Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-11512
----------------
SATCON TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
----------------
DELAWARE 04-2857552
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
161 FIRST STREET, CAMBRIDGE,
MASSACHUSETTS 02142
(Address of Principal Executive Offices) (Zip Code)
----------------
(617) 661-0540
(Registrant's Telephone Number, Including Area Code)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
Title of Class
----------------
COMMON STOCK, $.01 PAR VALUE
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Registrant's Common Stock, $.01 par value
per share, held by non-affiliates of the Registrant was $61,487,116, 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 15, 1999 ($8.125).
There were 11,376,570 shares of Common Stock outstanding as of December 15,
1999.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 2000 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
GENERAL
We were organized as a Massachusetts corporation in February 1985 and
reincorporated in Delaware in 1992. We design, develop and manufacture
intelligent, electro-mechanical products for aerospace, transportation,
industrial and utility applications. We also design, develop and manufacture
power and energy management products for telecommunications, silicon wafer
manufacturing, factory automation, aircraft and automotive applications. Our
electro-mechanical products are being developed for a wide variety of U.S.
government and commercial markets. For the government, our electro-mechanical
systems provide for applications ranging from satellite attitude control to
high speed drives for shipboard systems. In the transportation segment, we are
developing electric and hybrid electric drive components, auxiliary power units
and advanced steering, alternator and starter/generator systems. We are working
with major equipment producers to develop process equipment drives, high speed
and precision machine tools, manipulators and machinery isolation equipment.
Our electro-mechanical systems may offer advantages to the utility industry in
power generation, energy storage and power quality. In the consumer market, we
are developing variable speed motors for refrigeration equipment and other
long-life, high-efficiency machinery.
STRATEGY
It is our strategy to continue to expand development of our technologies for
use in commercial business applications and to seek the acquisition of
businesses, products, assets and technologies that complement or augment our
existing businesses, products, assets and technologies.
DEVELOPMENTS DURING 1999
During 1999, our technology center made a concentrated effort toward building
the power inverter for a fuel cell on-site power generation system. Using new
technology, developed with government funding over the last seven years, we are
developing new, smaller, high-efficiency, low-cost power inverters. Our power
inverters are combined with fuel cell power generation systems, micro-turbines,
or solar power generation systems for generating on-site power. Work also
continued on the Department of Energy's contract with us to manufacture power
electronics for use in hybrid-electric automobiles. With fuel cells and
microturbines becoming more affordable, their use as alternative fuel drive
trains is gaining interest from several perspectives. Our technology center
also received funded research and development contracts for a modular drive for
the U.S. Navy, miniature navigation systems, biological contamination detection
systems, and a remote surveillance and targeting vehicle for DARPA.
In January 1999, we acquired Lighthouse Software, Inc., which designs and
develops software for the industrial machine tool industry.
Over the past year, Magmotor, a manufacturer of custom electric motors
targeting the factory automation, medical, semiconductor and packaging markets,
introduced a new line of brushless DC servomotors for the machine tool
industry. Within its first year with this product line, Magmotor was able to
expand its customer base with the addition of orders from several machine tool
manufacturers. These customers purchased servomotor for inclusion in such
machines as Computer Numerical Control (CNC) machining centers, CNC lathes and
milling machines and for small part precision turning. Magmotor also completed
several delivery orders for its integrated suspension and motor (ISAM) product
to Applied Materials. By having the encoder, brake, gearbox, tachometer and
connectors that are required for each customer's unique application coupled
with the appropriate motor, Magmotor can now provide its customers with an
entire drive assembly. They have recently added brush and brushless motor
amplifiers to their product line and are building small motors for a major
automotive manufacturer to be used in fuel cell cars.
2
In January 1999, we acquired Inductive Components, Inc., a value-added
supplier selling systems in the machine tool and semi-conductor industry.
During 1999, FMI, a manufacturer and producer of custom integrated circuits
for the communications, industrial, military and aerospace markets, introduced
several new products. The first was a package of uplink electronics for
satellite telecommunications systems such as mobile telephone repeater
stations. The second set of products were a series of power resistors
manufactured with aluminum nitride, FMI's solution to eliminating
environmentally hazardous beryllium oxide, the substrate commonly used in this
past for these products. These resistors are used in several telecommunications
products, including cellular telephones. FMI was also chosen to design the thin
film circuits for new satellite television/internet system for residential and
business use. The system is being manufactured and sold through a major
electronics manufacturer that also markets a satellite television service. FMI
also developed a new process for manufacturing radio frequency identification
cards.
In April 1999, we acquired Hycomp, Inc., a manufacturer of high performance,
high quality multi-chip modules.
During 1999, Beacon, an affiliate of SatCon, successfully completed the first
phase field testing of its flywheel uninterruptible power supply systems for
telephone and cable television applications. The systems have successfully
operated for over 1,800 continuous hours. In both applications, Beacon's
flywheels have maintained the power during loss of utility power with no
degredation of service.
COMMERCIALIZATION
We intend to continue directing our commercialization efforts in the
following product areas:
Power Electronics
We have 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 our high-speed drive and flywheel product developments as
well as our power inverters for fuel cell, microturbine and other alternative
fuel on-site power generation systems..
We have also developed a new hermetic amplifier product line that is
manufactured without the use of hazardous beryllium oxide. In addition to the
amplifiers, we are developing a new motor controller line based on the SAT-32
DSP motor control technology that is currently used in the Integrated
Suspension and Motor product for semiconductor manufacturing.
Motors and High Speed Drives
We design and build 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 design of the
magnetic circuits, we have demonstrated electric motor prototypes that are
lightweight and have provided efficiencies in excess of 97 percent. Our 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. We have
participated in the development of such systems for spacecraft and ground-based
systems. Our magnetic bearing systems feature electromagnetic and permanent
magnet actuators and advanced digital control systems. These systems have been
developed for both commercial and military applications.
3
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.
We are 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, we have developed electro-
mechanical storage systems that we believe have the potential to offer
practical solutions for mobile and stationary applications. Beacon'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.
Beacon is completing 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 is being developed to offer 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
We are 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.
MARKETS
Our objective is to capitalize on our technological developments from our
internal and contract research and development projects to become a leading
supplier of a new generation of intelligent, electro-mechanical 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, are designed to provide competitive
advantages in performance.
COMPETITION
A variety of companies compete in each of the areas in which we are
developing and selling products. To date, we have faced only limited
competition in providing research services, prototype development and custom
and limited quality manufacturing. We expect competition to intensify greatly
as commercial applications increase for our products under development. Some of
our competitors are well established and have substantial managerial,
technical, financial, marketing and product development resources competitive
with, and, in some instances, greater than ours. Additional companies, both
large and small, are entering the markets in which we compete. There can be no
assurance that we will be successful in such a competitive environment.
4
PATENTS AND PROPRIETARY INFORMATION
We currently own 23 U.S. patents which expire between 2007 and 2017. We also
have 8 patent applications pending with the U.S. patent and trademark office.
As a qualifying small business, we have retained commercial ownership rights to
proprietary technology developed under various U.S. government contracts and
grants, including small business innovation research contracts. Our patent and
trade secret rights are of material importance to us and future prospects. No
assurance can be given to as to the issuance of additional patents or, if so
issued, as to their scope. Patents granted may not provide meaningful
protection from competitors. Even if a competitor's products were to infringe
patents owned by us, it would be costly for us to pursue our rights in an
enforcement action and would divert funds and resources which otherwise could
be used in our operations. Furthermore, there can be no assurance that we would
be successful in enforcing intellectual property rights or that we may not
infringe patent or intellectual of third parties. However, to date, we have not
been required to defend our patents or proprietary information against claims
by third parties.
Since we intend to enforce our patent, trademarks and copyrights and protect
our trade secrets, we may be involved from time to time in litigation to
determine the enforceability, scope and validity of these rights. This
litigation could result in substantial costs to us and divert efforts by our
management and technical personnel.
In addition to our patent rights, we also rely on treatment of our technology
as trade secrets and upon confidentiality agreements, which our employees are
required to sign, assigning to us all patent rights and technical or other
information developed by employees during their employment with us. Our
employees have also agreed not to disclose any trade secret or confidential
information without our prior written consent. Notwithstanding these
confidentiality agreements, there can be no assurance that other companies will
not acquire information that we consider proprietary.
RESEARCH AND DEVELOPMENT
Approximately $6,355,000 or 41% of our revenue during the year ended
September 30, 1999 was 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 we retain
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.
We expended approximately $726,000, $346,000 and $2,489,000 on internally-
funded research and development during our years ended September 30, 1999, 1998
and 1997, respectively. During the year ended September 30, 1999, our most
concentrated effort was directed toward building the power inverter for a fuel
cell on-site power generation system. We continued our development efforts in
the electro-optics and sensor inspection systems. In addition, we successfully
tested a new version of our "Powersmart" alternator electronics package for
Delco Remy International. Beacon's 20C1000 cable/telecom flywheel system and
the introduction of our ISAM product accounted for the majority of the 1998 and
1997 internally-funded costs.
GOVERNMENT REGULATION
We have entered into contracts, subcontracts and grants with the U.S.
government and its agencies which require compliance with applicable U.S.
government regulations, including regulations with respect to bidding on
proposals and billing practices. In the event that the U.S. government or its
agencies conclude that we have not adhered to federal regulations, any
contracts to which we are a party could be canceled. We could be prohibited
from bidding on future contracts which could materially adversely affect our
business. All payments 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. We could also be required to disgorge any payments received from U.S.
government agencies if we are found to have violated federal regulations.
The commercialization of our technologies for use in various industries may
also be affected by federal and state legislative and regulatory changes
affecting such industries.
5
MANUFACTURING AND SUPPLIERS
If we are successful in obtaining market penetration of our products, we will
be required to deliver large volumes of quality products or components to our
customers on a timely basis at reasonable costs. When necessary, we intend to
seek to supplement our manufacturing capabilities by establishing relationships
with manufacturing organizations to deliver large volumes of our products until
such time as we can develop our own manufacturing expertise and capacity. No
assurance can be given that we will be able to successfully establish
relationships with third party manufacturing organizations or, if such
relationships are established, that they will be successful.
The principal materials and supplies in our products are available from
several commercial sources, and we do not depend on any single source for a
significant portion of our materials or supplies.
BACKLOG
Our backlog consists primarily of research and development contracts and
orders for multi-chip modules, hybrid and motor products. At September 30,
1999, the backlog was approximately $7,300,000 for work to be performed and
products to be shipped during the year ending September 30, 2000 and beyond.
Many of our contracts and sales orders may be canceled at any time with limited
or no penalty. In addition, 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 we have no control. Our backlog
at September 30, 1998 was approximately $10,000,000.
SIGNIFICANT CUSTOMERS
Although we have been developing applications of our technology for both
commercial and government markets, a large percentage of our revenue is from
the U.S. department of defense, department of energy and NASA contracts,
subcontracts and grants. The majority of these contracts, subcontacts and
grants were awarded through the small business innovation research program.
Although we believe that the majority of our revenue in the future will result
from commercial applications of our technologies, a significant portion of our
business in the next few years will likely continue to involve research and
development for the U.S government and its agencies. Consequently, a portion of
future revenue may be subject to funding approval from Congress, which involves
political, budgetary, and other considerations which we have no control. To
date, we have not been adversely affected by reductions in defense spending. We
believe that government funding for the areas of our research and development
activities will continue without reduction. However, we cannot assure you that
this funding will not be reduced in the future. Any reduction could materially
adversely affect our business. In addition, many of our U.S. government
contracts may be canceled at any time by the U.S. government with limited or no
penalty.
EMPLOYEES
At September 30, 1999, we employed a total of 177 people: 171 on a regular
full-time basis, 4 on a regular part-time basis and 2 student interns. In
addition, at September 30, 1999, Beacon employed a total of 27 people; 26 on a
regular full-time basis and 1 on a regular part-time basis. Some of our
employees are affiliated with large universities located in the greater Boston
area. Approximately 59 persons are employed in engineering, 81 in
manufacturing, 28 in administration and 9 in sales and marketing. None of these
employees are represented by a union. We believe that our relations with our
employees are satisfactory.
Our success will depend, in large part, upon our ability to attract, motivate
and retain highly qualified scientists and engineers, as well as highly skilled
and experiences management and technical personnel. Competition for these
personnel is intense, and there can be no assurance that we will be successful
in attracting, motivating or retaining key personnel.
