiated
discovery. SatCon believes it has sufficient reserves on the books of FMI for
the overstatement in inventory balances.
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
("NASDAQ") under the trading symbol "SATC." As of December 31, 1998 there were
approximately 199 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 NASDAQ. Such
quotations represent inter-dealer quotations without adjustment for retail
markups, markdowns, or commissions and may not represent actual transactions.
As of December 31, 1998 the closing price for the Company's Common Stock, as
reported by NASDAQ, was $5.6875.
FISCAL YEAR FISCAL YEAR
1998 1997
-------------- -------------
BID BID
-------------- -------------
HIGH LOW HIGH LOW
------- ------ ------ ------
First Quarter................................. $14.375 $8.750 $8.625 $5.625
Second Quarter................................ 14.250 10.875 9.125 5.750
Third Quarter................................. 12.625 8.000 10.500 5.750
Fourth Quarter................................ 9.188 5.000 13.375 7.500
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 that may then be in place and other pertinent
factors.
RECENT SALES OF UNREGISTERED SECURITIES
On June 5, 1998, the Company issued to certain individuals, in settlement of
a claim asserted against the Company, Common Stock Purchase Warrants to
purchase up to 63,848 Shares of Common Stock at an exercise price of $11.43
per share. These warrants expire on November 11, 1999 and were issued in
reliance upon the exemptions from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), or Regulation D
promulgated thereunder, relative to sales by an issuer not involving any
public offering.
On November 11, 1998, the Company issued to certain individuals, who
formerly held warrants issued by the Company in connection with the Company's
initial public offering in November 1992, Common Stock Purchase Warrants to
purchase up to 67,125 shares of the Company's Common Stock at an exercise
price of $11.43 per share. These warrants expire on November 11, 1999 and were
issued in reliance upon the exemptions from registration under Section 4(2) of
the Securities Act or Regulation D promulgated thereunder, relative to sales
by an issuer not involving any public offering.
On January 4, 1999, the Company issued 100,000 shares of Common Stock to two
individuals in connection with K&D MagMotor Corp.'s, a wholly-owned subsidiary
of the Company, purchase of certain assets and assumption of certain
liabilities of Inductive Components, Inc. and Lighthouse Software, Inc. These
shares were issued in reliance upon the exemptions from registration under
Section 4(2) of the Securities Act or Regulation D promulgated thereunder,
relative to sales by an issuer not involving any public offering.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the years ended
September 30, 1998, 1997, 1996, 1995, and 1994 has been derived from the
financial statements of the Company which have been audited by
PricewaterhouseCoopers LLP, independent accountants. This information should
be read in conjunction with the consolidated financial statements and notes
thereto set forth elsewhere in this Annual Report on Form 10-K.
STATEMENT OF OPERATIONS DATA:
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Revenue................. $15,485,923 $12,466,335 $ 9,384,588 $11,475,427 $18,016,987
----------- ----------- ----------- ----------- -----------
Cost of revenue......... 10,991,202 10,071,150 6,394,830 9,493,963 13,861,274
Selling, general and ad-
ministrative
expenses............... 4,787,070 6,197,951 5,569,285 2,511,999 2,075,734
Research and develop-
ment................... 346,161 2,489,207 893,628 1,937,241 461,068
Goodwill amortization... 290,957 120,467 -- -- --
----------- ----------- ----------- ----------- -----------
Total operating ex-
penses............... 16,415,390 18,878,775 12,857,743 13,943,203 16,398,076
----------- ----------- ----------- ----------- -----------
Operating income/(loss). (929,467) (6,412,440) (3,473,155) (2,467,776) 1,618,911
Loss from Investment in
Beacon Power Corpora-
tion................... (3,541,817) -- -- -- --
Interest income, net.... 169,655 269,198 463,840 451,034 409,337
----------- ----------- ----------- ----------- -----------
Income/(loss) before in-
come taxes............. (4,301,629) (6,143,242) (3,009,315) (2,016,742) 2,028,248
Provision/(benefit) for
income taxes........... 3,872 -- (144,479) (806,697) 803,356
----------- ----------- ----------- ----------- -----------
Net income/(loss)....... $(4,305,501) $(6,143,242) $(2,864,836) $(1,210,045) $ 1,224,892
=========== =========== =========== =========== ===========
Net income/(loss) per
weighted
average common share,
basic.................. $ (.48) $ (.77) $ (.39) $ (.17) $ .19
=========== =========== =========== =========== ===========
Net income/(loss) per
weighted
average common share,
diluted................ $ (.48) $ (.77) $ (.39) $ (.17) $ .17
=========== =========== =========== =========== ===========
Weighted average number
of common shares, ba-
sic.................... 8,956,671 7,959,309 7,285,756 7,079,855 6,601,282
Weighted average number
of common shares, di-
luted.................. 8,956,671 7,959,309 7,285,756 7,079,855 7,367,481
BALANCE SHEET DATA:
AT SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Total assets............ $18,166,590 $20,709,438 $17,277,517 $19,792,966 $22,274,534
Total long term obliga-
tions.................. $ 221,462 $ 322,897 -- -- --
Total liabilities....... $ 2,752,583 $ 2,630,301 $ 1,178,349 $ 1,040,251 $ 2,768,493
Working capital......... $ 8,504,471 $10,595,294 $11,011,170 $15,615,645 $18,172,529
Stockholders' equity.... $15,414,007 $18,079,137 $16,099,168 $18,752,715 $19,506,041
Dividends per share..... -- -- -- -- --
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 itself and through its subsidiaries, designs, develops and
manufactures and sells hardware and software systems relating to energy
storage, energy conservation and power management with an emphasis on
environmentally friendly approaches
It is the Company's strategy to accelerate its technological 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 that the Company believes can both be sold to
government agencies and transition into high volume commercial products.
Recent changes in the SBIR 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
During fiscal year 1998 the Company initiated several actions to advance the
development and market introduction of new products, to establish a product
manufacturing base capable of supplying key components of SatCon's products,
and to improve the future profitability of the Company. These actions include
the production of the ISAM system and the introduction of a standard product
line of linear regulators. In addition, during a recapitalization of Beacon in
December 1997, the Company converted a significant portion of its ownership of
Beacon to preferred stock. The Company retained approximately 19.9% of
Beacon's outstanding voting stock. Although the Company owned less than 20% of
the outstanding voting stock of Beacon, based on other factors there was a
presumption that the Company had the ability to exercise significant
influence, and the equity method was required for the fair presentation
subsequent to this recapitalization. The Company's share of losses from Beacon
is shown as a single amount in the statement of operations, "Loss from
Investment in Beacon Power Corporation." The effects of these actions on the
Company's financial performance during fiscal year 1998 are discussed below.
The following table sets forth, for the periods indicated, the percentage of
revenue for certain items in the Company's Statement of Operations for each
period:
FOR THE YEARS
ENDED
SEPTEMBER 30,
-------------------
1998 1997 1996
----- ----- -----
Revenue................. 100.0% 100.0% 100.0%
Cost of revenue......... 71.0 80.8 68.1
Selling, general and ad-
ministrative expenses.. 30.9 49.7 59.4
Research and development
expenses............... 2.2 20.0 9.5
Goodwill amortization... 1.9 1.0 --
Total operating expenses
(excluding cost of rev-
enue).................. 35.0 70.7 68.9
Operating loss.......... (6.0) (51.5) (37.0)
Loss from Investment in
Beacon Power Corpora-
tion................... (22.9) -- --
Interest income, net.... 1.1 2.2 4.9
Loss before income tax-
es..................... (27.8) (49.3) (32.1)
Provision/(benefit) for
income taxes........... -- -- (1.5)
Net loss................ (27.8) (49.3) (30.6)
11
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
Revenue. The Company's revenue increased by approximately $3,020,000 or
24.2% from 1997 to 1998. The increase is due to the increase of revenue from
the sale of manufactured products offset by a decrease in revenue on research
and development contracts. During 1997, the Company acquired K&D MagMotor
Corporation ("MagMotor") and Film Microelectronics, Inc. ("FMI") as wholly-
owned subsidiaries which provided for additional revenue of approximately
$476,000 and $3,316,000, respectively, for the year ended September 30, 1998.
These increases in revenue were partially offset by a decrease in revenue of
approximately $232,000 related to research and development contracts.
Cost of revenue. Cost of revenue increased approximately $920,000 or 9.1%
from 1997 to 1998. The increase is primarily due to the addition of cost of
revenue associated with MagMotor and FMI of approximately $656,000 and
$2,135,000, respectively. These increases in cost of revenue were offset by a
decrease in cost of revenue on research and development contracts of
approximately $961,000.