6
ITEM 2. PROPERTIES
We lease 45,820 square feet of office and laboratory space at 161 First
Street, Cambridge, Massachusetts under a primary lease expiring on October 31,
2003, an additional 8,719 square feet of office and laboratory space located at
6245 East Broadway Boulevard, Suite 350, Tucson, Arizona under a primary lease
expiring on March 31, 2001 and an additional 1,561 square feet of laboratory
space located at 984 Southford Road, Middlebury, Connecticut under a primary
lease expiring on February 28, 2000. We 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, approximately
17,000 square feet of manufacturing space at 121 Higgins Street, Worcester,
Massachusetts under a primary lease expiring on March 31, 2003 and
approximately 15,300 square feet of manufacturing space at 165 Cedar Hill
Street, Marlborough, Massachusetts under a primary lease expiring on October
31, 2005 .
Effective November 5, 1997, we entered into an agreement to sub-lease 8,930
square feet at 161 First Street to a third party, and effective July 15, 1998,
we entered into an agreement to sub-lease an additional 3,952 square feet at
161 First Street to the same third party.
Effective February 8, 1999, we entered into an agreement to sub-lease
approximately 2,889 square feet at 6245 East Broadway Boulevard, Suite 350,
Tucson, Arizona to a third party. Effective July 29, 1999, we entered into an
agreement to sub-lease the remaining 5,830 square feet at the Tucson, Arizona
location to another third party.
We believe our facilities are adequate for our current needs and that
adequate facilities for expansion, if required, are available.
ITEM 3. LEGAL PROCEEDINGS
On October 15, 1997, we received a letter from the Department of the Air
Force stating that it may terminate for default a contract between the Air
Force and us for development of a satellite component, unless perceived
performance problems were cured. In the event of an actual default, we could be
liable for extra costs incurred by the United States government in developing
the component. We have had several discussions with the Air Force in order to
resolve the issue. We informed the Air Force contracting officer of our belief
that a termination for default is not warranted.
On December 15, 1997, the Air Force issued a "Show Cause Notice" to us
requiring us to demonstrate to the Air Force why the contract should not be
terminated "for cause." On December 31, 1997, we responded to the Air Force's
"Show Cause Notice, explaining our view that we should not be terminated for
cause.
As a related matter to the Air Force contract issue, on December 15, 1997, we
received a subpoena from the United States Attorney for the District of
Arizona. The subpoena sought documents relating to USAF Program/Contract No.
F290601-96-C-145. On January 30, 1998 and February 4, 1998, we produced the
documents responsive to the subpoena. In addition, we have made several of our
current and former employees available to interview with officials from the Air
Force and the United States Attorney's office. We are currently awaiting the
United States Attorney's decision whether to proceed with any further
investigation.
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 year covered by this report through the solicitation of proxies
or otherwise.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq national market under the trading
symbol SATC. As of December 15, 1999 there were approximately 189 stockholders
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 15, 1999 the closing price for our common stock, as reported by
Nasdaq, was $8.125.
FISCAL YEAR FISCAL YEAR
1999 1998
-------------- ---------------
BID BID
-------------- ---------------
HIGH LOW HIGH LOW
------- ------ ------- -------
First Quarter............................... $ 7.500 $5.063 $14.375 $ 8.750
Second Quarter.............................. 5.688 4.750 14.250 10.875
Third Quarter............................... 9.875 4.563 12.625 8.000
Fourth Quarter.............................. 10.125 7.563 9.188 5.000
DIVIDEND POLICY
We have not paid dividends to our stockholders since our inception and do not
anticipate paying cash dividends in the foreseeable future. We intend to
reinvest earnings, if any, in the development and expansion of our business.
Declaration of dividends on our common stock or preferred stock will depend
upon, among other things, future earnings, our operating and financial
condition, our capital requirements and general business conditions.
RECENT SALES OF UNREGISTERED SECURITIES
On November 11, 1998, we issued to certain individuals, who formerly held
warrants issued by us in connection with the our initial public offering in
November 1992, warrants to purchase up to 67,125 shares of our common stock at
an exercise price of $11.43 per share. These warrants expired on November 11,
1999 unexercised 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, we issued 100,000 shares of our common stock to two
individuals in connection with the purchase by K&D MagMotor Corp., a wholly
owned subsidiary of us, of certain assets and the 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.
On March 9, 1999, we issued 42,860 shares of our common stock to an escrow
agent in connection with a consulting agreement entered into by us and Mr.
Albert R. Snider pursuant to which Mr. Snider will perform such consulting,
advisory and related services as we may reasonably request from time to time
between October 1, 1999 and October 1, 2002. 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.
On April 7, 1999, we issued non-qualified stock options to Continental
Capital & Equity Corporation to purchase in consideration of Continental
Capital's consulting services rendered to us 50,000 shares of the our common
stock at $5.75 per share and 50,000 shares of our common stock at an exercise
price of $6.75 per
8
share. As of December 20, 1999, Continental Capital has received 50,000 shares
of our common stock at an exercise price of $5.75 per share and 10,000 shares
of our common stock at an exercise price of $6.75 per share upon exercise of
these options. The remaining options expire on April 7, 2000 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 August 25, 1999, we issued 8,000 shares of our series A redeemable
convertible preferred stock, $0.01 par value per share, to Brown Simpson
Strategic Growth Funds for an aggregate price of $8 million. The series A
redeemable convertible preferred stock is initially convertible into 1,025,641
shares of our common stock at an initial conversion price of $7.80 per share.
Under certain circumstances, we have the option to cause the series A preferred
stock to convert into shares of common stock or otherwise be redeemed. At the
end of seven years, we must redeem any remaining shares of the series A
redeemable convertible preferred stock for cash or, at our option, common stock
with a then fair market value equal to the original purchase price of the
series A redeemable convertible preferred stock. The obligation at seven years
to redeem any remaining shares of the series A redeemable convertible preferred
stock accelerates to August 25, 2003 in the event the average bid price of our
common stock for the 60 "trading day" period immediately preceding the fourth
anniversary is $5.00 per share or less. In connection with the transaction, we
also issued to Brown Simpson warrants to purchase up to 675,000 additional
shares of common stock at an exercise price of $8.54 per share. These warrants
expire on August 25, 2003. The series A preferred stock and these warrants 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 August 25, 1999, in connection with the Brown Simpson financing, we issued
to H.C. Wainwright & Co., Inc., Matthew Balk and Scott Weisman warrants to
purchase up to 18,000, 61,200 and 40,800 shares, respectively, of our common
stock at an exercise price of $7.80 per share. These warrants have a call
option value of $12.81 per share. These warrants expire on August 25, 2003 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 October 21, 1999, in connection with our acquisition of Ling Electronics,
Inc. and Ling Electronics, Ltd., we issued 770,000 shares of our common stock
to Mechanical Technology Incorporated, the parent entity of the two acquired
entities. The common stock was 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 a public
offering.
On October 21, 1999, in connection with an investment, we issued 370,800
shares of our common stock to Mechanical Technology, Inc. In addition, we
issued to Mechanical Technology Incorporated a warrant to purchase 36,000
shares of our common stock at an exercise price of $8.80 per share. This
warrant expires on October 21, 2003. In connection with this transaction, we
also received a warrant to purchase 36,000 shares of the common stock of
Mechanical Technology Incorporated at an exercise price of $37.66 per share and
$2,570,000 in cash. This warrant expires on October 21, 2003. Both the common
stock and the warrant 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 November 16, 1999, we issued 578,761 shares of our common stock to
Northrop Grumman Corporation in exchange for certain intellectual property,
equipment and other assets which were used by Northop Grumman Corporation in
connection with its power electronics products business. In addition, we issued
to Northrop Grumman Corporation a warrant to purchase up to 100,000 shares of
our common stock at an exercise price of $9.725 per share. This warrant expires
on December 31, 2006. Both the common stock and the warrant 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 year ended
September 30, 1999 has been derived from our financial statements which have
been audited by Arthur Andersen LLP, independent public accountants. The
selected consolidated financial data set forth below for the year ended
September 30, 1998, 1997, 1996 and 1995 has been derived from our financial
statements 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,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ----------- ------------
Revenue................. $ 15,477,881 $ 15,485,923 $ 12,466,335 $ 9,384,588 $ 11,475,427
------------ ------------ ------------ ----------- ------------
Cost of revenue......... 15,339,218 10,991,202 10,071,150 6,394,830 9,493,963
Selling, general and ad-
ministrative expenses.. 8,818,706 4,787,070 6,197,951 5,569,285 2,511,999
Research and development
expenses............... 726,187 346,161 2,489,207 893,628 1,937,241
Goodwill amortization... 371,087 290,957 120,467 -- --
------------ ------------ ------------ ----------- ------------
Total operating ex-
penses............... 25,255,198 16,415,390 18,878,775 12,857,743 13,943,203
------------ ------------ ------------ ----------- ------------
Operating loss.......... (9,777,317) (929,467) (6,412,440) (3,473,155) (2,467,776)
Loss from investment in
Beacon Power Corpora-
tion................... (2,357,679) (3,541,817) -- -- --
Other losses............ (150,464) -- -- -- --
Interest income......... 42,287 179,861 283,131 465,640 452,368
Interest expenses....... (115,692) (10,206) (13,933) (1,800) (1,334)
------------ ------------ ------------ ----------- ------------
Net loss before income
taxes.................. (12,358,865) (4,301,629) (6,143,242) (3,009,315) (2,016,742)
Provision/(benefit) for
income taxes........... -- 3,872 -- (144,479) (806,697)
------------ ------------ ------------ ----------- ------------
Net loss................ $(12,358,865) $ (4,305,501) $ (6,143,242) $(2,864,836) $ (1,210,045)
------------ ------------ ------------ ----------- ------------
Accretion of redeemable
preferred stock dis-
count.................. (50,904) -- -- -- --
------------ ------------ ------------ ----------- ------------
Net loss attributable to
common stockholders.... $(12,409,769) $ (4,305,501) $ (6,143,242) $(2,864,836) $ (1,210,045)
============ ============ ============ =========== ============
Net loss per share,
basic and diluted...... $ (1.35) $ (.48) $ (.77) $ (.39) $ (.17)
============ ============ ============ =========== ============
Weighted average number
of common shares, basic
and diluted............ 9,176,041 8,956,671 7,959,309 7,285,756 7,079,855
============ ============ ============ =========== ============
BALANCE SHEET DATA:
AT SEPTEMBER 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Total assets............ $17,400,374 $18,166,590 $20,709,438 $17,277,517 $19,792,966
Total long term obliga-
tions, net of current
portion................ $ 63,606 $ 239,209 $ 322,897 -- --
Total liabilities....... $ 3,060,207 $ 2,752,583 $ 2,630,301 $ 1,178,349 $ 1,040,251
Working capital......... $ 7,844,857 $ 8,501,927 $10,595,294 $11,011,170 $15,615,645
Stockholders' equity.... $ 9,446,055 $15,414,007 $18,079,137 $16,099,168 $18,752,715
Dividends per share..... -- -- -- -- --
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We were organized as a Massachusetts corporation in February 1985 and
reincorporated in Delaware in 1992. We design, develop and manufacture
intelligent, electro-mechanical products for aerospace, transportation,
industrial and utility applications. We also design, develop and manufacture
power and energy management products for telecommunications, silicon wafer
manufacturing, factory automation, aircraft and automotive applications. Our
electro-mechanical products are being developed for a wide variety of U.S.
government and commercial markets. For the government, our electro-mechanical
systems provide for applications ranging from satellite attitude control to
high speed drives for shipboard systems. In the transportation segment, we are
developing electric and hybrid electric drive components, auxiliary power units
and advanced steering, alternator and starter/generator systems. We are working
with major equipment producers to develop process equipment drives, high speed
and precision machine tools, manipulators and machinery isolation equipment.
Our electro-mechanical systems may offer advantages to the utility industry in
power generation, energy storage and power quality. In the consumer market, we
are developing variable speed motors for refrigeration equipment and other
long-life, high-efficiency machinery.
It is our strategy to continue to expand development of our technologies for
use in commercial business applications and to seek the acquisition of
businesses, products, assets and technologies that complement or augment our
existing businesses, products, assets and technologies.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains or incorporates forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 and
section 21E of the Securities Act of 1934. You can identify these forward-
looking statement by our use of the words "believes," "anticipates," "plans,"
"expects," "may," "will," "intends," "estimates," and similar expressions,
whether in the negative or in the affirmative. Although we believe that these
forward-looking statements reasonably reflect our plans, intentions and
expectations. Our actual results could differ materially from the plans,
intentions and expectations disclosed in the forward-looking statements we
make. We have included important factors in the cautionary statements below
(particularly under the heading "Factors Affecting Future Results") that we
believe could cause our actual results to differ materially from the forward-
looking statements that we make. We do not intend to update information
contained in any forward-looking statement we make.
RESULTS OF OPERATIONS
During 1999, we 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 our products, and to improve our future
profitability. The effects of these actions on our financial performance during
1999 are discussed below.
11
The following table sets forth, for the periods indicated, the percentage of
revenue for certain items in our Statement of Operations for each period:
FOR THE YEARS
ENDED
SEPTEMBER 30,
-------------------
1999 1998 1997
----- ----- -----
Revenue.................................................... 100.0% 100.0% 100.0%
Cost of revenue............................................ 99.1 71.0 80.8
Selling, general and administrative expenses............... 57.0 30.9 49.7
Research and development expenses.......................... 4.7 2.2 20.0
Goodwill amortization...................................... 2.4 1.9 1.0
Total operating expenses (excluding cost of revenue)....... 64.1 35.0 70.7
Operating loss............................................. (63.2) (6.0) (51.5)
Loss from investment in Beacon Power Corporation........... (15.2) (22.9) --
Other losses............................................... (1.0) -- --
Interest income............................................ 0.3 1.2 2.3
Interest expense........................................... (0.7) (0.1) (0.1)
Net loss before income taxes............................... (79.8) (27.8) (49.3)
Provision for income taxes................................. -- -- --
Net loss................................................... (79.8) (27.8) (49.3)
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1998
Revenue. Revenue decreased by approximately $8,000 or 0.1% from 1998 to 1999.
The decrease is due to a decrease in revenue on research and development
contracts of approximately $1,610,000 offset by an increase of revenue from the
sale of manufactured products of approximately $1,602,000.
Cost of revenue. Cost of revenue increased approximately $4,348,000 or 39.6%
from 1998 to 1999. The increase is due to the increase of cost of revenue from
the sale of manufactured products of approximately $4,037,000 and an increase
in cost on research and development contracts of approximately $311,000. The
Company determined that approximately $870,000 of additional reserves were
required for potentially obsolete and excess inventory at September 30, 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased approximately $4,032,000 or 84.2% from 1998
to 1999. The increase is primarily due to compensation expense related to the
issuance of stock options and warrants to non-employees with a fair value, as
determined by using the Black-Scholes option pricing model, of approximately
$2,209,000. We also recorded additional reserves for unbilled contract costs
and accounts receivable of approximately $689,000 and $345,000, respectively.
Research and development expenses. Research and development expenses
increased approximately $380,000 or 109.8% from 1998 to 1999. The increase is
primarily the result of our effort toward building the power inverter for a
fuel cell on-site power generation system. We also continued our development
efforts in the electro-optics and sensor inspection systems. In addition, we
successfully tested a new and improved version of its "Powersmart" alternator
electronics package for Delco Remy International.
Goodwill amortization. Goodwill amortization increased approximately $80,000
or 27.5% from 1998 to 1999. This was primarily the result of the acquisition of
Inductive Components, Inc. and Lighthouse Software, Inc. in January 1999.
Loss from Investment in Beacon Power Corporation. Loss from investment in
Beacon Power Corporation decreased approximately $1,184,000 or 33.4% from 1998
to 1999. Effective October 23, 1998, our share of Beacon's losses was reduced
from 100% to 50%. Effective April 1, 1999, our share of Beacon's losses was
reduced from 50% to 33%.
12
At September 30, 1999, we have accrued losses of approximately $203,000
relating to our share of Beacon losses incurred through September 30, 1999,
which we are required to fund pursuant to the terms of a note and warrant
purchase agreement. In future periods, we will continue to record our share of
Beacon's losses up to the amount of our actual and committed investment. It is
anticipated that substantially all of our remaining and committed investment of
approximately $131,000 in Beacon will be recorded as a loss during the quarter
ending December 31, 1999.
Other losses. Other losses of approximately $150,000 during 1999 was
primarily the result of the sale of marketable securities.
Interest income. Interest income decreased approximately $138,000 or 76.5%
from 1998 to 1999. The decrease is primarily the result of a decrease of
interest income associated with marketable securities.
Interest expense. Interest expense increased approximately $105,000 or
1033.6% from 1998 to 1999. The increase is primarily the result of interest
expense associated with advances on the discretionary demand line of credit.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
Revenue. 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, we 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 expenses. 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, we
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, we had a reserve of $100,000,
primarily relating to the lease cancellation costs. During 1997, we formed
Beacon, a wholly-owned subsidiary, to continue the work of its Energy Systems
Division. During a recapitalization of Beacon in December 1997, we converted a
significant portion of our ownership of Beacon to convertible preferred stock.
We retained approximately 19.9% of Beacon's outstanding voting stock. Although
we owned less than 20% of the outstanding voting stock of Beacon, based on
other factors, there was a presumption that we had the ability to exercise
significant influence, and the equity method was required for the fair
presentation subsequent to this recapitalization. Our 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 expenses. Internally funded research and development
expenses decreased approximately $2,143,000 or 86.1% from 1997 to 1998. During
1997, we 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.
13
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, we formed
our subsidiary, Beacon, through a strategic partnership with Duquesne
Enterprises, a subsidiary of DQE, Inc., to manufacture and distribute our
flywheel energy storage systems. Duquesne Enterprises made an initial
investment in us totaling $5,000,000 to fund flywheel product development.
Beacon assumed the activities of our 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 we converted a significant portion of our ownership of
Beacon to convertible preferred stock. We 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 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.
Although we owned less than 20% of the outstanding voting stock of Beacon,
based on other factors, there was a presumption that we had the ability to
exercise significant influence, and the equity method of accounting for this
investment was required for the fair presentation subsequent to this
recapitalization. This method of accounting required us to show our share of
losses from Beacon as a single amount in the statement of operations, "Loss
from Investment in Beacon Power Corporation."
Interest income. Interest income decreased approximately $103,000 or 36.5%
from 1997 to 1998. The decrease is primarily the result of a decrease of
interest income associated with marketable securities.
Interest expense. Interest expense decreased approximately $4,000 or 26.7%
from 1997 to 1998. The decrease is primarily the result of a reduction of
outstanding debt during the year ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, our cash and cash equivalents were approximately
$2,533,000, an increase of approximately $1,331,000 from September 30, 1998.
Cash used in operating activities during 1999 was approximately $5,631,000 as
compared to cash used in operating activities of approximately $2,383,000
during 1998. This was primarily the result of an increase in operating expenses
and inventory related to the introduction of new standard products.
Cash used in investing activities, for the year ended September 30, 1999, was
approximately $1,435,000. This relates primarily to the cash paid for the
acquisition of the assets of Inductive Components, Inc., Lighthouse Software,
Inc. and certain assets of HyComp of approximately $996,000, patent
expenditures of approximately $102,000 and capital expenditures of
approximately $220,000.
In addition, we purchased from Beacon two notes each with a principal amount
of $333,333.33 ("Bridge Notes") plus accrued interest due and payable on the
earlier of (i) the date of conversion as defined, or (ii) upon the occurrence
of an event of default. The notes bears interest at 12 1/2% per annum; provided
that if a certain event does not occur within six months such interest rate
shall increase effective February 2, 2000 to 15% per annum pursuant to the
terms of a note and warrant purchase agreement. Interest on the Bridge Note is
payable on the Maturity Date.
Pursuant to the terms of the note and warrant purchase agreement, we
purchased an additional note with a principal amount of $333,333.33 and a
warrant to purchase a number of shares of Beacon Class E Preferred Stock on
October 19, 1999.
This cash used by investing activities was partially offset by the proceeds
from the sale and maturity of marketable securities of approximately $580,000.
14
Cash provided by financing activities as of September 30, 1999, was
approximately $8,397,000. During August 1999, we completed an $8 million
private placement of 8,000 shares of our series A redeemable convertible
preferred stock, $0.01 par value per share, with Brown Simpson Strategic Growth
Funds. The series A redeemable convertible preferred stock is initially
convertible into 1,025,641 shares of our common stock, $0.01 par value per
share, at an initial conversion price of $7.80 per share. The series A
redeemable convertible preferred stock is also subject to certain dilution
protection for a period of three years. Under certain circumstances, we have
the option to cause the series A preferred stock to convert into shares of
common stock or otherwise be redeemed. At the end of seven years, we must
redeem any remaining shares of the series A redeemable convertible preferred
stock for cash or, at our option, common stock with a then fair market value
equal to the original purchase price of the series A redeemable convertible
preferred stock. The obligation at seven years to redeem any remaining shares
of the series A redeemable convertible preferred stock accelerates to the
fourth anniversary of the closing in the event the average bid price of our
common stock for the 60 "trading day" period immediately preceding the fourth
anniversary is $5.00 per share or less. In the event of certain change in
control events regarding us or our common stock is delisted, Brown Simpson has
the right to cause the series A preferred stock to be redeemed. In connection
with the transaction, Brown Simpson also received warrants to purchase up to
675,000 additional shares of common stock at $8.54 per share. The Brown Simpson
Warrants expire on August 25, 2003. H.C. Wainwright & Co., Inc. served as
placement agent for the transaction and received a commission of $560,000 and
warrants to purchase 120,000 shares of our common stock at $7.80 per share.
These warrants expire on August 25, 2003. H.C. Wainwright will also receive a
future fee in the amount of 4% of any monies received by us upon the exercise
of the Brown Simpson Warrants.
During 1999, we granted options to purchase 755,000 shares of our common
stock to consultants at prices ranging from $5.75 to $10.00 per share. As of
December 20, 1999, the consultants exercised options to purchase 450,000,
50,000 and 10,000 shares at exercise prices of $7.00, $5.75 and $6.75 per
share, respectively. As of September 30, 1999, we received approximately
$1,333,000 of cash and the remaining amount due from the shareholder is
classified within stockholders' equity as amounts receivable from exercise of
stock options.
We have a $3,000,000 demand discretionary line of credit with a bank. The
line of credit bears interest at the bank's prime rate plus 1 1/2% (9 3/4% as
of September 30, 1999). Available borrowings are based on a formula of eligible
accounts receivable and inventory. During 1999, we borrowed approximately
$2,657,000 against the line of credit. At September 30, 1999, there were no
amounts outstanding under the line of credit.
We anticipate that existing cash resources, cash flow from operations,
proceeds from exercise of stock options, the availability of our demand
discretionary line of credit and the outside funding by Mechanical Technology
Incorporated will be sufficient to fund our operations at least through
September 30, 2000. Our ability to generate cash from operations depends upon,
among other things, revenue growth, our credit and payment terms with vendors,
the collection of accounts receivable, and the availability of our demand
discretionary line of credit. If such sources of cash prove insufficient or it
is otherwise unable to obtain necessary third party funding through the
issuance of debt or equity securities or otherwise, we will be required to make
changes in its operations, sell assets or otherwise seek protection from its
creditors. Any of these actions will likely have a material adverse effect on
our business.
We have currently in effect a stock repurchase program which authorizes us to
repurchase up to 5% of our outstanding common stock. Under the repurchase
program, we are authorized to purchase shares of our common stock on the open
market from time to time, depending on market conditions. To date, 44,500
shares have been purchased by us under the repurchase program.
FACTORS AFFECTING FUTURE RESULTS
Our future results remain difficult to predict and may be affected by a
number of factors which could cause actual results to differ materially from
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
15
conditions within the aerospace, transportation, industrial, utility,
telecommunications, silicon wafer manufacturing, factory automation, aircraft
and automotive industries and the world economies as a whole, and competitive
pressures that may impact research and development spending. Our 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 we can successfully obtain such
funds. In addition, our future growth opportunities are dependent on the
introduction of new products that must penetrate aerospace, transportation,
industrial, utility, telecommunications, silicon wafer manufacturing, factory
automation, aircraft and automotive 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 us; or that we 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 our
stock price frequently experiences significant volatility.
On October 23, 1998, we granted the purchasers of Beacon class D preferred
stock the right to cause us, under circumstances described below, to purchase
all of the Beacon's shares issued to those purchasers and, upon exercise of
this "put right," we must pay $4,750,000 in our common stock, valued at the
average fair value for the fifteen trading days before and after notice of
exercise of the put right. 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 us. If the put right
were to be exercised, we would most likely recognize a loss equal to the value
of our common stock issued upon exercise of the put right.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 (SFAS No. 137), "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which defers the effective date of Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities" to all fiscal quarters of all
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a new
model for accounting for derivatives and hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure these instruments at fair value. We
will adopt SFAS No. 133 beginning in the first quarter of the fiscal year
ending September 30, 2001.