Selling, general and administrative. Selling, general and administrative
expenses decreased approximately $1,411,000 or 22.8% from 1997 to 1998. The
decrease is the result of consolidating the Tucson Space Division into the
Technology Center, the recapitalization of Beacon and the continued management
of selling, general and administrative costs. During 1997, the Company
established a reserve of approximately $498,000 for expenses, primarily lease
cancellation costs relating to consolidating the Tucson Space Division into
the Technology Center. At September 30, 1998, the Company had a reserve of
$100,000, primarily relating to the lease cancellation costs. During 1997, the
Company formed Beacon, a wholly-owned subsidiary, to continue the work of its
Energy Systems Division. During a recapitalization of Beacon in December 1997,
the Company converted a significant portion of its ownership of Beacon to
convertible preferred stock. The Company retained approximately 19.9% of
Beacon's outstanding voting stock. Although the Company owned less than 20% of
the outstanding voting stock of Beacon, based on other factors, there was a
presumption that the Company had the ability to exercise significant
influence, and the equity method was required for the fair presentation
subsequent to this recapitalization. The Company's share of losses from Beacon
is shown as a single amount in the statement of operations, "Loss from
Investment in Beacon Power Corporation." These decreases were partially offset
by increases of approximately $225,000 and $813,000 of expenses related to
MagMotor and FMI, respectively.
Research and development. Internally funded research and development
expenses decreased approximately $2,143,000 or 86.1% from 1997 to 1998. During
1997, the Company recognized certain capitalized product development costs, in
the amount of approximately $2,593,000, rather than amortizing these costs
over future years' revenue based on the uncertainty of future revenue. These
costs related primarily to Beacon's 20C1000 Cable/Telecom Flywheel system
development efforts and the ISAM product. This decrease was partially offset
by an increase in cost due to the continued development of the flywheel energy
storage system incurred by Beacon for the period from October 1, 1997 to
December 24, 1997.
Goodwill amortization. Goodwill amortization increased approximately
$170,000 or 141.5% from 1997 to 1998. The increase is the result of a full
year of goodwill amortization related to goodwill in connection with the
acquisitions of MagMotor and FMI completed in 1997.
Loss from Investment in Beacon Power Corporation. On May 20, 1997, the
Company formed its subsidiary, Beacon, through a strategic partnership with
Duquesne Enterprises, a subsidiary of DOE, Inc., to manufacture and distribute
the Company's flywheel energy storage systems. Duquesne Enterprises made an
initial investment totaling $5,000,000 in the Company to fund flywheel product
development. Beacon assumed the activities of the Company's Energy Systems
Division which was formed in October 1995 to focus 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 services. In December 1997,
Beacon obtained equity financing from private investors and the Company
converted a significant portion of its ownership of Beacon to convertible
preferred stock. The Company retained approximately 19.9% of Beacon's
outstanding voting stock. On October 23, 1998, Beacon completed a $4,750,000
private placement of equity securities with Perseus Capital L.L.C., Duquesne
Enterprises and Micro
12
Generation Technology Fund, L.L.C. Beacon will utilize the proceeds from the
private placement toward the completion of the commercialization of the
20C1000 Cable/Telecom Flywheel System. Beacon's focus is limited to providing
flywheel energy storage products for stationary terrestrial applications.
As set forth in Note J to the Company's audited consolidated financial
statements for the year ended September 30, 1997, upon converting the majority
of its equity ownership interest in Beacon to convertible preferred stock in
December 1997, the Company believed that the appropriate accounting treatment
for its investment in Beacon was to account for the investment on the cost
basis and to treat Beacon as a non-consolidated entity. The Company has
reported its financial results since the second quarter of 1998 without
reflecting Beacon's losses in its results of operations and showing its
investment in Beacon at cost on its balance sheet.
In auditing the Company's financial statements for the year ended September
30, 1998, the Company's independent accountants advised the Company that the
treatment of Beacon as a non-consolidated entity was inappropriate for the
period subsequent to December 1997 and prior to the October 1998 financing.
Consequently, the Company will be required to amend its financial results for
the second and third quarters of fiscal year 1998 and has included
approximately $3,542,000 of loss from its investment in Beacon since December
1997 in the financial statements for the year ended September 30, 1998. This
resulted in a net loss of approximately $4,306,000 (or $.48 per share) for the
year ended September 30, 1998. The balance sheet reflects a corresponding
increase in retained earnings/(deficit). The loss reported in connection with
Beacon has not affected the business prospects or cash position of either the
Company or Beacon and the Company has no further funding commitments to
Beacon.
The Company has been advised by its independent accountants that they concur
with the Company's view that the Company is neither required to consolidate
nor reflect its pro-rata share of Beacon's losses for any period subsequent to
the third-party financing Beacon obtained in October 1998. Consequently,
during the fiscal year ended September 30, 1999, the Company will carry its
investment in Beacon at its remaining cost of approximately $1,458,000 and
will not be consolidating or otherwise reflecting Beacon's results of
operations in its financial statements.
The Company will continue to review its investment in Beacon. While the
Company continues to be optimistic regarding the long term prospects for
Beacon and the flywheel technology, Beacon has not yet successfully introduced
a flywheel product and will need substantial additional financing to continue
its operations. If in the future the Company determines that its investment in
Beacon does not have any remaining value, the Company would take appropriate
actions to write-off the remaining cost of its investment.
Interest income, net. Interest income, net decreased approximately $100,000
or 37.0% from 1997 to 1998. The decrease is primarily the result of the
decrease in marketable securities of approximately $1,319,000 or 66.7% from
1997 to 1998.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1996
Revenue. The Company's revenue increased approximately $3,082,000 or 32.8%
from 1996 to 1997. The increase is due to the introduction of revenue from the
sale of manufactured products as well as an increase in revenue on research
and development contracts. During 1997, the Company acquired MagMotor and FMI
as wholly-owned subsidiaries which provided for incremental revenue of
approximately $1,135,000 and $2,595,000, respectively. Revenue from the
Company's new ISAM product contributed approximately $540,000 of additional
revenue. Approximately $1,295,000 of the increase in revenue related to an
increase in revenue on research and development contracts. These increases
were partially offset by a decrease in revenue of approximately $3,410,000
from contracts with Chrysler Corporation for the development of drive train
components as part of the Patriot Hybrid Vehicle Program. During 1996,
Chrysler Corporation announced the cancellation of the Patriot Hybrid Vehicle
Program. Chrysler also announced that it intends to transition technologies
utilized in the Patriot Program to their Hybrid-Electric Vehicle program being
sponsored by the U.S. Government's Super Car Initiative.
13
Cost of revenue. Cost of revenue increased approximately $3,676,000 or 57.5%
from 1996 to 1997. The increase is primarily due to the addition of cost of
revenue associated with MagMotor and FMI of approximately $797,000 and
$1,886,000, respectively, and increased cost of revenue on research and
development contracts accounting for an additional $696,000. In addition, the
Company established a reserve of approximately $910,000 in connection with the
cost to complete a number of commercial development contracts. These increases
were partially offset by a decrease in cost of revenue on contracts with
Chrysler Corporation.
Selling, general and administrative. Selling, general and administrative
expenses increased approximately $629,000 or 11.3% from 1996 to 1997.
Approximately $250,000 and $570,000 of the increase is due to selling, general
and administrative expenses related to MagMotor and FMI, respectively. In
addition, the Company established a reserve of approximately $498,000 for
expenses, primarily lease cancellation costs relating to consolidating the
Tucson Space Division into the Technology Center. These increases are offset
by a decrease of approximately $800,000 primarily due to the management of
travel and other selling and administrative costs.
Research and development. Internally funded research and development
expenses increased approximately $1,596,000 or 178.6% from 1996 to 1997.
Approximately $2,593,000 of the increase is related to the Company's decision
to recognize certain capitalized product development costs in fiscal year 1997
rather than amortizing the costs over future years' revenue based on the
uncertainty of future sales. These costs related primarily to Beacon's 20C1000
Cable/Telecom Flywheel system development efforts and the ISAM product. These
costs are partially offset by the reversal of a reserve for a fiscal year 1996
dispute over contractual terms. Management believes that the reserve is no
longer necessary and that the financial statements properly reflect the
ultimate impact of this matter.
Goodwill amortization. The Company recognized approximately $120,000 of
goodwill amortization in 1997 related to goodwill in connection with the
acquisition of MagMotor and FMI.
Interest income, net. Interest income, net decreased approximately $195,000
or 37.0% from 1996 to 1997. The decrease is primarily the result of the
decrease in marketable securities of approximately $1,459,000 or 42.5% from
1996 to 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's cash and cash equivalents were
approximately $1,202,000, a decrease of approximately $3,055,000 from
September 30, 1997. Cash used in operating activities during 1998 was
approximately $2,383,000 as compared to cash used in operating activities of
approximately $3,482,000 during fiscal year 1997. This was primarily the
result of an increase in inventory related to the introduction of new standard
products.
Cash used in investing activities, as of September 30, 1998, was
approximately $2,261,000. This relates primarily to the investment in Beacon
and capital expenditures of manufacturing and inspection equipment. This was
partially offset by the sale and maturity of approximately $1,341,000 of
marketable securities.
Cash provided by financing activities as of September 30, 1998, was
approximately $1,590,000. This relates primarily to proceeds from the exercise
of options and warrants to purchase common stock.
On December 16, 1998, the Company obtained a $2,000,000 discretionary demand
line of credit (the "Line of Credit"), bearing interest at the bank's prime
rate of interest plus 1 1/2%. Available borrowings are based on a formula of
eligible accounts receivable and inventory and will be used for capital
expenditures, working capital and general corporate purposes.
The Company anticipates that existing cash resources, cash flow from
operations and the Line of Credit will be sufficient to fund its operations at
least through September 30, 1999 and to repurchase up to 5 percent of the
Company's outstanding shares under a stock repurchase program (the "Repurchase
Program") provided that
14
the Company meets its operating plan. Under the Repurchase Program, the
Company plans to purchase shares of its Common Stock on the open market from
time to time, depending on market conditions. 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 payment terms with vendors and
collections of accounts receivable. 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 will be sufficient to meet its operating
requirements or that additional debt or equity financing will be available on
terms acceptable to the Company, or at all.
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 of 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.
On October 23, 1998, the Company entered into a Securities Purchase
Agreement, by and among Beacon Power Corporation ("Beacon"), Perseus Capital
L.L.C. ("Perseus"), Duquesne Enterprises ("Duquesne") Micro Generation
Technology Fund, L.L.C. ("Micro", and together with Perseus and Duquesne the
"Purchasers") and the Company. Pursuant to the terms of the agreement, (i) the
Purchasers purchased from Beacon and Beacon issued, sold and delivered to the
Purchasers 1,900,000 shares (the "Shares") of Beacon's Class D Preferred
Stock, $.01 par value per share; (ii) the Purchasers have the right to receive
certain warrants to purchase shares of Beacon's common stock, $.01 par value
per share (Beacon's Common Stock"); (iii) the Company granted the Purchasers
the right (the "Put Right") to cause the Company, in circumstances described
below, to purchase all of the Shares and all of Beacon's Common Stock issuable
upon conversion of the Shares; and (iv) upon exercise of the Put Right
pursuant to the terms of the agreement, the Company must pay the consideration
contemplated by the agreement in shares of the Company's Common Stock, valued
at the average fair value for the fifteen trading days before and after notice
of exercise of the Put Right. The aggregate consideration received by Beacon
was $4,750,000. The Put Right is exercisable within sixty days of the second,
third, forth and fifth anniversary of the closing date of the transaction,
upon certain events of bankruptcy of Beacon and upon the occurrence of certain
going private transactions involving the Company. If the Put Right were to be
exercised, the Company would most likely recognize a loss equal to the value
of the Company's shares issued upon exercise of the Put Right.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 is effective for fiscal years beginning after
December 15, 1997 and requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The Company will adopt SFAS 130 beginning in the first
quarter of the fiscal year ending September 30, 1999.
15
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information." SFAS is effective for fiscal years beginning after December 15,
1997 and establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products and
services, geographical areas and major customers. The Company will adopt SFAS
131 beginning in the first quarter of the fiscal year ending September 30,
1999.
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 is effective for fiscal years beginning after June 15,
1999 and establishes a new model for accounting for derivatives and hedging
activities. The Company will adopt SFAS 133 beginning in the first quarter of
the fiscal year ending September 30, 2000.
Adoption of SFAS 130, SFAS 131 and SFAS 133 are not expected to have a
material impact to the Company's consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and
content of its disclosures.
EFFECTS OF INFLATION
The Company believes that inflation over the past three years has not had a
significant impact on the Company's revenue or operating results.
EFFECTS OF YEAR 2000
The year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Certain computer programs that have date-sensitive software and use two digits
only may recognize a date using "00" as the year 1900 rather than the year
2000.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the Y2K software failures and has established a project
team to address the Y2K risks. The project team has coordinated the
identification of, and will coordinate the implementation of, changes to
computer hardware and software applications that will attempt to ensure
availability and integrity of the Company's information systems and the
reliability of its operational systems and manufacturing processes. The
Company is also assessing the potential overall impact of Y2K on its business,
results of operations and financial position.
The Company has reviewed its information and operational systems and
manufacturing processes in order to identify those products, services or
systems that are not Y2K compliant. As a result of this review, the Company
has determined that it will be required to modify or replace certain
information and operational systems so that they will be Y2K compliant. These
modifications and replacements are being, and will continue to be, made in
conjunction with the Company's overall system initiatives. The total cost of
these Y2K compliance measures has not been, and is not anticipated to be,
material to the Company's financial position or its results of operations. The
Company expects to complete its Y2K project during fiscal year 1999. Based on
available information, the Company does not believe any material exposure to
significant business interruption exists as a result of Y2K compliance issues.
Accordingly, the Company has not adopted any formal contingency plan in the
event its Y2K project is not completed in a timely manner. These costs and the
timing in which the Company plans to complete its Y2K modifications and
testing processes are based on management's best estimates. However, there can
be no assurance that the Company will timely identify and remediate all
significant Y2K problems, that remedial efforts will not involve significant
time and expense or that such problems will not have a material adverse effect
on the Company's business, results of operations or financial position.
The Company also faces risks to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the Company
transacts business do not comply with the Y2K requirements. The Company is
identifying significant suppliers and customers to determine the extent to
which the Company is vulnerable to these third parties' failure to remediate
their own Y2K issues. In the event any such third party
16
cannot provide the Company the products, services or systems that meet the Y2K
requirements on a timely basis, the Company's results of operations could be
materially and adversely affected. To the extent Y2K issues cause significant
delays in, or cancellation of, decisions to purchase the Company's products or
services, the Company's business, results of operations or financial position
would be materially adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company maintains an investment portfolio consisting of debt securities
of various issuers, types and maturities. These securities are classified as
available for sale, and consequently are recorded on the balance sheet at
market value, with the unrealized gain or loss recorded through the equity
section. These instruments are not leveraged, and are not held for purposes of
trading.
The following table summarizes derivative financial instruments included in
marketable securities held by the Company at September 30, 1998, which are
sensitive to changes in interest rates:
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------
TOTAL TOTAL
FACE FAIR
DESCRIPTION 1999 2000 2001 2002 2003 THEREAFTER VALUE VALUE
- ----------- ------ ------ ------ ------ ------ ---------- -------- --------
Floater................. $350,000 $350,000 $325,500
Average Interest Rate. 5.7% 5.7% 5.7% 5.7% 5.7% 5.7%
CMO..................... $ 70,614 $ 70,614 $ 73,492
Average Interest Rate. 5.4% 5.4% 5.4% 5.4% 5.4% 5.4%
Structured Notes........ $250,000 $250,000 $258,439
Average Interest Rate. 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
17
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
PAGE
----
Report of Independent Accountants......................................... 19
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 and 1997........... 20
Consolidated Statements of Operations for the Years Ended September 30,
1998, 1997, and 1996................................................... 21
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1998, 1997, and 1996............................... 22
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997, and 1996................................................... 23
Notes to Consolidated Financial Statements.............................. 24
Schedule II; Valuation and Qualifying Accounts for the Years Ended Sep-
tember 30, 1998, 1997, and 1996........................................ 40
18
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of SatCon Technology Corporation and its subsidiaries at September
30, 1998 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
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 of these statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 17, 1998 except as to the information in Note R, for which the date
is January 4, 1999
19
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,201,610 $ 4,256,504
Marketable securities (Note B)................... 657,431 1,976,400
Accounts receivable, net of allowance of $51,836
in 1998 and $159,243
in 1997......................................... 3,347,405 2,965,559
Unbilled contract costs, net of allowance of
$57,611 in 1998 and $1,130,468
in 1997 (Note C)................................ 1,196,318 1,709,826
Inventory (Note D)............................... 3,678,067 1,577,483
Prepaid expenses and other assets................ 358,308 416,926
Amounts due from related party (Note F).......... 596,453 --
----------- -----------
Total current assets........................... 11,035,592 12,902,698
Property and equipment, net (Note E)............... 2,677,786 4,784,355
Intangibles, net (Note P).......................... 2,967,988 2,992,659
Investment in Beacon Power Corporation (Note F).... 1,458,183 --
Other assets....................................... 27,041 29,726
----------- -----------
Total assets................................... $18,166,590 $20,709,438
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 1,447,897 $ 850,208
Accrued payroll and payroll related expenses..... 352,701 392,235
Deferred revenue................................. 197,930 191,128
Accrued costs for consolidation of facilities
(Note H)........................................ 100,000 498,000
Other accrued expenses........................... 285,999 290,049
Current portion of long-term debt (Note G)....... 146,594 85,784
----------- -----------
Total current liabilities...................... 2,531,121 2,307,404
Long-term liabilities:
Note Payable..................................... -- 6,737
Long-term debt (Note G).......................... 221,462 316,160
----------- -----------
Total long-term liabilities.................... 221,462 322,897
Commitments and contingencies (Note H).............