Adoption of SFAS No. 133 is not expected to have a material impact to our
consolidated financial position, results of operations or cash flows.
EFFECTS OF INFLATION
We believe that inflation and changing prices over the past three years have
not had a significant impact on our net revenue or on income from continuing
operations.
EFFECTS OF YEAR 2000
We have assessed our software systems and internal operations. We believe
that we have resolved all potential Year 2000 issues and problems and, to the
best of our knowledge, our systems are Year 2000 compliant. However, if our
systems do not operate properly with respect to date calculations involving the
Year 2000 and subsequent dates, we could incur unanticipated expenses to remedy
any problems, which could seriously harm our business. We may also experience
reduced sales of our products as current or potential customers reduce their
budgets due to increased expenditures on their own Year 2000 compliance
efforts.
Additionally, we rely on information technology supplied by third parties and
our other business partners, including third-party distributors and
consultants, who are also heavily dependent on information technology systems
and on their own and third-party vendor systems. Year 2000 problems experienced
by us or any of
16
these third parties could materially adversely affect our business. Prior
versions of our products may contain technology from third parties that is not
Year 2000 compliant.
Given the pervasive nature of the Year 2000 problem, we cannot guarantee that
disruptions in other industries and market segments will not adversely affect
our business. Moreover, our costs related to Year 2000 compliance, which thus
far have not been material, could ultimately be significant. In the event that
we experience unforeseen disruptions as a result of the Year 2000 problem, our
business could be seriously affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We maintain 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 us 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 Public Accountants.................................. 19
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 and 1998........... 21
Consolidated Statements of Operations for the Years Ended September 30,
1999, 1998, and
1997................................................................... 22
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1999, 1998, and 1997............................... 23
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998, and 1997................................................... 24
Notes to Consolidated Financial Statements.............................. 25
Schedule II; Valuation and Qualifying Accounts for the Years Ended Sep-
tember 30, 1999, 1998, and 1997........................................ 47
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
SatCon Technology Corporation:
We have audited the accompanying consolidated balance sheet of SatCon
Technology Corporation and its subsidiaries (a Delaware corporation) as of
September 30, 1999 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SatCon Technology Corporation
and its subsidiaries as of September 30, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 27, 1999
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of SatCon Technology Corporation:
In our opinion, the consolidated balance sheet as of September 30, 1998 and
the related consolidated statements of operations, of changes in stockholders'
equity and of cash flows for each of the two years in the period ended
September 30, 1998 present fairly, in all material respects, the financial
position, results of operations and cash flows of SatCon Technology Corporation
and its subsidiaries at September 30, 1998 and for each of the two years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule for the years ended September 30, 1998 and 1997 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. We have
not audited the consolidated financial statements of SatCon Technology
Corporation for any period subsequent to September 30, 1998.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 17, 1998
20
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,533,072 $ 1,201,610
Marketable securities............................. -- 657,431
Accounts receivable, net of allowance of $386,686
and $51,836 at September 30, 1999
and 1998, respectively........................... 2,799,143 3,347,405
Unbilled contract costs and fees, net of allow-
ance of $746,121 and $57,611 at September 30,
1999
and 1998, respectively........................... 1,462,201 1,196,318
Inventory......................................... 3,697,972 3,678,067
Prepaid expenses and other current assets......... 346,653 338,017
Amounts due from related party.................... 2,417 596,453
------------ ------------
Total current assets............................ 10,841,458 11,015,301
Property and equipment, net........................ 3,260,632 2,677,786
Intangibles, net................................... 3,194,609 2,967,988
Investment in Beacon Power Corporation............. -- 1,458,183
Other long-term assets............................. 103,675 47,332
------------ ------------
Total assets.................................. $ 17,400,374 $ 18,166,590
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 1,563,605 $ 1,447,897
Accrued payroll and payroll related expenses...... 479,888 352,701
Deferred revenue.................................. 113,179 197,930
Accrued losses from investment in Beacon Power
Corporation...................................... 202,829 --
Other accrued expenses............................ 620,874 368,252
Current portion of long-term debt................. 16,226 146,594
------------ ------------
Total current liabilities....................... 2,996,601 2,513,374
Long-term liabilities:
Long-term debt, net of current portion............ 33,871 221,462
Other long-term liabilities....................... 29,735 17,747
------------ ------------
Total long-term liabilities..................... 63,606 239,209
Commitments and contingencies (Note I)
Redeemable convertible preferred stock............. 4,894,112 --
Stockholders' equity:
Preferred stock; $.01 par value, 1,000,000 shares
authorized; 8,000 shares series A redeemable
convertible preferred stock issued and outstand-
ing at September 30, 1999 and none issued and
outstanding at September 30, 1998................ -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 9,617,009 and
9,018,549 shares issued at September 30, 1999
and 1998, respectively........................... 96,170 90,185
Additional paid-in capital........................ 37,074,161 28,377,718
Common stock held in escrow, at market value;
42,860 and 0 shares at September 30, 1999
and 1998, respectively........................... (428,600) --
Amounts receivable from exercise of stock op-
tions............................................ (1,816,667) --
Accumulated deficit............................... (25,229,305) (12,870,440)
Net unrealized losses on marketable securities,
net of tax effect................................ -- (10,380)
Treasury stock, at cost; 44,500 and 28,300 shares
at September 30, 1999 and 1998, respectively..... (249,704) (173,076)
------------ ------------
Total stockholders' equity...................... 9,446,055 15,414,007
------------ ------------
Total liabilities, redeemable convertible pre-
ferred stock and stockholders' equity........ $ 17,400,374 $ 18,166,590
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
21
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
------------ ----------- -----------
Revenue................................ $ 15,477,881 $15,485,923 $12,466,335
------------ ----------- -----------
Cost of revenue........................ 15,339,218 10,991,202 10,071,150
Selling, general and administrative ex-
penses................................ 8,818,706 4,787,070 6,197,951
Research and development expenses...... 726,187 346,161 2,489,207
Goodwill amortization.................. 371,087 290,957 120,467
------------ ----------- -----------
Total operating expenses............... 25,255,198 16,415,390 18,878,775
------------ ----------- -----------
Operating loss......................... (9,777,317) (929,467) (6,412,440)
Loss from investment in Beacon Power
Corporation........................... (2,357,679) (3,541,817) --
Other losses........................... (150,464) -- --
Interest income........................ 42,287 179,861 283,131
Interest expense....................... (115,692) (10,206) (13,933)
------------ ----------- -----------
Net loss before income taxes........... (12,358,865) (4,301,629) (6,143,242)
Provision for income taxes............. -- 3,872 --
------------ ----------- -----------
Net loss............................... (12,358,865) (4,305,501) (6,143,242)
------------ ----------- -----------
Accretion of redeemable convertible
preferred stock discount.............. (50,904) -- --
------------ ----------- -----------
Net loss attributable to common stock-
holders............................... $(12,409,769) $(4,305,501) $(6,143,242)
============ =========== ===========
Net loss per share, basic and diluted.. $ (1.35) $ (.48) $ (.77)
============ =========== ===========
Weighted average number of common
shares, basic and diluted............. 9,176,041 8,956,671 7,959,309
============ =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
22
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
AMOUNTS
COMMON RECEIVABLE NET
SHARES COMMON FROM UNREALIZED
ADDITIONAL HELD STOCK EXERCISE OF LOSS ON
COMMON COMMON PAID-IN IN HELD IN STOCK ACCUMULATED MARKETABLE TREASURY TREASURY
SHARES STOCK CAPITAL ESCROW ESCROW OPTIONS DEFICIT SECURITIES SHARES STOCK
--------- ------- ----------- ------ --------- ----------- ------------ ---------- -------- ---------
Balance,
September 30,
1996........... 7,359,074 $73,591 $18,487,209 -- -- -- $ (2,421,697) $(39,935) -- --
Net loss........ -- -- -- -- -- -- (6,143,242) -- -- --
Exercise of
stock options.. 161,934 1,619 408,390 -- -- -- -- -- -- --
Change in net
unrealized
losses on
marketable
securities..... -- -- -- -- -- -- -- 19,720 -- --
Stock issued in
acquisition.... 450,000 4,500 2,871,750 -- -- -- -- -- -- --
Securities
purchase
agreement...... 798,138 7,981 4,809,251 -- -- -- -- -- -- --
--------- ------- ----------- ------ --------- ----------- ------------ -------- ------ ---------
Balance,
September 30,
1997........... 8,769,146 $87,691 $26,576,600 -- -- -- $ (8,564,939) $(20,215) -- --
Net loss........ -- -- -- -- -- -- (4,305,501) -- -- --
Exercise of
stock options.. 100,266 1,003 580,736 -- -- -- -- -- -- --
Exercise of
warrants....... 149,137 1,491 1,220,382 -- -- -- -- -- -- --
Treasury stock
purchased...... -- -- -- -- -- -- -- -- 28,300 $(173,076)
Change in net
unrealized
losses on
marketable
securities..... -- -- -- -- -- -- -- 9,835 -- --
--------- ------- ----------- ------ --------- ----------- ------------ -------- ------ ---------
Balance,
September 30,
1998........... 9,018,549 $90,185 $28,377,718 -- -- -- $(12,870,440) $(10,380) 28,300 $(173,076)
Net loss........ -- -- -- -- -- -- (12,358,865) -- -- --
Exercise of
stock options.. 455,600 4,556 3,173,445 -- -- (1,816,667) -- -- -- --
Treasury stock
purchased...... -- -- -- -- -- -- -- -- 16,200 (76,628)
Common stock
issued in
acquisitions... 100,000 1,000 567,800 -- -- -- -- -- -- --
Common stock
issued in
connection with
settlement
agreement which
is held in
escrow......... 42,860 429 189,762 42,860 (190,191) -- -- -- -- --
Compensation
expense related
to stock
options and
warrants issued
to non-
employees...... -- -- 2,208,639 -- -- -- -- -- -- --
Valuation
adjustment
for common
stock held in
escrow......... -- -- 238,409 -- (238,409) -- -- -- -- --
Warrants issued
in connection
with the sale
of redeemable
preferred
stock.......... -- -- 2,369,292 -- -- -- -- -- -- --
Change in net
unrealized
losses on
marketable
securities..... -- -- -- -- -- -- -- 10,380 -- --
Accretion of
redeemable
convertible
preferred stock
discount....... -- -- (50,904) -- -- -- -- -- -- --
--------- ------- ----------- ------ --------- ----------- ------------ -------- ------ ---------
Balance,
September 30,
1999........... 9,617,009 $96,170 $37,074,161 42,860 $(428,600) $(1,816,667) $(25,229,305) -- 44,500 $(249,704)
========= ======= =========== ====== ========= =========== ============ ======== ====== =========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance,
September 30,
1996........... $16,099,168
Net loss........ (6,143,242)
Exercise of
stock options.. 410,009
Change in net
unrealized
losses on
marketable
securities..... 19,720
Stock issued in
acquisition.... 2,876,250
Securities
purchase
agreement...... 4,817,232
-------------
Balance,
September 30,
1997........... $18,079,137
Net loss........ (4,305,501)
Exercise of
stock options.. 581,739
Exercise of
warrants....... 1,221,873
Treasury stock
purchased...... (173,076)
Change in net
unrealized
losses on
marketable
securities..... 9,835
-------------
Balance,
September 30,
1998........... $15,414,007
Net loss........ (12,358,865)
Exercise of
stock options.. 1,361,334
Treasury stock
purchased...... (76,628)
Common stock
issued in
acquisitions... 568,800
Common stock
issued in
connection with
settlement
agreement which
is held in
escrow......... --
Compensation
expense related
to stock
options and
warrants issued
to non-
employees...... 2,208,639
Valuation
adjustment
for common
stock held in
escrow......... --
Warrants issued
in connection
with the sale
of redeemable
preferred
stock.......... 2,369,292
Change in net
unrealized
losses on
marketable
securities..... 10,380
Accretion of
redeemable
convertible
preferred stock
discount....... (50,904)
-------------
Balance,
September 30,
1999........... $ 9,446,055
=============
The accompanying notes are an integral part of the consolidated financial
statements.