Stockholders' equity:
Preferred stock; $.01 par value, 1,000,000 shares
authorized; none issued
and outstanding (Note L)........................ -- --
Common stock, $.01 par value, 15,000,000 shares
authorized; 9,018,549 and 8,769,146 shares is-
sued at September 30, 1998 and 1997, respec-
tively
(Note K)........................................ 90,185 87,691
Additional paid-in capital....................... 28,377,718 26,576,600
Retained earnings/(deficit)...................... (12,870,440) (8,564,939)
Net unrealized losses on marketable securities,
net of tax effect (Note B)...................... (10,380) (20,215)
Treasury stock, at cost; 28,300 and 0 shares at
September 30, 1998 and 1997, respectively....... (173,076) --
----------- -----------
Total stockholders' equity..................... 15,414,007 18,079,137
----------- -----------
Total liabilities and stockholders' equity... $18,166,590 $20,709,438
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
20
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenue................................. $15,485,923 $12,466,335 $ 9,384,588
----------- ----------- -----------
Cost of revenue......................... 10,991,202 10,071,150 6,394,830
Selling, general and administrative ex-
penses................................. 4,787,070 6,197,951 5,569,285
Research and development expenses....... 346,161 2,489,207 893,628
Goodwill amortization................... 290,957 120,467 --
----------- ----------- -----------
Total operating expenses................ 16,415,390 18,878,775 12,857,743
Operating loss.......................... (929,467) (6,412,440) (3,473,155)
Loss from Investment in Beacon Power
Corporation............................ (3,541,817) -- --
Interest income, net.................... 169,655 269,198 463,840
----------- ----------- -----------
Net loss before income taxes............ (4,301,629) (6,143,242) (3,009,315)
Provision/(benefit) for income taxes.... 3,872 -- (144,479)
----------- ----------- -----------
Net loss................................ $(4,305,501) $(6,143,242) $(2,864,836)
=========== =========== ===========
Net loss per weighted average share, ba-
sic and diluted........................ $ (.48) $ (.77) $ (.39)
=========== =========== ===========
Weighted average number of common
shares, basic and diluted.............. 8,956,671 7,959,309 7,285,756
The accompanying notes are an integral part of the consolidated financial
statements.
21
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
NET
UNREALIZED
ADDITIONAL RETAINED LOSS ON TOTAL
COMMON COMMON PAID-IN EARNINGS / MARKETABLE TREASURY TREASURY STOCKHOLDERS'
SHARES STOCK CAPITAL (DEFICIT) SECURITIES SHARES STOCK EQUITY
--------- ------- ----------- ------------ ---------- -------- --------- -------------
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 op-
tions.................. 192,473 1,925 202,723 204,648
Change in net unrealized
losses on marketable
securities............. 6,641 6,641
--------- ------- ----------- ------------ -------- ------ --------- -----------
Balance, September 30,
1996................... 7,359,074 $73,591 $18,487,209 $ (2,421,697) $(39,935) -- -- $16,099,168
Net Loss................ (6,143,242) (6,143,242)
Exercise of stock op-
tions.................. 161,934 1,619 408,390 410,009
Change in net unrealized
losses on marketable
securities............. 19,720 19,720
Stock issued in acquisi-
tion
(Note P)............... 450,000 4,500 2,871,750 2,876,250
Securities purchase
agreement (Note F)..... 798,138 7,981 4,809,251 4,817,232
--------- ------- ----------- ------------ -------- ------ --------- -----------
Balance, September 30,
1997................... 8,769,146 $87,691 $26,576,600 $ (8,564,939) $(20,215) -- -- $18,079,137
Net loss................ (4,305,501) (4,305,501)
Exercise of stock op-
tions.................. 100,266 1,003 580,736 581,739
Exercise of warrants.... 149,137 1,491 1,220,382 1,221,873
Treasury stock pur-
chased................. 28,300 $(173,076) (173,076)
Change in net unrealized
losses on marketable
securities............. 9,835 9,835
--------- ------- ----------- ------------ -------- ------ --------- -----------
Balance, September 30,
1998................... 9,018,549 $90,185 $28,377,718 $(12,870,440) $(10,380) 28,300 $(173,076) $15,414,007
========= ======= =========== ============ ======== ====== ========= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
22
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net loss.............................. $(4,305,501) $(6,143,242) $(2,864,836)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization..... 676,240 969,010 820,991
Allowance for unbilled contract
costs............................ (19,065) 697,968 366,000
Allowance for doubtful accounts... (94,424) 28,324 --
Write off impaired assets......... 50,104 2,593,558 --
Loss from Investment in Beacon
Power
Corporation...................... 3,541,817 -- --
Changes in operating assets and
liabilities:
Accounts receivable............. (318,859) 535,797 (905,787)
Prepaid expenses and other as-
sets........................... (11,860) 62,174 222,821
Unbilled contract costs......... 532,573 (749,462) (532,886)
Inventory....................... (2,117,372) (403,302) --
Other assets.................... (607,245) 212,339 (221,772)
Accounts payable................ 597,689 (385,868) (19,907)
Accrued costs for consolidation
of facilities.................. (398,000) 498,000 --
Accrued expenses and payroll.... 90,516 (1,396,970) 236,225
Deferred income taxes........... -- -- (173,283)
----------- ----------- -----------
Total adjustments................... 1,922,114 2,661,568 (207,598)
----------- ----------- -----------
Net cash used in operating activities... (2,383,387) (3,481,674) (3,072,434)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities.... -- (600,000) (1,450,000)
Sales and maturities of marketable se-
curities............................. 1,340,609 2,079,064 8,407,185
Patent and intangible expenditures.... (522,483) (150,534) (156,843)
Deferred financing fees............... -- 56,313 (56,313)
Capital expenditures.................. (1,021,478) (2,496,726) (2,293,305)
Acquisitions, net of cash acquired.... -- (112,986) --
Investment in Beacon Power Corpora-
tion................................. (2,058,066) -- --
----------- ----------- -----------
Net cash (used in)/provided by investing
activities............................. (2,261,418) (1,224,869) 4,450,724
----------- ----------- -----------
Cash flows from financing activities:
Repayment of borrowings............... (40,625) (35,119) --
Proceeds from exercise of stock op-
tions................................ 581,739 410,009 204,648
Proceeds from exercise of warrants.... 1,221,873 -- --
Proceeds from issuance of common
stock................................ -- 4,817,232 --
Purchase of treasury stock............ (173,076) -- --
----------- ----------- -----------
Net cash provided by financing activi-
ties................................... 1,589,911 5,192,122 204,648
----------- ----------- -----------
Net (decrease)/increase in cash and cash
equivalents............................ (3,054,894) 485,579 1,582,938
Cash and cash equivalents at beginning
of year................................ 4,256,504 3,770,925 2,187,987
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 1,201,610 $ 4,256,504 $ 3,770,925
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
23
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED 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 itself and through its subsidiaries, designs, develops,
manufacturers and sells hardware and software systems relating to energy
storage, energy conservation and power management with an emphasis on
environmentally friendly approaches.
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. SatCon can then leverage this
funding to develop products that the Company believes can both be sold to
government agencies and transition into high volume commercial products.
Recent changes in the SBIR 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.
Basis of Consolidation
The consolidated financial statements include the accounts of SatCon and its
majority-owned subsidiaries. All inter-company accounts and transactions have
been eliminated.
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. Revenue 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 revenue 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.
The Company also designs and manufactures standard products such as multi-
chip modules and hybrids, custom electric motors, and integrated suspension
and motor systems. Revenue from product sales is recognized upon shipment.
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, 1997, $67,632 of cash and cash equivalents was 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 Standard No. 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.
24
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities available for sale are carried at fair value, based on quoted
market prices, with the unrealized gains and losses, net of tax effect,
reported in a separate component of stockholders' 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, 1998 and 1997, 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. At September
30, 1997, $600,000 of marketable securities was reserved as collateral for an
operating lease.
Inventory
Inventories are stated at the lower of cost or market and costs are
determined based on the first-in, first-out method of accounting.
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. The estimated
useful lives of property and equipment are as follows:
ESTIMATED LIVES
---------------
Computer equipment and software................ 3-5 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......................... 7-10 Years
Leasehold improvements......................... Lesser of the life of the
lease or the useful life of
the improvement
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.
Long-Lived Assets
The Company periodically evaluates the potential impairment of its long-
lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. At the occurrence of a
certain event or change in circumstances or at each balance sheet date, the
Company evaluates the potential impairment of an asset based on future
undiscounted cash flows. In the event impairment exists, the Company will
measure the amount of such impairment based the present value of estimated
future cash flows using a discount rate commensurate with the risks involved.
Factors which management considers in performing this assessment include
current operating results, trends and prospects and, in addition, demand,
competition and other economic factors.
Intangibles, which consist primarily of patents and trademarks, goodwill and
a non-compete agreement, are amortized on a straight-line basis over periods
ranging from 5 to 15 years. At September 30, 1998 and 1997, accumulated
amortization of intangibles amounted to $442,237 and $138,563, respectively.
25
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenue
Deferred revenue consists of payments received from customers in advance of
services performed.
Treasury Stock
The Company is authorized to repurchase up to 5 percent of the Company's
outstanding shares through July 2000. Under the repurchase program, the
Company plans to purchase shares on the open market from time-to-time,
depending on market conditions. The Company's repurchase of shares of common
stock are recorded as "Treasury stock" and result in a reduction of
"Stockholders' equity."
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period
reported. Actual results could differ from these estimates.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109 ("SFAS 109"), "Accounting for Income
Taxes," which requires a balance sheet approach for accounting and reporting
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. In addition, SFAS 109 requires a
valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. The Company, as required under the
Internal Revenue Code of 1986, as amended ("the Code"), has switched from the
cash to accrual method for tax reporting purposes.