23
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
------------ ----------- -----------
Cash flows from operating activities:
Net loss............................. $(12,358,865) $(4,305,501) $(6,143,242)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 1,013,037 676,240 969,010
Allowance for unbilled contract
costs and fees.................. 688,510 (19,065) 697,968
Allowance for doubtful accounts.. 334,850 (94,424) 28,324
Allowance for inventory.......... 870,021 (549,765) 758,541
Loss from investment in Beacon
Power Corporation............... 2,357,679 3,541,817 --
Loss on sale of marketable secu-
rities.......................... 87,535 -- --
Write-off impaired assets........ 255,544 50,104 2,593,558
Compensation expense related to
issuance of stock options and
warrants to non-employees....... 2,208,639 -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable............ 89,858 (318,859) 535,797
Prepaid expenses and other as-
sets.......................... 31,455 (11,860) 62,174
Unbilled contract costs and
fees.......................... (954,393) 532,573 (749,462)
Inventory...................... (601,120) (1,567,607) (1,161,843)
Other assets................... 517,402 (607,245) 212,339
Accounts payable............... 72 597,689 (385,868)
Accrued costs for consolidation
of facilities................. -- (398,000) 498,000
Accrued expenses and payroll... (98,163) 83,714 (1,396,970)
Other liabilities.............. (72,763) 6,802 --
------------ ----------- -----------
Total adjustments.................. 6,728,163 1,922,114 2,661,568
------------ ----------- -----------
Net cash used in operating activities.. (5,630,702) (2,383,387) (3,481,674)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities... -- -- (600,000)
Sales and maturities of marketable
securities.......................... 580,144 1,340,609 2,079,064
Patent and intangible expenditures... (102,227) (522,483) (150,534)
Deferred financing fees.............. -- -- 56,313
Capital expenditures................. (220,416) (1,021,478) (2,496,726)
Acquisitions, net of cash acquired... (995,876) -- (112,986)
Investment in Beacon Power Corpora-
tion................................ (696,667) (2,058,066) --
------------ ----------- -----------
Net cash used in investing activities.. (1,435,042) (2,261,418) (1,224,869)
------------ ----------- -----------
Cash flows from financing activities:
Repayment of borrowings.............. (100,000) (40,625) (35,119)
Borrowings under line of credit...... 2,657,234 -- --
Repayment of borrowings under line of
credit.............................. (2,657,234) -- --
Proceeds from exercise of stock op-
tions............................... 1,361,334 581,739 410,009
Proceeds from exercise of warrants... -- 1,221,873 --
Proceeds from issuance of common
stock............................... -- -- 4,817,232
Proceeds from issuance of redeemable
convertible preferred stock......... 7,212,500 -- --
Purchase of treasury stock........... (76,628) (173,076) --
------------ ----------- -----------
Net cash provided by financing activi-
ties.................................. 8,397,206 1,589,911 5,192,122
------------ ----------- -----------
Net increase/(decrease) in cash and
cash equivalents...................... 1,331,462 (3,054,894) 485,579
Cash and cash equivalents at beginning
of year............................... 1,201,610 4,256,504 3,770,925
------------ ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 2,533,072 $ 1,201,610 $ 4,256,504
============ =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
24
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 designs, develops and manufactures intelligent, electro-mechanical
products for aerospace, transportation, industrial and utility applications.
SatCon also designs, develops and manufactures power and energy management
products for telecommunications, silicon wafer manufacturing, factory
automation, aircraft and automotive applications. The Company's electro-
mechanical products are being developed for a wide variety of U.S. government
and commercial markets. For the government, the electro-mechanical systems
provide for applications ranging from satellite attitude control to high-speed
drives for shipboard systems. In the transportation segment, SatCon is
developing electric and hybrid electric drive components, auxiliary power units
and advanced steering, alternator and starter/generator systems. The Company is
working with major equipment producers to develop process equipment drives,
high speed and precision machine tools, manipulators and machinery isolation
equipment. The Company's electro-mechanical systems may offer advantages to the
utility industry in power generation, energy storage and power quality. In the
consumer market, SatCon is developing variable speed motors for refrigeration
equipment and other long-life, high-efficiency machinery.
Basis of Consolidation
The consolidated financial statements include the accounts of SatCon and its
majority-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Revenue Recognition
The Company performs research under cost-type, fixed-price, and time-and-
material contracts and sells product prototypes. On fixed-price contracts,
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. Revenue on time and material
contracts is recognized as services are provided.
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. The
Company provides for warranty reserves at the time product is shipped.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and highly liquid
investments with a maturity of three months or less when acquired. Cash
equivalents are stated at cost, which approximates market value.
Marketable Securities
The Company accounts for marketable securities in accordance with the
Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
25
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such determination at
each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale.
Securities available for sale are carried at fair value, based on quoted
market prices, with the unrealized gains and losses, net of tax 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,
1999 and 1998, 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.
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 and include
material, labor and manufacturing overhead costs.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization 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 that impairment exists, the Company will
measure the amount of such impairment based on the present value of estimated
future cash flows using a discount rate commensurate with the risks involved.
Factors that management
26
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
considers in performing this assessment include current operating results,
trends and prospects and, in addition, demand, competition and other economic
factors. At September 30, 1999 and 1998, the Company determined that there had
been no impairment of its long-lived assets, except as in Note E.
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, 1999 and 1998, accumulated
amortization of intangibles amounted to $831,922 and $442,237, respectively.
Deferred Revenue
Deferred revenue consists of payments received from customers in advance of
services performed or product shipped.
Treasury Stock
The Company is authorized to repurchase up to 5% of the Company's outstanding
shares of common stock through July 2000. Under the repurchase program, the
Company plans to purchase shares of the Company's outstanding common stock on
the open market from time-to-time, depending on market conditions.
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 SFAS No. 109,
"Accounting for Income Taxes," which is the asset and liability method for
accounting and reporting for income taxes. Under SFAS No. 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 No. 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.
Stock-based Compensation
The Company recognizes stock-based compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires that
companies recognize compensation expense for grants of stock, stock options,
and other equity instruments based on fair value, or, for grants to employees,
provide pro forma disclosure of net income and earnings per share in the notes
to the financial statements using the fair value method.
27
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Loss per Basic and Diluted Common Share
The Company reports net loss per basic and diluted common share in accordance
with SFAS No. 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 that subject the Company to concentrations of credit
risk consist principally of cash equivalents, investments in marketable
securities, trade accounts receivable, unbilled contract costs and amounts
receivable from exercise of stock options.
The Company's trade accounts receivable and unbilled contract costs and fees
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 and fees 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.
Research and Development Costs
The Company expenses research and development costs as incurred.
Comprehensive Loss
Comprehensive loss includes net loss, as well as other changes in
stockholders' equity, except stockholders' investments and distributions.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, unbilled contract costs and fees, accounts payable, debt
instruments and amounts receivable from exercise of stock options. The book
value of such financial instruments approximate their respective fair values
due to their short-term maturities.
Reclassifications
Certain prior year balances have been reclassified to conform to current year
presentations.
Effect of Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133,"
28
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
which defers the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" to all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure these instruments at fair value. The Company
will adopt SFAS No. 133 beginning in the first quarter of the fiscal year
ending September 30, 2001.
Adoption of SFAS No. 133 is not expected to have a material impact to the
Company's consolidated financial position, results of operations or cash flows.
B. MARKETABLE SECURITIES
At September 30, 1998, 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 consisted 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)
======== ======== ======= ========
The change in net unrealized losses during 1999, 1998 and 1997 were $10,380,
$23,312, and $32,866, 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 1999, 1998
and 1997 were $580,144, $1,340,609, and $2,079,064, respectively. Gross
realized losses from the sale of securities classified as available for sale
during 1999, 1998 and 1997 were $87,535, $0, and $0, respectively.
C. UNBILLED CONTRACT COSTS AND FEES
Unbilled contract costs and fees represent revenue recognized in excess of
amounts billed due to contractual provisions. These amounts included retained
fee and unliquidated costs totaling $282,746 and $363,087 at September 30, 1999
and 1998, respectively.
D. INVENTORY
Inventory consisted of the following:
SEPTEMBER 30,
---------------------
1999 1998
---------- ----------
Raw material......................................... $1,139,064 $1,783,803
Work-in-process...................................... 2,199,199 1,788,241
Finished goods....................................... 359,709 106,023
---------- ----------
$3,697,972 $3,678,067
========== ==========
29
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
E. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
SEPTEMBER 30,
---------------------
1999 1998
---------- ----------
Machinery and equipment.............................. $4,505,287 $3,391,758
Sales and demonstration equipment.................... -- 19,052
Furniture and fixtures............................... 280,769 265,173
Computer software.................................... 621,583 556,876
Leasehold improvements............................... 648,734 626,216
---------- ----------
6,056,373 4,859,075
Less accumulated depreciation and amortization....... 2,795,741 2,181,289
---------- ----------
$3,260,632 $2,677,786
========== ==========
Depreciation expense for the years ended September 30, 1999, 1998, and 1997
was $633,964, $540,213, and $736,924, respectively.
As of September 30, 1999, there was $19,903 and $29,910 of capital leases
that were included in machinery and equipment and computer software,
respectively. As of September 30, 1998, there was no equipment under capital
lease.
During 1999 and 1997, the Company determined that certain of its machinery
and equipment totaling $105,544 and $2,593,558, respectively, was impaired
based on a change in the needs of its customers and such assets were written-
off during 1999 and 1997, respectively.
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. 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
Beacon's Common Stock and 1,000,000 shares of Beacon's preferred stock, par
value $.01 per share. 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. The
consolidated financial statements for the year ended September 30, 1997
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 of accounting for this
investment was required for the fair presentation subsequent to this
recapitalization. The consolidated financial statements include the recognition
of 100% of Beacon's losses for the period
30
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 24, 1997 to September 30, 1998. 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 15 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 60 days of the second, third, fourth 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. The Company retained approximately 0.1% 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
transaction.
On June 22, 1999, the Company purchased from Beacon a note (the "June 22,
1999 Note ") with a principal amount of $125,000 due and payable on the earlier
of (i) September 22, 1999 ("Maturity Date") or (ii) upon the occurrence of an
event of default, as defined therein. The note bears interest at 12 % per
annum; provided that, if the note is not repaid in full on or prior to Maturity
Date, the interest rate would increase to 15% per annum. The June 22, 1999 Note
was issued pursuant to the terms of a Note Purchase Agreement, dated as of June
22, 1999, by and among Beacon, the Purchasers named therein, and the Company
(the "Note Purchase Agreement"). Interest on the June 22, 1999 Note is payable
on the Maturity Date.
31
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 6, 1999, the Company purchased from Beacon an additional note (the
"July 6, 1999 Note") with a principal amount of $125,000 due and payable on the
earlier of (i) Maturity Date or (ii) upon the occurrence of an event of
default. The note bears interest at 12 % per annum; provided, that if the note
is not repaid in full on or prior to Maturity Date, the interest rate would
increase to 15% per annum (the "July 6, 1999 Note" and together with the June
22, 1999 Note, the "Notes"). The July 6, 1999 Note was also issued pursuant to
the terms of the Note Purchase Agreement. Interest on the July 6, 1999 Note is
payable on the Maturity Date.
In August 1999, the Company exchanged in full the Notes and $83,333.33 for a
note with a principal amount of $333,333.33 ("Bridge Note") plus accrued
interest due and payable on the earlier of (i) the date of conversion of the
note as described below or (ii) upon the occurrence of an event of default. The
Bridge Note bears interest at 12 % per annum; provided that if the Funding Date
(as defined below) does not occur within six months, such interest rate shall
increase effective February 2, 2000 to 15% per annum. The Bridge Note was
issued pursuant to the terms of a Note and Warrant Purchase Agreement, dated as
of August 2, 1999, by and among Beacon, the Purchasers named therein, and the
Company (the "Note and Warrant Purchase Agreement"). Interest on the Bridge
Note is payable on the Maturity Date.
Pursuant to the terms of the Note and Warrant Purchase, the Company purchased
two (2) additional notes each with a principal amount of $333,333.33 on
September 16, 1999 and October 19, 1999. The Bridge Note and the additional
notes each with a principal amount of $333,333.33 are collectively referred to
as the "Bridge Securities."
In the event that Beacon obtains a funding commitment for at least $5 million
of external funds within four months of the issuance of the first Bridge
Security and closes a funding pursuant to such commitment within six months of
the first issuance of the first Bridge Security (the date of such funding, the
"Funding Date"), all outstanding principal and interest on the Bridge
Securities will convert into equity of Beacon at a price and on terms that are
equivalent to the securities issued by Beacon pursuant to the funding
commitment. If Beacon does not obtain a qualified financing commitment within
the four-month period referred to above, or close such funding within the six-
month period referred to above, the Bridge Securities will convert into
securities of Beacon pursuant to terms to be agreed to with Beacon, or if no
terms are agreed to, the Company has the right to demand payment of all
principal and interest on the Bridge Securities.
Warrants to purchase shares of Beacon Securities were issued in connection
with each issuance of the Bridge Securities. The warrants are for the purchase
of the type of securities to be issued upon conversion of the Bridge Securities
or if such securities are not converted, Beacon Common Stock. The number of
shares of Beacon securities that will be subject to the warrants will be
determined by dividing (i) 25% of the principal amount of the Bridge Securities
issued by (ii) the price per share of the Bridge Securities, or, if the Bridge
Securities are not converted, $2.50.
The consolidated financial statements include under the equity method of
accounting for investments the recognition of 100% of Beacon's losses for the
period October 1, 1998 to October 22, 1998, 50% of Beacon's losses for the
period October 23, 1998 to March 31, 1999 and 33% of Beacon's losses subsequent
to March 31, 1999.
At September 30, 1999, the Company has accrued losses of $202,829 relating to
its share of Beacon losses, which it is required to fund pursuant to the terms
of the Note and Warrant Purchase Agreement. In future periods, the Company will
continue to record its share of Beacon's losses up to the amount of its actual
and committed investment.
32
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
G. LINE OF CREDIT
In December 1998, as modified, the Company obtained a $3,000,000 demand
discretionary line of credit with a bank. The line of credit bears interest at
the bank's prime rate plus 1 1/2 % (9 3/4 % as of September 30, 1999).
Available borrowings are based on a formula of eligible accounts receivable and
inventory. There were no amounts outstanding under the line of credit at
September 30, 1999. During 1999, the maximum amount outstanding on the line of
credit was $2,657,234. The Company has pledged all assets of the Company as
collateral against this line of credit.
H. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30,
------------------
1999 1998
-------- --------
Note payable due in 52 weekly payments. The total
note of $443,804 commenced on April 16, 1997........ $ -- $368,056
Capital lease obligations............................ 50,097 --
Less: Current Portion................................ (16,226) (146,594)
-------- --------
$ 33,871 $221,462
======== ========
At September 30, 1999, maturities of these obligations are as follows:
FISCAL YEAR
-----------
2000............................................................. $ 16,226
2001............................................................. 17,494
2002............................................................. 10,778
2003............................................................. 5,599
--------
50,097
Less: Current Portion............................................ (16,226)
--------
$ 33,871
========
On March 1, 1999, the Company reached a definitive settlement arrangement
with Albert R. Snider (the "Settlement Agreement"), the holder of the note
payable which commenced on April 16, 1997, regarding the suit filed against Mr.
Snider for breach of certain representations made by him, 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 of the business of
FMI and a counterclaim filed by Mr. Snider seeking, among other things,
payments allegedly due from the Company under a promissory note.
Pursuant to the terms of the Settlement Agreement, the Company made a
$100,000 cash payment to Mr. Snider on March 9, 1999 and the parties executed
mutual general releases dismissing any and all claims between them. In
addition, the Settlement Agreement provides a right of first refusal in favor
of the Company with respect to certain shares of the Company's Common Stock,
beneficially owned by Mr. Snider. Concurrently with the execution of the
Settlement Agreement, the Company and Mr. Snider entered into a consulting
agreement pursuant to which Mr. Snider will perform certain consulting,
advisory and related services as the Company may reasonably request from time
to time between October 1, 1999 and October 1, 2002. In exchange for these
services, the Company issued 42,860 shares of its Common Stock to an escrow
agent who will release such shares to Mr. Snider or his nominees on January 2,
2001. The Company has recorded these shares held in escrow at market value and
as a reduction to stockholders' equity as of September 30, 1999. The Company
will continue to mark-to-market these securities until such shares are released
from escrow.
33
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company will amortize the market value of the common stock held in escrow
as consulting, advisory and related services expense as services are provided
between the period October 1, 1999 and October 1, 2002.
I. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities under various operating leases that expire
through 2003. The Company has also entered into a master leasing agreement to
lease various items of equipment not to exceed $600,000. At September 30, 1999,
the availability under this facility has expired.
Future minimum annual rentals under the lease agreements at September 30,
1999 are as follows:
FISCAL YEAR
-----------
2000............................................................ $1,471,382
2001............................................................ 1,520,400
2002............................................................ 1,446,996
2003............................................................ 1,215,498
2004............................................................ 280,850
Thereafter...................................................... 218,829
----------
Total (not reduced by minimum sublease rentals of
$1,265,847)................................................ $6,153,955
==========
Total rental expense including operating expenses and real estate taxes for
operating leases amounted to $1,683,749, $1,235,867, and $1,245,238 for the
years ended September 30, 1999, 1998 and 1997, respectively.
Certain of the facility leases contain escalation clauses, effective October
1, 1998, rental expense has been recognized on a straight-line basis over the
remaining lease term. At September 30, 1999, deferred rent expense amounted to
$110,390.
In the fourth quarter of 1997, the Company decided to consolidate its
operating facility in Tucson, AZ with its facility in Cambridge, MA. As a
result, the Company accrued approximately $498,000, primarily related to the
buyout of the facility lease. At September 30, 1999 and 1998, the Company had a
reserve of $100,000, primarily related to the lease cancellation costs.
J. 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. During 1999, the
Company extended the Plan to its wholly-owned subsidiaries. The Company made
matching contributions to the Plan of $218,729, $86,883 and $133,018 during
1999, 1998 and 1997, respectively.
34
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
K. INCOME TAXES
The provision for income taxes consists of the following:
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Current payable:
Federal......................... -- -- --
State........................... -- $ 3,872 --
----------- ----------- -----------
-- 3,872 --
----------- ----------- -----------
Deferred tax expense/(benefit):
Federal......................... $(3,888,031) $(1,349,519) $(1,823,584)
State........................... (1,167,905) (404,950) (680,530)
Change in valuation allowance... 5,055,936 1,754,469 2,504,114
----------- ----------- -----------
-- -- --
----------- ----------- -----------
-- $ 3,872 --
=========== =========== ===========
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, 1999
and 1998, the components of the net deferred tax assets/(liabilities) are as
follows:
1999 1998
----------- ----------
Federal net operating
loss................... $ 5,048,719 $3,563,810
State net operating
loss, net of federal
benefit................ 404,540 574,613
Unrealized losses on
marketable securities.. -- 4,116
Credits................. 499,585 455,982
Depreciation............ 336,038 15,318
Loss on investment in
Beacon Power Corpora-
tion................... 2,363,850 1,404,347
Other................... 1,562,820 189,152
Valuation allowance..... (10,215,552) (6,207,338)
----------- ----------
Net deferred income tax-
es..................... -- --
=========== ==========
The Company has placed a full valuation allowance against its net deferred
tax assets since the Company believes it is "more likely than not" that it will
not be able to utilize its deferred tax asset.
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 the 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,
---------------------
1999 1998 1997
----- ----- -----
Tax at statutory rate............................. (34.0)% (34.0)% (34.0)%
State taxes--net of federal benefit............... (6.2) (6.2) (7.3)
Other............................................. (0.7) (0.5) .6
Change in valuation allowance..................... 40.9 40.8 40.7
----- ----- -----
Effective tax rate................................ -- % 0.1% -- %
===== ===== =====
35
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1999, the Company had net operating loss carry-forwards of
approximately $15,026,000 and $6,452,000 for federal and state income tax
purposes, respectively. The federal net operating losses expire beginning
September 30, 2008 through 2019. The state net operating losses will expire
beginning September 30, 2000 through 2004. The use of these losses may be
limited due to ownership change limitations under Section 382 of the Code.
L. STOCKHOLDERS' EQUITY
Stock Options
Under the Company's 1992, 1994, 1996 and 1998 Stock Option Plans, both
qualified and non-qualified stock options may be granted to certain officers,
employees, directors and consultants to purchase up to 1,550,000 shares of the
Company's common stock. At September 30, 1999, all of the 1,550,000 stock
options available for grant under the Company's 1992, 1994, 1996 and 1998 Stock
Option Plan have been granted.
During 1999, the Company adopted its 1999 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 1,500,000 shares of the Company's
common stock. At September 30, 1999, 816,898 of the 1,500,000 stock options
available for grant under the Company's 1999 Stock Option Plan have been
granted.
The 1992, 1994, 1996, 1998, and 1999 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 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.
The Plans contain antidilutive provisions authorizing appropriate adjustments
in certain circumstances. Shares of common stock subject to options that expire
without being exercised or that are canceled as a result of the cessation of
employment are available for further grants.
36
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, 1999, 1998 and 1997 and changes for the years then ended are presented
below.
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning
of year................ 820,910 $ 9.58 700,427 $ 8.44 713,392 $ 7.08
Granted............... 1,404,000 7.09 319,000 11.20 144,000 8.97
Exercised............. (455,600) 6.98 (100,266) 5.80 (144,466) 2.25
Canceled.............. (118,083) 8.84 (98,251) 10.55 (12,499) 10.71
--------- ------ -------- ------ -------- ------
Outstanding at end of
year 1,651,227 $ 8.24 820,910 $ 9.58 700,427 $ 8.44
========= ====== ======== ====== ======== ======
Options exercisable at
year-end............... 640,560 $ 9.18 413,403 $ 8.48 503,660 $ 8.14
========= ====== ======== ====== ======== ======
The following table summarizes information about stock options outstanding as
of September 30, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- --------- -------- ----------- --------
$5.00--$7.81 576,328 7.8 $5.75 159,328 $5.86
$8.75--$10.50 773,399 8.4 8.84 345,732 9.72
$11.00--$13.38 301,500 7.9 10.69 135,500 11.69
--------- --- ----- ------- -----
1,651,227 8.1 $8.24 640,560 $9.18
========= === ===== ======= =====
An additional 683,102 shares were available under the 1999 Stock Option Plan
for future grants at September 30, 1999.
During 1999, the Company granted fully vested options to purchase 755,000
shares of the Company's common stock to consultants at prices ranging from
$5.75 to $10.00 per share. The Company has recorded the fair value of the
options, as determined by the Black-Scholes option pricing model, of
$2,152,277, to selling, general and administrative expenses during the year
ended September 30, 1999. As of September 30, 1999, options to purchase 450,000
shares at $7.00 per share have been exercised. As of September 30, 1999, the
Company received $1,333,333 of cash and the remaining amount due from the
shareholders is classified within stockholders' equity as amounts receivable
from exercise of stock options.
Warrants
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 68,795 shares of common stock, as amended, at an exercise price
of $11.43 per share. These warrants expired on November 11, 1999 unexercised.
On November 11, 1998, the Company issued common stock warrants to purchase up
to 67,125 shares of the Company's Common Stock at an exercise price of $11.43
per share. The Company has recorded the fair value of these warrants as
determined by the Black-Scholes option pricing model, of $56,362, to selling,
general and administrative expenses during the year ended September 30, 1999.
These warrants expired on November 11, 1999 unexercised.
37
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 25, 1999, in connection with the $8 million private placement of
8,000 shares of the Company's Series A Convertible Preferred Stock, $0.01 par
value per share with Brown Simpson Strategic Growth Funds (See Note M), the
Company issued common stock warrants to purchase up to 120,000 and 675,000
shares of common stock at an exercise price of $7.80 and $8.54, respectively.
These warrants expire on August 25, 2003. At September 30, 1999, none of these
warrants have been exercised.
Stock-Based Compensation
Had compensation cost for the Company's stock-based compensation been
determined based on fair value at the grant dates as calculated in accordance
with SFAS No. 123, the Company's net loss and loss per share for the years
ended September 30, 1999, 1998 and 1997 would have been increased to the pro
forma amounts indicated below:
1999 1998 1997
-------------------- -------------------- --------------------
NET LOSS LOSS NET LOSS LOSS NET LOSS LOSS
ATTRIBUTABLE PER ATTRIBUTABLE PER ATTRIBUTABLE PER
TO COMMON COMMON TO COMMON COMMON TO COMMON COMMON
STOCKHOLDERS SHARE STOCKHOLDERS SHARE STOCKHOLDERS SHARE
------------ ------ ------------ ------ ------------ ------
As reported...... $(12,409,769) $(1.35) $(4,305,501) $(.48) ($6,143,242) $(.77)
Pro forma........ $(13,614,221) $(1.48) $(4,881,491) $(.55) ($6,215,049) $(.78)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
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 seven years, expected volatility of
80.0%, no dividends, and risk-free interest rate of 6.08% for September 30,
1999; an expected life of seven years, expected volatility of 57.9%, no
dividends, and risk-free interest rate of 5.76% for September 30, 1998; and an
expected life of seven years, expected volatility of 57.9%, no dividends, and
risk-free interest rate of 6.125% for September 30, 1997. The weighted average
price of the fair value of options granted for years ended September 30, 1999,
1998 and 1997 are $5.21, $7.14 and $5.80, respectively.