Income/(Loss) per Basic and Diluted Common Share
The Company reports net income/(loss) per basic and diluted common share in
accordance with Statement of Financial Accounting Standard No. 128 ("SFAS
128"), "Earnings Per Share," which establishes standards for computing and
presenting earnings per share. Basic earnings per share excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
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 several 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 two regional commercial banks and an
investment company. Credit exposure to any one entity is limited by Company
policy.
26
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentations.
B. MARKETABLE SECURITIES
At September 30, 1998 and 1997, marketable securities have been categorized
as available for sale, and as a result, are stated at fair value.
As of September 30, 1998 marketable securities consist of the following:
AMORTIZED AGGREGATE GROSS GROSS
COST FAIR UNREALIZED UNREALIZED
SECURITY CATEGORY BASIS VALUE GAINS LOSSES
----------------- --------- --------- ---------- ----------
Corporate debt securities........ $597,197 $583,939 $ 8,149 $(21,407)
Mortgage-backed securities....... 70,614 73,492 2,878 --
-------- -------- ------- --------
$667,811 $657,431 $11,027 $(21,407)
======== ======== ======= ========
As of September 30, 1997 marketable securities consist of the following:
GROSS GROSS
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
SECURITY CATEGORY COST BASIS FAIR VALUE GAINS LOSSES
----------------- ---------- ---------- ---------- ----------
Corporate debt securities..... $ 597,178 $ 568,000 -- $(29,178)
Debt securities issued by U.S.
Government and its agencies.. 1,301,396 1,296,063 -- (5,333)
Mortgage-backed securities.... 111,518 112,337 $819 --
---------- ---------- ---- --------
$2,010,092 $1,976,400 $819 $(34,511)
========== ========== ==== ========
The contractual maturities of debt securities available for sale at
September 30, 1998 are as follows:
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
---------- ----------
Due within one year.................................. -- --
Due after one year through five years................ $250,290 $258,439
Due after five years through 10 years................ 70,614 73,492
Due after 10 years................................... 346,907 325,500
-------- --------
$667,811 $657,431
======== ========
The change in net unrealized holding losses during fiscal year 1998, 1997
and 1996 were $23,312, $32,866, and $66,558, respectively, and are included in
the balance sheet in a separate component of stockholders' equity, net of tax
effect.
Proceeds from sales and maturities of marketable securities during fiscal
year 1998, 1997 and 1996 were $1,340,609, $2,079,064, and $8,407,185,
respectively. Gross realized losses from the sale of securities classified as
available for sale during fiscal year 1998, 1997 and 1996 were $0, $0, and
$1,461, respectively.
C. UNBILLED CONTRACT COSTS
Unbilled contract costs represent revenue recognized in excess of amounts
billed due to contractual provisions. These amounts include retained fee and
un-liquidated costs totaling $363,087 and $493,565 at September 30, 1998 and
1997, respectively. It is anticipated that substantially all of these unbilled
amounts will be collected during the fiscal year ending September 30, 1999.
27
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
D. INVENTORY
Inventory consists of the following:
SEPTEMBER 30,
---------------------
1998 1997
---------- ----------
Raw material......................................... $1,783,803 $ 651,460
Work-in-process...................................... 1,788,241 637,657
Finished goods....................................... 106,023 288,366
---------- ----------
$3,678,067 $1,577,483
========== ==========
E. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30,
---------------------
1998 1997
---------- ----------
Machinery and equipment.............................. $3,493,435 $3,251,193
Sales and demonstration equipment.................... 19,052 2,115,921
Furniture and fixtures............................... 265,173 261,478
Computer software.................................... 556,876 529,788
Leasehold improvements............................... 524,539 496,977
---------- ----------
4,859,075 6,655,357
Less accumulated depreciation and amortization....... 2,181,289 1,871,002
---------- ----------
$2,677,786 $4,784,355
========== ==========
Depreciation expense for the fiscal years ended September 30, 1998, 1997,
and 1996 was $540,213, $736,924, and $817,539, respectively.
As of September 30, 1998, there was no equipment under capital leases. There
was $29,650 of the $3,251,193 machinery and equipment related to a capital
lease as of September 30, 1997. The associated accumulated depreciation was
$13,837 at September 30, 1997.
During 1997, the Company determined that certain of its machinery and
equipment totaling $2,593,558 was impaired based on a change in the needs of
its customers and such assets were written off during fiscal year 1997.
F. INVESTMENT IN BEACON POWER CORPORATION
On May 28, 1997, SatCon Technology Corporation entered into a Securities
Purchase Agreement (the "Agreement"), dated as of May 28, 1997, by and among
the Company, Beacon Power Corporation ("Beacon"), a new wholly-owned
subsidiary of the Company, and Duquesne Enterprises ("Duquesne"). Pursuant to
the terms of the Agreement, Duquesne purchased from the Company and the
Company issued, sold and delivered to Duquesne 798,138 shares (the "Shares")
of the Company's Common Stock. Duquesne also received warrants (the "Beacon
Warrant") to purchase 500,000 shares of Beacon's Common Stock, $.01 par value
per share ("Beacon's Common Stock"), at a purchase price of $6.00 per share.
The warrants expire on the earlier of May 28, 1999 and 30 days prior to the
filing of a registration statement with respect to Beacon's Common Stock. The
aggregate consideration received by the Company was $5,000,000. In exchange
for certain fixed assets and a capital contribution, the Company received all
of the capital stock of Beacon, consisting of 3,000,000 shares of Beacons'
Common Stock and 1,000,000 shares of Beacon's preferred stock, par value $.01
per share ("Beacon's
28
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock"). Beacon's Preferred Stock is convertible into shares of
Beacon's Common Stock automatically upon the exercise of the Beacon Warrant by
Duquesne. Duquesne also entered into agreements pursuant to which it will act
as exclusive distributor of Beacon's products, subject to certain exceptions,
in seven Mid-Atlantic States and the District of Columbia. Duquesne is also
entitled to purchase sufficient securities in future Beacon equity financings
to increase its ownership in Beacon to 20% of the voting securities of Beacon
(assuming the Beacon Warrant is exercised). The foregoing purchase right
expires (i) upon the expiration of the Beacon Warrant if the Beacon Warrant is
not exercised in full; or (ii) if the Beacon Warrant is exercised in full,
upon the closing of an initial public offering of Beacon's Common Stock. The
consolidated financial statements included the accounts of Beacon and all
wholly-owned subsidiaries.
During a recapitalization of Beacon on December 24, 1997, Beacon obtained
equity financing from private investors and the Company converted a
significant portion of its ownership of Beacon to convertible preferred stock.
The Company retained approximately 19.9% of Beacon's outstanding voting stock.
Although the Company owned less than 20% of the outstanding voting stock of
Beacon, based on other factors there was a presumption that the Company had
the ability to exercise significant influence, and the equity method was
required for the fair presentation subsequent to this recapitalization. The
impact on the consolidated financial statements at December 24, 1997 was as
follows:
Accounts Receivable.......................................... $ (31,437)
Inventory.................................................... (16,788)
Prepaid expenses and other assets............................ (70,478)
Property and Equipment, net.................................. (2,859,572)
Intangibles, net............................................. (90,957)
Accrued payroll and payroll related expenses................. 32,298
Deferred revenue............................................. 95,000
Cash......................................................... (2,058,066)
-----------
Investment in Beacon Power Corporation....................... $ 5,000,000
===========
At September 30, 1998, the Company had amounts of $596,453 due from Beacon.
These amounts arose from transactions after December 24, 1997, whereby the
Company advanced money and made payments for certain expenses incurred by
Beacon. Such amounts were subsequently repaid in connection with the October
23, 1998 financing.
On October 23, 1998, the Company entered into a Securities Purchase
Agreement, by and among Beacon, Perseus Capital, L.L.C. ("Perseus"), Duquesne,
Micro Generation Technology Fund, L.L.C ("Micro", and together with Perseus
and Duquesne the "Purchasers") and the Company. Pursuant to the terms of the
Agreement, (i) the Purchasers purchased from Beacon and Beacon issued, sold
and delivered to the Purchasers 1,900,000 shares (the "Shares") of Beacon's
Class D Preferred Stock, $.01 par value per share; (ii) the Purchasers have
the right to receive certain warrants to purchase shares of Beacon's common
stock, $.01 par value per share ("Beacon's Common Stock"); (iii) the Company
granted the Purchasers the right (the "Put Right") to cause the Company, in
circumstances described below, to purchase all of the Shares and all of
Beacon's Common Stock issuable upon conversion of the Shares; and (iv) upon
exercise of the Put Right pursuant to the terms of the Agreement, the Company
must pay the consideration contemplated by the Agreement in shares of the
Company's common stock, $.01 par value per share, valued at the average fair
value for the fifteen trading days before and after notice of exercise of the
Put Right. The aggregate consideration received by Beacon was $4,750,000. The
Put Right is exercisable within sixty days of the second, third, forth and
fifth anniversary of the closing date of the transaction, upon certain events
of bankruptcy of Beacon and upon the occurrence of certain going private
transactions involving the Company. If the Put Right were to be exercised, the
Company would most likely recognize a loss equal to the value of the Company's
shares issued upon exercise
29
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the Put Right. The Company retained approximately 19.9% of Beacon's
outstanding voting stock. Accordingly, as a result of the third-party
financing obtained on October 23, 1998 the Company's remaining investment in
Beacon from October 23, 1998 going forward will be accounted for on a cost
basis.