M. 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
On August 25, 1999, the Company completed an $8 million private placement of
8,000 shares of its Series A Redeemable Convertible Preferred Stock, $0.01 par
value per share (the "Series A Preferred Stock"), with Brown Simpson Strategic
Growth Funds ("Brown Simpson"). The Series A Preferred Stock is initially
convertible into 1,025,641 shares of the Company's common stock, $0.01 par
value per share (the "Common Stock"), at an initial conversion price of $7.80
per share. The Series A Preferred Stock is also subject to certain dilution
protection for a period of three years. Under certain circumstances, the
Company has the option to cause the Series A Preferred Stock to convert into
shares of Common Stock or otherwise be redeemed. At the end of seven years, the
Company must redeem any remaining shares of the Series A Preferred Stock for
cash or, at the Company's option, Common Stock with a then fair market value
equal to the original purchase price of the Series A Preferred Stock. The
obligation at seven years to redeem any remaining shares of the Series A
Preferred Stock accelerates to the fourth anniversary of the closing in the
event that the average bid
38
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
price of the Company's Common Stock for the 60 "trading day" period immediately
preceeding the fourth anniversary is $5 per share or less. In the event of
certain changes in control events regarding the Company or if the Common Stock
is delisted, Brown Simpson has the right to cause the Series A Preferred Stock
to be redeemed.
In connection with the transaction, Brown Simpson also received warrants to
purchase up to 675,000 additional shares of Common Stock at $8.54 per share
(the "Brown Simpson Warrants"). The Brown Simpson Warrants expire on August 25,
2003. The Company has allocated $1,818,558 of the proceeds, net of $1,338,234
transaction costs, based on the fair value of these warrants, as determined by
the Black-Scholes option pricing model.
H.C. Wainwright & Co., Inc. ("H.C. Wainwright") served as placement agent for
the transaction and received a commission of $560,000 and warrants to purchase
120,000 shares of the Company's Common Stock at $7.80 per share. These warrants
expire on August 25, 2003. H.C. Wainwright will also receive a future fee in
the amount of 4% of any monies received by the Company upon the exercise of the
Brown Simpson Warrants. The Company has recorded the fair value of these
warrants, as determined by the Black-Scholes option pricing model, of $550,734
as a transaction cost of this offering.
The Company has valued the redeemable convertible preferred stock at issuance
to be $4,843,208 based on the relative fair market values of the financial
instruments issued in connection with this placement. The Company will accrete
the carrying value of the redeemable convertible preferred stock to its
redeemable value of $8,000,000 at August 25, 2003, in the event that the
average bid price for the 60 trading days prior is $5.00 or less, using the
effective interest method. As of September 30, 1999, the Company has accreted
$50,904 and recorded this as a charge against additional paid-in capital.
N. SIGNIFICANT CUSTOMERS
Significant customers, defined as net revenues from those customers that
account for 10% or more of total net revenue in a fiscal year, were as follows:
PERCENTAGE OF
TOTAL NET
REVENUES
FOR THE YEARS
ENDED
SEPTEMBER 30,
----------------
CUSTOMER 1999 1998 1997
-------- ---- ---- ----
U.S. government:
U.S. Department of Defense............................... 20.6% 22.2% 44.6%
==== ==== ====
O. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-Cash Investing and Financing Activities
FOR THE YEARS ENDED
SEPTEMBER 30,
-------------------
1999 1998 1997
------- ----- -----
Accretion of redeemable convertible preferred stock
discount.............................................. $50,904 $ -- $ --
======= ===== =====
Acquisition of equipment under capital leases.......... $49,813 $ -- $ --
======= ===== =====
39
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest and Income Taxes Paid
Cash paid for interest and income taxes were as follows:
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------
1999 1998 1997
-------- ------- -------
Interest............................................ $115,692 $10,206 $13,933
======== ======= =======
Income taxes........................................ -- $ 5,772 $ 5,800
======== ======= =======
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.
MagMotor 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.
The pro forma financial information has not been presented as the acquisition
of Magmotor is not material.
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 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. The pro
forma results are
40
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 YEAR
ENDED
SEPTEMBER
30, 1997
------------
Net revenue................................................. $14,974,765
Net operating loss.......................................... $(7,024,383)
Net loss.................................................... $(6,544,837)
Net loss per share.......................................... $ (.82)
Inductive Components, Inc. and Lighthouse Software, Inc.
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 $246,000. The
Company has included in its consolidated results of operations the acquisition
of Inductive and Lighthouse under the purchase method of accounting. The
purchase price has been allocated as follows:
Inventory...................................................... $ 50,000
Property and equipment......................................... 100,597
Intangibles.................................................... 275,000
Goodwill....................................................... 389,079
---------
$ 814,676
=========
The pro forma financial information has not been presented, as the
acquisitions of Inductive Components, Inc. and Lighthouse Software, Inc. are
not material.
HyComp, Inc.
On April 12, 1999, the Company executed an agreement to purchase
substantially all of the assets and assume certain liabilities of HyComp, Inc.
("HyComp"). This agreement was dated March 31, 1999 and was by and between
HyComp and HyComp Acquisition Corp., a wholly-owned subsidiary of the Company.
The aggregate consideration paid by the Company for the acquired assets of
HyComp consisted of (i) $750,000 in cash; (ii) the assumption of certain
liabilities and obligations of HyComp in the amount of approximately $422,000;
(iii) transaction costs of $95,000; and (iv) a 5% royalty to HyComp on certain
sales through April 12, 2000. At September 30, 1999, the Company has recorded
$50,000 of accrued royalties. The Company has included in its consolidated
results of operations the acquisition of HyComp under the purchase method of
accounting. The purchase price has been allocated as follows:
Accounts receivable.......................................... $ 38,556
Inventory.................................................... 318,359
Deposits..................................................... 19,800
Property and equipment....................................... 940,500
-----------
$ 1,317,215
===========
41
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma financial information has not been presented as the acquisition
of HyComp is not material.
Net cash paid for the acquisitions of K&D MagMotor Corporation, Film
Microelectronics, Inc., Inductive Components Inc., Lighthouse Software, Inc.
and HyComp, Inc. was as follows:
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------
1999 1998 1997
---------- ------- ----------
Fair value of assets..................... $1,742,812 -- $4,723,408
Cost in excess of net assets of companies
acquired, net........................... 389,079 -- 987,678
Liabilities assumed, including transac-
tion costs.............................. (567,215) -- (2,624,836)
Stock issued............................. (568,800) -- (2,876,250)
---------- ------- ----------
Cash paid................................ $ 995,876 -- $ 210,000
Less: Cash acquired...................... -- -- (97,014)
---------- ------- ----------
Net cash paid for the acquisitions....... $ 995,876 -- $ 112,986
========== ======= ==========
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,
--------------------------------------
1999 1998 1997
------------ ----------- -----------
Net loss attributable to common share-
holders............................... $(12,409,769) $(4,305,501) $(6,143,242)
BASIC:
Common shares outstanding, beginning of
year.................................. 8,990,249 8,769,146 7,359,074
Weighted average common shares issued
during the year....................... 200,017 190,163 600,235
Weighted average shares repurchased
during the year....................... (14,225) (2,638) --
------------ ----------- -----------
Weighted average shares outstanding--
basic................................. 9,176,041 8,956,671 7,959,309
============ =========== ===========
Net loss per share, basic.............. $ (1.35) $ (.48) $ (.77)
============ =========== ===========
DILUTED:
Weighted average shares outstanding--
basic................................. 9,176,041 8,956,671 7,959,309
Weighted average common stock equiva-
lents (a)............................. -- -- --
------------ ----------- -----------
Weighted average shares outstanding--
diluted............................... 9,176,041 8,956,671 7,959,309
============ =========== ===========
Net loss per share, diluted............ $ (1.35) $ (.48) $ (.77)
============ =========== ===========
- --------
(a) At September 30, 1999, 1998 and 1997, 2,582,147, 884,758 and 1,000,427
options and warrants, respectively, were excluded from the weighted
average common shares outstanding as their effect would be antidilutive.
42
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
R. COMPREHENSIVE LOSS
The Company's total comprehensive loss is as follows:
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------------------
1999 1998 1997
------------ ----------- -----------
Net loss.............................. $(12,358,865) $(4,305,501) $(6,143,242)
============ =========== ===========
Other comprehensive income/(loss), net
of tax:
Unrealized gains/(losses) on securi-
ties................................. $ 10,380 $ 9,835 $ 19,720
------------ ----------- -----------
Other comprehensive income/(loss)..... $ 10,380 $ 9,835 $ 19,720
------------ ----------- -----------
Comprehensive loss.................... $(12,348,485) $(4,295,666) $(6,123,522)
============ =========== ===========
S. SEGMENT DISCLOSURES
As of October 1, 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 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. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and assess their performance.
The Company's organizational structure is based on strategic business units
that offer various products to the principal markets in which the Company's
products are sold. These business units equate to three reportable segments:
contract engineering, power electronic products and motion-control products.
SatCon Technolgy Corporation markets and provides contract engineering
services. Film Microelectronics, Inc designs and manufactures power electronics
products. The Magmotor Division specializes in the engineering and
manufacturing of motion-control products. The Company's principal operations
and markets are located in North America.
The accounting policies of each of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on revenue and profit and loss from operations
before income taxes, interest income, interest expense, other income and losses
and loss from investment in Beacon Power Corporation, excluding the effects of
amortization of intangible assets associated with acquisitions. Common costs
not directly attributable to a particular segment are allocated among segments
based on management's estimates.
43
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the Company's operations by operating segment:
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------------
1999 1998 1997
----------- ---------- -----------
Contract engineering:
Revenue................................ $ 6,355,383 $7,965,735 $ 8,738,293
----------- ---------- -----------
Loss from operations, net of amortiza-
tion.................................. $(6,577,012) $ (833,015) $(6,522,850)
=========== ========== ===========
Power electronic products:
Revenue................................ $ 6,306,085 $5,909,765 $ 2,594,023
----------- ---------- -----------
(Loss)/income from operations, net of
amortization.......................... $(2,073,946) $ 504,528 $ 137,268
=========== ========== ===========
Motion-control products:
Revenue................................ $ 2,816,413 $1,610,423 $ 1,134,019
----------- ---------- -----------
(Loss)/income from operations, net of
amortization.......................... $ (755,272) $ (310,023) $ 93,609
=========== ========== ===========
The following is a summary of the Company's long-lived assets, excluding the
investment in Beacon Power Corporation, by operating segment:
SEPTEMBER 30,
---------------------
1999 1998
---------- ----------
Contract engineering:
Long-lived assets...................................... $1,717,228 $1,842,517
---------- ----------
Power electronic products:
Long-lived assets...................................... $3,978,027 $3,416,341
---------- ----------
Motion-control products:
Long-lived assets...................................... $ 863,661 $ 434,248
---------- ----------
T. SUBSEQUENT EVENTS
On October 21, 1999, the Company received an investment from Mechanical
Technology, Inc. ("MTI") of $7,000,000 in the Company. In consideration for
MTI's investment, MTI will receive 1,030,000 shares of the Company's common
stock at a discounted price of approximately $6.80 per share, $.01 par value
per share (the "Common Stock"), and warrants to purchase an additional 100,000
shares of the Company's Common Stock. MTI funded $2,570,000 of its investment
in the Company on October 21, 1999 and received 370,800 shares of the Company's
Common Stock and a warrant to purchase 36,000 shares of the Company's Common
Stock, and it will make the remaining investment by the end of January 2000. In
addition, the Company has received a warrant to purchase 36,000 shares of MTI's
Common Stock and will receive the remaining warrant to purchase 64,000 shares
of MTI's Common Stock by the end of January 2000.
Additionally, the Company acquired Ling Electronics, Inc. and Ling
Electronics, Ltd. (collectively, "Ling Electronics") from MTI. In consideration
for the acquisition of Ling Electronics, MTI received $70,000 and 770,000
shares of the Company's common stock, $.01 par value per share (the "Common
Stock") valued at $9.8438 per share or $7,579,726.