The Company will continue to review its investment in Beacon. While the
Company continues to be optimistic regarding the long term prospects for
Beacon and the flywheel technology, Beacon has not yet successfully introduced
a flywheel product and will need substantial additional financing to continue
its operations. If in the future the Company determines that its investment in
Beacon does not have any remaining value, the Company would take appropriate
actions to write-off the remaining cost of its investment.
G. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30,
-------------------
1998 1997
--------- --------
Note payable due in 52 weekly payments. The total
note of $443,804 commenced on April 16, 1997....... $ 368,056 $401,944
Less: Current Portion............................... (146,594) (85,784)
--------- --------
$ 221,462 $316,160
========= ========
Long-term debt maturities payable for the five years and thereafter
subsequent to September 30, 1998 are as follows:
1999.............................................................. $146,594
2000.............................................................. 221,462
2001.............................................................. --
2002.............................................................. --
2003 and thereafter............................................... --
--------
$368,056
========
H. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases 45,820 square feet of office and laboratory space at 161
First Street, Cambridge, Massachusetts under a primary lease expiring on
October 31, 2003 and 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 also leases approximately 14,757 square feet of
office and manufacturing space at 530 Turnpike Street, North Andover,
Massachusetts under a primary lease expiring on July 31, 2002 and
approximately 17,000 square feet at 121 Higgins Street, Worcester,
Massachusetts under a primary lease expiring on March 31, 2003.
Effective November 5, 1997, the Company entered into an agreement to sub-
lease 8,930 square feet at 161 First Street to a third party and effective
July 15, 1998, the Company entered into an agreement to sub-lease an
additional 3,952 square feet at 161 First Street to the same third party.
The Company has also entered into a master leasing agreement to lease
various items of equipment not to exceed $600,000. At September 30, 1998,
approximately $428,000 of this facility has been utilized.
30
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum annual rentals under all lease agreements at September 30,
1998 are as follows:
FISCAL YEAR
-----------
1999............................................................. $1,227,529
2000............................................................. 1,253,658
2001............................................................. 1,307,326
2002............................................................. 1,233,922
2003............................................................. 1,002,424
Thereafter....................................................... 79,687
----------
Total (not reduced by minimum sublease rentals of $448,657).... $6,104,546
==========
Total rental expense including operating expenses and real estate taxes for
operating leases amounted to $1,235,867, $1,245,238, and $1,000,802 for the
years ended September 30, 1998, 1997 and 1996, respectively.
In the fourth quarter of fiscal 1997, the Company decided to consolidate its
operating facility in Tucson, AZ back to Cambridge, MA. As a result, the
Company accrued approximately $498,000 primarily related to the buyout of the
facility lease. At September 30, 1998, the Company had a reserve of $100,000,
primarily related to the lease cancellation costs.
I. EMPLOYEE BENEFIT PLAN
The Company offers a 401(k) Employee Benefit Plan (the "Plan"). Under the
Plan, any regular employee, as defined by the Plan, who has completed six
months of service and has attained the age of 21 years is eligible to
participate. Under the terms of the Plan, an employee may defer up to 15% of
his or her compensation through contributions to the Plan. The Company made
matching contributions to the Plan of $86,883, $133,018 and $128,458 during
fiscal year 1998, 1997 and 1996, respectively.
J. INCOME TAXES
The provision for income taxes consists of the following:
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Current payable:
Federal........................... -- -- $ 9,775
State............................. $ 3,872 -- --
----------- ----------- -----------
3,872 -- 9,775
Deferred tax expense/(benefit):
Federal........................... $(1,349,519) $(1,823,584) $(1,853,352)
State............................. (404,950) (680,530) 37,769
Change in valuation allowance..... 1,754,469 2,504,114 1,661,329
----------- ----------- -----------
-- -- (154,254)
----------- ----------- -----------
$ 3,872 -- $ (144,479)
=========== =========== ===========
31
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
1998 and 1997, the components of the net deferred tax assets/(liabilities) are
as follows:
1998 1997
----------- -----------
Accrual to cash adjustment...................... -- $(1,175,626)
Federal net operating loss...................... $ 3,563,810 3,176,307
State net operating loss, net of federal bene-
fit............................................ 574,613 533,120
Unrealized losses on marketable securities...... 4,116 13,568
Credits......................................... 455,982 183,728
Depreciation.................................... 15,318 407,537
Loss on Investment in Beacon Power Corporation.. 1,404,347 --
Other........................................... 189,152 363,334
Valuation allowance............................. (6,207,338) (3,501,968)
----------- -----------
Net deferred income taxes....................... -- --
=========== ===========
A decrease in net deferred tax assets and a decrease in the valuation
allowance in the amount of approximately $541,000 each has been made to
account for the recapitalization of Beacon Power Corporation during fiscal
year ended September 30, 1998.
The provision for income taxes differs from the Federal statutory rate due
to the following:
FOR THE YEARS
ENDED
SEPTEMBER 30,
---------------------
1998 1997 1996
----- ----- -----
Tax at statutory rate... (34.0)% (34.0)% (34.0)%
State taxes--net of fed-
eral benefit........... (6.2) (7.3) (0.8)
Other................... (0.5) .6 2.1
Change in valuation al-
lowance................ 40.8 40.7 27.9
----- ----- -----
Effective tax rate...... 0.1 % -- % (4.8)%
===== ===== =====
At September 30, 1998, the Company had net operating loss carry-forwards of
approximately $10,480,000 and $9,160,000 for federal and state income tax
purposes, respectively, of which approximately $1,900,000 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, 2008
through 2018. The state net operating losses will expire beginning September
30, 1999 through 2003. The use of these losses may be limited due to ownership
change limitations under Section 382 of the Code.
K. STOCKHOLDERS' EQUITY
Stock Options
Under the Company's 1986 Stock Option Plan, both qualified and non-qualified
stock options may be granted to certain officers and key employees. Options
under the 1986 Plan become exercisable as vested over four years, and expired
December 31, 1996. At September 30, 1998 and 1997, all of the 553,196 stock
options available for grant under the Company's 1986 Stock Option Plan have
been granted.
32
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1992, the Company adopted its 1992 Stock Option Plan that provides
for the grant to employees, officers, directors and consultants of qualified
and non-qualified stock options to purchase up to 450,000 shares of the
Company's common stock. At September 30, 1998 and 1997, 449,699 and 449,199,
respectively, of the 450,000 stock options available for grant under the
Company's 1992 Stock Option Plan have been granted.
In February 1994, the Company adopted its 1994 Stock Option Plan that 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 non-qualified stock options to purchase up to 300,000 shares of
the Company's common stock. At September 30, 1998 and 1997, 291,532 and
293,033, respectively, of the 300,000 stock options available for grant under
the Company's 1994 Stock Option Plan have been granted.
During fiscal year 1996, the Company adopted its 1996 Stock Option Plan that
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, 1998 and 1997, 257,750 and
113,000 respectively, of the 300,000 stock options available for grant under
the Company's 1996 Stock Option Plan have been granted.
During fiscal year 1998, the Company adopted its 1998 Stock Option Plan that
provides for the grant to employees, officers, directors and consultants for
qualified and non-qualified stock options to purchase up to 500,000 shares of
the Company's common stock. At September 30, 1998, 120,000 of the 500,000
stock options available for grant under the Company's 1998 Stock Option Plan
have been granted.
The 1986, 1992, 1994, 1996, and 1998 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 qualified options may not exceed $100,000. No
person who owns, directly or indirectly, at the time of the granting of a
qualified 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
qualified options under the Plans unless the 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. Non-qualified options are not subject to this limitation.
Qualified options are issued only to employees of the Company, while non-
qualified options may be issued to non-employee 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. Qualified options granted under the Plans cannot be
exercised more than 10 years from the date of grant except that qualified
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 antidilutive 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.
33
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's stock option plans as of September
30, 1998, 1997 and 1996 and changes for the years then ended are presented
below.
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning
of year................ 700,427 $ 8.44 713,392 $ 7.08 904,503 $ 5.91
Granted............... 319,000 11.20 144,000 8.97 20,000 7.00
Exercised............. (100,266) 5.80 (144,466) 2.25 (185,773) .91
Canceled.............. (98,251) 10.55 (12,499) 10.71 (25,338) 10.39
-------- -------- --------
Outstanding at end of
year................... 820,910 $ 9.58 700,427 $ 8.44 713,392 $ 7.08
======== ======== ========
Options exercisable at
year-end............... 413,403 $ 8.48 503,660 $ 8.14 579,776 $ 6.49
The following table summarizes information about stock options outstanding
as of September 30, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- --------- -------- ----------- --------
$5.00--$7.81 166,261 4.7 $5.84 159,761 $5.78
$8.75--$10.50 304,899 6.9 9.49 198,642 9.56
$11.00--$13.38 349,750 9.0 11.44 55,000 12.43
------- --- ----- ------- -----
$5.00--$13.38 820,910 7.3 $9.58 413,403 $8.48
======= =======
An additional 431,019 and 194,768 shares were available for future grants at
September 30, 1998 and 1997, respectively.
All outstanding options vest at various rates over periods up to four years
and expire at various dates from November 30, 2002 to July 24, 2008.
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 were exercisable
at a price of $5.25 per share and expired in March 1997. At September 30,
1998, all 33,500 options have been exercised.
Warrants
In connection with its initial public offering in November 1992, the Company
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. In November 1997,
such warrants were exercised for a total of $1,221,873. The remainder of the
warrants expired on November 11, 1997.
On June 5, 1998, the Company issued to certain individuals, in settlement of
a claim asserted against the Company, Common Stock Purchase Warrants to
purchase up to 63,848 shares of common stock at an exercise price of $11.43
per share. These warrants expire on November 11, 1999. At September 30, 1998,
none of these warrants have been exercised.
34
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 11, 1998, the Company issued to certain individuals, who
formerly held warrants issued by the Company in connection with the Company's
initial public offering in November 1992, Common Stock Purchase Warrants to
purchase up to 67,125 shares of the Company's Common Stock at an exercise
price of $11.43 per share. These warrants expire on November 11, 1999.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 is
effective for periods beginning after December 15, 1995. SFAS 123 requires
that companies either recognize compensation expense for grants of stock,
stock options, and other equity instruments based on fair value, or provide
pro forma disclosure of net income and earnings per share in the notes to the
financial statements. The Company adopted the disclosure provisions of SFAS
123 for year ended September 30, 1997 and has applied APB Opinion 25 and
related interpretations in accounting for its plans. There were no
compensation costs recognized in fiscal year ended September 30, 1998, 1997
and 1996.
Had compensation cost for the Company's stock-based compensation plans been
determined based on fair value at the grant dates as calculated in accordance
with SFAS 123, the Company's net loss and loss per share for fiscal years
ended September 30, 1998, 1997 and 1996 would have been increased to the pro
forma amounts indicated below:
1998 1997 1996
---------------------- ---------------------- ----------------------
LOSS LOSS LOSS
NET LOSS PER SHARE NET LOSS PER SHARE NET LOSS PER SHARE
----------- --------- ----------- --------- ----------- ---------
As reported............. $(4,305,501) $(.48) ($6,143,242) $(.77) ($2,864,836) $(.39)
Pro forma............... $(4,881,491) $(.55) ($6,215,049) $(.78) ($2,883,079) $(.40)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
fiscal year 1996 and additional awards in future years are anticipated.
The fair value of each stock option is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions: an expected life of 7 years, expected volatility of
57.9%, no dividends, and risk-free interest rate of 5.76% for September 30,
1998. The weighted average price of the fair value of options granted for
years ended September 30, 1998, 1997 and 1996 are $7.14, $5.80 and $4.53,
respectively.
L. 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.
35
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
M. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 is effective for fiscal years beginning after
December 15, 1997 and requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The Company will adopt SFAS 130 beginning in the first
quarter of the fiscal year ending September 30, 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information." SFAS 131 is effective for fiscal years beginning after December
15, 1997 and establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products and
services, geographical areas and major customers. The Company will adopt SFAS
131 beginning in the first quarter of the fiscal year ending September 30,
1999.
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 is effective for fiscal years beginning after June 15,
1999 and establishes a new model for accounting for derivatives and hedging
activities. The Company will adopt SFAS 133 beginning in the first quarter of
the fiscal year ending September 30, 2000.
Adoption of SFAS 130, SFAS 131 and SFAS 133 are not expected to have a
material impact to the Company's consolidated financial position, results of
operations or cash flows and any effect will be limited to the form and
content of its disclosures.
N. SIGNIFICANT CUSTOMERS
Significant customers, defined as those customers whose gross revenue
account for 10% or more of total gross revenue in a fiscal year, were as
follows:
FOR THE YEARS
ENDED SEPTEMBER
30,
-------------------
1998 1997 1996
----- ----- -----
U.S. Government:
N.A.S.A............................................. 2.7% 2.9% 18.2%
U.S. Department of Defense.......................... 22.2 44.6 33.6
----- ----- -----
24.9 47.5 51.8
Commercial:
Automotive.......................................... 3.3 9.7 38.2
Avionics............................................ 38.2 20.8 --
----- ----- -----
41.5 30.5 38.2
Other:................................................ 33.6 22.0 10.0
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
36
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
O. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and Income Taxes Paid
Cash paid for interest and income taxes were as follows:
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------
1998 1997 1996
------- ------- -------
Interest........................................... $10,206 $13,933 $ 330
======= ======= =======
Income taxes....................................... $ 5,772 $ 5,800 $36,900
======= ======= =======
Acquisition of Subsidiaries
Net cash paid for the acquisitions of K&D MagMotor Corporation and Film
Microelectronics, Inc. was as follows:
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------
1998 1997 1996
---- ----------- ----
Fair value of assets............................... -- $ 4,723,408 --
Cost in excess of net assets of companies acquired,
net............................................... 987,678
Liabilities assumed................................ (2,624,836)
Stock issued....................................... (2,876,250)
--- ----------- ---
Cash paid.......................................... -- $ 210,000 --
Less: Cash acquired................................ (97,014)
--- ----------- ---
Net cash paid for the acquisitions................. -- $ 112,986 --
=== =========== ===
Non-Cash Transaction
During fiscal year 1996, equipment with a fair market value of $100,000 was
received in exchange for the relief of $100,000 of accounts receivable.
P. ACQUISITIONS
K&D MagMotor Corporation
On January 23, 1997, the Company acquired substantially all of the assets
and assumed certain of the liabilities of K&D MagMotor Corporation
("MagMotor") pursuant to the terms of an Asset Purchase Agreement, dated as of
January 2, 1997, by and among the Company, MagMotor and MagMotor's principal
stockholder (the "Stockholder") (the "Asset Purchase Agreement"). The
aggregate consideration paid by the Company for the acquired assets of
MagMotor was approximately $210,000 in cash and 30,000 shares of the Company's
common stock, par value $.01 per share valued at $6.625 per share or $198,750.
MagMotor's assets, including machinery and equipment and inventory, were
recorded at their estimated market value of $250,000 and $160,000,
respectively.
The terms of the Asset Purchase Agreement were determined on the basis of
arms-length negotiations. Prior to the execution of the Asset Purchase
Agreement, the Company did not have any material relationship with MagMotor or
the Stockholder.
37
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MagMotor, headquartered in Worcester, Massachusetts, is a manufacturer of
custom electric motors targeting the factory automation, medical, semi-
conductor and packaging markets. The Company continues to use the assets in
the same manner in which they were used by MagMotor immediately prior to the
acquisition. The Company has included in its consolidated results of
operations the acquisition of MagMotor under the purchase method of
accounting.
Film Microelectronics, Inc.
On April 16, 1997, the Company acquired substantially all of the assets of
Film Microelectronics, Inc. ("FMI") pursuant to the Asset Purchase Agreement,
dated as of April 3, 1997, by and among the Company, FMI and FMI's principal
stockholder. In addition, the Company assumed trade payables aggregating
approximately $900,000 and the assumption of indebtedness of approximately $1
million. The aggregate consideration paid by the Company for the acquired
assets of FMI was 420,000 shares of the Company's common stock, par value $.01
per share (the "Common Stock") valued at $6.375 per share or $2,677,500.
FMI, headquartered in North Andover Massachusetts, is a manufacturer of
production and custom integrated circuits for the communications, industrial,
military and aerospace markets. The Company continues to use the assets in the
same manner in which they were used by FMI immediately prior to the
acquisition. FMI's assets have been recorded at their estimated market values
with the excess purchase price assigned to goodwill which is being amortized
over 15 years.
The Company has included in its consolidated results of operations the
acquisition of FMI under the purchase method of accounting. The following
unaudited pro forma financial information combines SatCon and FMI's results of
operations as if the acquisition had taken place on October 1, 1996 and 1995.
The pro forma results are not necessarily indicative of what the results of
operations actually would have been if the transaction had occurred on the
applicable dates indicated and are not intended to be indicative of future
results of operations.
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
Net revenue...................................... $14,974,765 $13,794,481
Net operating loss............................... $(7,024,383) $(4,290,888)
Net loss......................................... $(6,544,837) $(3,522,463)
Net loss per share............................... $ (.82) $ (.45)
38
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Q. EARNINGS PER SHARE
The following is the reconciliation of the numerators and denominators of
the basic and diluted per share computations of net loss:
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------
1998 1997
----------- -----------
Net loss........................................ $(4,305,501) $(6,143,242)
BASIC:
Common shares outstanding, beginning of year.... 8,769,146 7,359,074
Weighted average common shares issued during the
year........................................... 190,163 600,235
Weighted average shares repurchased during the
year........................................... (2,638) --
----------- -----------
Weighted average shares outstanding--basic...... 8,956,671 7,959,309
=========== ===========
Net loss per weighted average share, basic...... $ (.48) $ (.77)
=========== ===========
DILUTED:
Weighted average shares outstanding--basic...... 8,956,671 7,959,309
Weighted average common stock equivalents (a)... -- --
----------- -----------
Weighted average shares outstanding--diluted.... 8,956,671 7,959,309
=========== ===========
Net loss per weighted average share, diluted.... $ (.48) $ (.77)
=========== ===========
- --------
(a) not included if antidilutive
R. SUBSEQUENT EVENTS
On December 16, 1998, the Company obtained a $2,000,000 demand discretionary
line of credit, bearing interest at the banks prime rate of interest plus 1
1/2% for an effective rate of 9 1/4% at December 16, 1998. Available
borrowings are based on a formula of eligible accounts receivable and
inventory.
On January 4, 1999, the Company's MagMotor subsidiary acquired substantially
all of the assets and assumed certain liabilities of Inductive Components,
Inc. and Lighthouse Software, Inc. pursuant to the terms of an Asset Purchase
Agreement, dated January 4, 1999, among MagMotor, the Company, Inductive
Components, Inc, Lighthouse Software, Inc. and Thomas Glynn, the sole
stockholder of Inductive and the majority stockholder of Lighthouse. The
aggregate consideration paid by the Company for the acquired assets of
Inductive Components, Inc. and Lighthouse Software, Inc. was 100,000 shares of
the Company's Common Stock, valued at $5.6875 per share or $568,750. In
addition, the Company assumed indebtedness of approximately $250,000.
39
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ----------- ----------
Year Ended September 30, 1996:
Allowance for doubtful accounts. $ 130,900 $ 130,900
Allowance for unbilled contract
costs.......................... $ 66,500 $ 390,500 $ (24,500) $ 432,500
Deferred tax valuation allow-
ance........................... $1,661,329 $1,661,329
Year Ended September 30, 1997:
Allowance for doubtful accounts. $ 130,900 $ 30,750 $ (2,407) $ 159,243
Allowance for unbilled contract
costs.......................... $ 432,500 $ 909,100 $ ( 211,132) $1,130,468
Deferred tax valuation allow-
ance........................... $1,661,329 $1,840,639 $3,501,968
Allowance for obsolete invento-
ry............................. $ 758,541 $ 758,541
Reserve for product warranty ex-
pense.......................... $ 16,511 $ 16,511
Accrued costs for consolidation
of facilities.................. $ 498,000 $ 498,000
Year Ended September 30, 1998:
Allowance for doubtful accounts. $ 159,243 $ 29,014 $ (136,421) $ 51,836
Allowance for unbilled contract
costs.......................... $1,130,468 $(1,072,857) $ 57,611
Deferred tax valuation allow-
ance........................... $3,501,968 $2,705,370 $6,207,338
Allowance for obsolete invento-
ry............................. $ 758,541 $ (549,765) $ 208,776
Reserve for product warranty ex-
pense.......................... $ 16,511 $ (16,511) -
Accrued costs for consolidation
of facilities.................. $ 498,000 $ (398,000) $ 100,000
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 1999 Annual Meeting of Stockholders to be held March 17, 1999 (the "1999
Proxy Statement"). Information relating to certain filings of Forms 3, 4, and
5 of the Company is contained in the 1999 Proxy Statement under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to the
section entitled "Compensation of Executive Officers" in the 1999 Proxy
Statement.
The sections entitled "Compensation Committee Report on Executive
Compensation" and "Comparative Stock Performance Graph" in the 1999 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 1999 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 1999
Proxy Statement.
42
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.Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Operations for the Years Ended September 30,
1998, 1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997, and 1996
Notes to Consolidated Financial Statements
2.Financial Statement Schedule:
Schedule II; Valuation and Qualifying Accounts for the Years Ended
September 30, 1998, 1997, and 1996
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 consolidated financial
statements or notes thereto.
3.Exhibits:
The Exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period
covered by the Annual Report on Form 10-K.
On October 30, 1998, the Company filed a Current Report on Form 8-K, dated
October 23, 1998, in connection with the Securities Purchase Agreement, dated
October 23, 1998, by and among Beacon Power Corporation, Perseus Capital,
L.L.C., Duquesne Enterpises, Micro Generation Technology Fund, L.L.C. and the
Company.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cambridge, Commonwealth of Massachusetts on January 13, 1999.
SatCon Technology Corporation
/s/ David B. Eisenhaure
By: ___________________________________
David B. Eisenhaure, President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
NAME CAPACITY
DATE
/s/ David B. Eisenhaure President, Chief Executive January 13, 1999
- -------------------------- Officer, and Chairman of the
David B. Eisenhaure Board of Directors (Principal
Executive Officer)
/s/ Michael C. Turmelle Vice President, Chief January 13, 1999
- -------------------------- Financial Officer,
Michael C. Turmelle Treasurer and Director
(Principal Financial and
Accounting Officer)
/s/ James L. Kirtley, Vice President, General January 13, 1999
Jr. Manager and Director
- --------------------------
James L. Kirtley, Jr.
/s/ John P. O'Sullivan Director January 13, 1999
- --------------------------
John P. O'Sullivan
/s/ Marshall J. Director January 13, 1999
Armstrong
- --------------------------
Marshall J. Armstrong
/s/ Anthony J. Villiotti Director January 13, 1999
- --------------------------
Anthony J. Villiotti
44
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
2.1(1) --Amended and Restated Asset Purchase Agreement among SatCon Film
Microelectronics, Inc., Film Microelectronics Inc., and Albert
R. Snider, dated as of April 3, 1997
3.1(2) --Certificate of Incorporation of the Registrant
3.2(2) --Bylaws of the Registrant
3.3(3) --Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Secretary of State of the State of
Delaware on May 12, 1997
3.4(3) --Bylaws Amendment of the Registrant
4.1(2) --Specimen Certificate of Common Stock, $.01 par value
10.1(2) --Employment Agreement, dated July 1, 1992, between the Registrant
and David B. Eisenhaure
10.2(2) --Employment Agreement, dated July 1, 1992, between the Registrant
and Michael C. Turmelle
10.3(2)(*) --1992 Stock Option Plan
10.4(4)(*) --1994 Stock Option Plan
10.5(5)(*) --1996 Stock Option Plan
10.6(2) --Lease, dated October 21, 1993, between the Registrant and
Gunwyn/First Street Limited Partnership
10.7 --First Amendment to Lease, dated June 22, 1998, by and between
the Registrant and Gunwyn/First Street Limited Partnership
10.8(3) --Manufacturing Agreement between Applied Materials, Inc. and its
wholly-owned subsidiaries and the Registrant, dated as of
February 20, 1997
10.9(6) --Securities Purchase Agreement, dated as of May 28, 1997, by and
among the Registrant, Beacon Power Corporation and Dusquene
Enterprises
10.10(7) --Securities Purchase Agreement, dated as of October 23, 1998, by
and among Beacon Power Corporation, Perseus Capital, L.L.C.,
Dusquene Enterprises, Micro Generation Technology Fund, L.L.C.
and the Registrant
10.11(7) --Amended and Restated License Agreement, dated as of October 23,
1998, by and among the Registrant and Beacon Power Corporation
10.12(7) --Registration Right Statement, dated as of October 23, 1998, by
and among Beacon Power Corporation, Perseus Capital, L.L.C.,
Dusquene Enterprises, Micro Generation Technology Fund, L.L.C.
and the Registrant, setting forth certain registration rights
granted by the Registrant
10.13(7) --Registration Right Statement, dated as of October 23, 1998, by
and among Beacon Power Corporation, Perseus Capital, L.L.C.,
Dusquene Enterprises, Micro Generation Technology Fund, L.L.C.
and the Registrant, setting forth certain registration rights
granted by Beacon Power Corporation
10.14 --Form of Common Stock Purchase Warrant issued to certain
individuals and entities on June 15, 1998
10.15 --Form of Common Stock Purchase Warrant issued to certain
individuals and entities on November 11, 1998
10.16 --Lease, dated February 27, 1996, by and between the Registrant
and Diamond Management, Inc.
10.17 --Lease, dated March 5, 1998, by and between the Registrant and
Harold W. Slovin
i
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.18 --Discretionary Demand Line of Credit Letter Agreement, dated as of
December 16, 1998, between the Registrant, SatCon Film
Microelectronics, Inc., K&D MagMotor Corp. and BankBoston, N.A.,
together with Promissory Note, dated as of December 16, 1998,
made in favor of BankBoston, N.A. by the Registrant, SatCon Film
Microelectronics, Inc. and K&D MagMotor Corp. and Security
Agreement, dated as of December 16, 1998, between the Registrant
and BankBoston N.A.
10.19 --North America Distributor Agreement, dated June 4, 1998, by and
between SatCon Film Microelectronics, Inc., a division of the
Registrant, and Falcon Electronics, Inc.
21.1 --Subsidiaries of the Registrant
23.1 --Consent of PricewaterhouseCoopers LLP
27 --Financial Data Schedule
- --------
(1) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated April 16, 1997.
(2) Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-49286).
(3) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 1997.
(4) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1994.
(5) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1996.
(6) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated May 28, 1997.
(7) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated October 23, 1998.
(*) Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.
ii