44
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following unaudited pro forma financial information combines SatCon and
Ling's results of operations as if the acquisition had taken place on October
1, 1997. 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,
-------------------------
1999 1998
------------ -----------
(UNAUDITED)
Net revenue...................................... $ 23,849,881 $27,719,923
Operating loss................................... $(11,252,135) $(1,488,285)
Net loss......................................... $(13,833,683) $(5,116,575)
Net loss attributable to common stockholders..... $(13,884,587) $(5,116,575)
Net loss per share, basic and diluted............ $ (1.51) $ (0.57)
On November 16, 1999, the Company purchased certain intellectual property,
equipment and other assets from Northrop Gruman Corporation ("NGC"). These
assets were used by NGC in connection with its power electronics products
business. The Company also entered into (i) a sublease with NGC pursuant it
entered into a five-year sublease for approximately 14,863 square feet of
rentable space in the Baltimore area and (ii) a three-year Transition Services
Agreement providing the Company access to certain test facilities and personnel
of NGC on a fee basis. In consideration for these foregoing acquisition and
agreements, NGC received 578,761 shares of the Company's common stock, $.01 par
value per share (the "Common Stock"), and warrants to purchase an additional
200,000 shares of the Company's Common Stock.
The pro forma financial information has not been presented, as the Company
views this transaction as the purchase of assets rather than as a business
combination.
45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE
To the Board of Directors of SatCon Technology Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated statements of SatCon Technology Corporation and its
subsidiaries and have issued our report thereon dated December 27, 1999. Our
audit was made for the purpose of forming an opinion on those consolidated
financial statements taken as a whole. The schedule listed in the financial
statement schedule index is the responsibility of the Company's management and
is presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated financial
statements. This schedule has been subjected to auditing procedures applied in
the audit of the basic consolidated financial statements and, in our opinion,
fairly states, in all material respects, the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
Arthur Andersen LLP
Boston, Massachusetts
December 27, 1999
46
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, 1997:
Allowance for doubtful ac-
counts........................ $ 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
expense....................... -- $ 16,511 -- $ 16,511
Accrued costs for consolidation
of facilities................. -- $ 498,000 -- $ 498,000
Year Ended September 30, 1998:
Allowance for doubtful ac-
counts........................ $ 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
expense....................... $ 16,511 -- $ (16,511) --
Accrued costs for consolidation
of facilities................. $ 498,000 -- $ (398,000) $ 100,000
Year Ended September 30, 1999:
Allowance for doubtful ac-
counts........................ $ 51,836 $ 345,433 $ (10,583) $ 386,686
Allowance for unbilled contract
costs......................... $ 57,611 $ 688,510 -- $ 746,121
Deferred tax valuation allow-
ance.......................... $6,207,338 $4,008,214 -- $10,215,552
Allowance for obsolete invento-
ry............................ $ 208,776 $ 870,021 -- $ 1,078,797
Reserve for product warranty
expense....................... -- $ 36,000 -- $ 36,000
Accrued costs for consolidation
of facilities................. $ 100,000 -- -- $ 100,000
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 12, 1999, we dismissed PricewaterhouseCoopers LLP from its position as
our independent public accountants. The decision to change accountants was
recommended by our Audit Committee and approved by our Board of Directors. None
of the reports of PricewaterhouseCoopers LLP on our financial statements for
the years ended September 30, 1998 and 1997 contained an adverse opinion or
disclaimer of opinion, or was qualified or modified at to uncertainty, audit
scope or accounting principles. During the years ended September 30, 1998 and
1997, and any subsequent interim period immediately preceding the date of
dismissal of PricewaterhouseCoopers LLP, we had no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused PricewaterhouseCoopers LLP to make reference to such
matter of disagreement(s) in connection with its report on our financial
statements. None of the reportable events listed in Item 304 (a) (1) (v) of
Regulation S-K under the Securities Act of 1934, as amended, occurred with
respect to the years ended September 30, 1998 and 1997 or the subsequent
interim period preceding the dismissal of PricewaterhouseCoopers LLP.
On May 25, 1999, we engaged Arthur Andersen LLP as our independent public
accountants. The decision to engage Arthur Andersen LLP was recommended by our
Audit Committee and approved by our Board of Directors. During our two most
recent fiscal years, and any subsequent interim period prior to engaging Arthur
Andersen LLP, (i) neither we nor anyone on our behalf consulted Arthur Andersen
LLP regarding the application of accounting principles to a specific completed
or proposed transaction or the type of audit opinion that might be rendered on
our financial statements; and (ii) no written report or oral advice concerning
the same was provided to us that Arthur Andersen LLP concluded was an important
factor considered by us in reaching a decision as to any accounting, auditing
or financial reporting issue.
48
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 2000
Annual Meeting of Stockholders to be held March 15, 2000 (the "2000 Proxy
Statement"). Information relating to certain filings of Forms 3, 4, and 5 of
the Company is contained in the 2000 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 2000 Proxy
Statement.
The sections entitled "Compensation Committee Report on Executive
Compensation" and "Comparative Stock Performance Graph" in the 2000 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 2000 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 2000
Proxy Statement.
49
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, 1999 and 1998
Consolidated Statements of Operations for the Years Ended September 30,
1999 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1999 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Schedule II; Valuation and Qualifying Accounts for the Years Ended
September 30, 1999 1998 and 1997
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:
On August 26, 1999, we filed a Current Report on Form 8-K, dated August
25, 1999, in connection with our completion of an $8 million private
placement of 8,000 shares of our Series A Convertible Preferred Stock,
$0.01 par value per share, with Brown Simpson Strategic Growth Funds.
On November 5, 1999, we filed a Current Report on Form 8-K, dated
October 21, 1999, in connection with our acquisition of Ling
Electronics, Inc. and Ling Electronics, Ltd. from Mechanical Technology
Incorporated and an investment by Mechanical Technology Incorporated of
approximately $7,000,000.
On November 24, 1999, we filed a Current Report on Form 8-K, dated
November 16, 1999, in connection with our purchase of certain
intellectual property, equipment and other assets from Northrop Grumman
Corporation.
50
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 December 28, 1999.
SatCon Technology Corporation
/s/ David B. Eisenhaure
By: _________________________________
David B. Eisenhaure
President, Chief Executive
Officer and
Chairman of the Board
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. President, Chief Executive Officer and December 28, 1999
Eisenhaure Chairman of the Board of Directors
____________________ (Principal Executive Officer)
David B. Eisenhaure
/s/ Michael C. Vice President, Chief Financial Officer, December 28, 1999
Turmelle Treasurer and Director (Principal
____________________ Financial and Accounting Officer)
Michael C. Turmelle
/s/ James L. Vice President, General Manager and December 28, 1999
Kirtley, Jr. Director
____________________
James L. Kirtley,
Jr.
Director
____________________
Marshall J. Arm-
strong
Director
____________________
Alan P. Goldberg
/s/ John P. Director December 28, 1999
O'Sullivan
____________________
John P. O'Sullivan
/s/ Anthony J. Director December 28, 1999
Villiotti
____________________
Anthony J. Villiotti
51
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.
2.2(2) --Stock Purchase Agreement, dated as of October 21, 1999, by and
among the Registrant, Mechanical Technology Incorporated, Ling
Electronics, Inc. and Ling Electronics, Ltd.
2.3(3) --Asset Purchase Agreement, dated as of November 16, 1999, by and
between the Registrant and Northrop Grumman Corporation.
3.1(4) --Certificate of Incorporation of the Registrant.
3.2(4) --Bylaws of the Registrant.
3.3(5) --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(5) --Bylaws Amendment of the Registrant.
3.5(6) --Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Secretary of State of the State of
Delaware on March 17, 1999.
3.6(6) --Certificate of Designation of Series and Statement of Variations
of Relative Rights, Preferences and Limitations of Preferred
Stock, dated as of August 25, 1999, relating to the Series A
Preferred Stock.
4.1(4) --Specimen Certificate of Common Stock, $.01 par value.
10.1(4)(*) --Employment Agreement, dated July 1, 1992, between the Registrant
and David B. Eisenhaure.
10.2(4)(*) --Employment Agreement, dated July 1, 1992, between the Registrant
and Michael C. Turmelle.
10.3(4)(*) --1992 Stock Option Plan.
10.4(7)(*) --1994 Stock Option Plan.
10.5(8)(*) --1996 Stock Option Plan.
10.6(9)(*) --1998 Stock Incentive Plan.
10.7(*) --1999 Stock Incentive Plan.
10.8(4) --Lease, dated October 21, 1993, between the Registrant and
Gunwyn/First Street Limited Partnership.
10.9(5) --Manufacturing Agreement between Applied Materials, Inc. and its
wholly-owned subsidiaries and the Registrant, dated as of
February 20, 1997.
10.10(10) --Securities Purchase Agreement, dated as of May 28, 1997, by and
among the Registrant, Beacon Power Corporation and Duquesne
Enterprises.
10.11(11) --Securities Purchase Agreement, dated as of October 23, 1998, by
and among Beacon Power Corporation, Perseus Capital, L.L.C.,
Duquesne Enterprises, Micro Generation Technology Fund, L.L.C.
and the Registrant.
10.12(11) --Amended and Restated License Agreement, dated as of October 23,
1998, by and among the Registrant and Beacon Power Corporation.
10.13(11) --Registration Rights Statement, dated as of October 23, 1998, by
and among Beacon Power Corporation, Perseus Capital, L.L.C.,
Duquesne Enterprises, Micro Generation Technology Fund, L.L.C.,
and the Registrant, setting forth certain registration rights
granted by the Registrant.
52
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.14(11) --Registration Rights Statement, dated as of October 23, 1998, by
and among Beacon Power Corporation, Perseus Capital, L.L.C.,
Duquesne Enterprises, Micro Generation Technology Fund, L.L.C.
and the Registrant, setting forth certain registration rights
granted by Beacon Power Corporation.
10.15(12) --Form of Common Stock Purchase Warrant issued to certain
individuals and entities on June 15, 1998.
10.16(12) --Form of Common Stock Purchase Warrant issued to certain
individuals and entities on November 11, 1998.
10.17(12) --Lease, dated February 27, 1996, by and between the Registrant
and Diamond Management, Inc.
10.18(12) --Lease, dated March 5, 1998, by and between the Registrant and
Harold W. Slovin.
10.19(12) --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.
10.20 --Modification, dated April 9, 1999, to 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 modification,
dated May 7, 1999, to Discretionary Demand Line of Credit Letter
Agreement, dated as of December 16, 1998, between the
Registrant, SatCon Film Microelectronics, Inc., K&D MagMotor
Corp. , HyComp Acquisition Corp. and BankBoston, N.A.
10.21(12) --North America Distributor Agreement, dated June 4, 1998, by and
between SatCon Film Microelectronics, Inc., a division of the
Registrant, and Falcon Electronics, Inc.
10.22(13) --Asset Purchase Agreement, dated as of January 4, 1999, among K&D
MagMotor Corp., the Registrant, Inductive Components, Inc.,
Lighthouse Software, Inc. and Thomas Glynn.
10.23(14) --Asset Purchase Agreement dated as of March 31, 1999 by and
between HyComp, Inc. and HyComp Acquisition Corp., a wholly-
owned subsidiary of the Registrant.
10.24(14) --Note Purchase Agreement dated as of June 22, 1999 by and among
Beacon Power Corporation, Perseus Capital, L.L.C., Duquesne
Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and
the Registrant.
10.25(14) --Note and Warrant Purchase Agreement dated as of August 2, 1999
by and among Beacon Power Corporation, Perseus Capital, L.L.C.,
Duquesne Enterprises, Inc., Micro Generation Technology Fund,
L.L.C. and the Registrant.
10.26(15) --License and Technical Assistant Agreement dated as of June 7,
1999 by and between Delco Remy America, Inc. and the Registrant.
10.27(6) --Securities Purchase Agreement, dated as of August 25, 1999,
among the Registrant and the purchasers listed on Schedule I
thereto.
10.28(6) --Registration Rights Agreement, dated as of August 25, 1999,
among the Registrant and the investors named on the signature
pages thereof.
10.29(6) --Form of Warrants issued on August 25, 1999 in connection with
the sale of the Series A Preferred Stock.
10.30(2) --Securities Purchase Agreement, dated as of October 21, 1999,
between the Registrant and Mechanical Technology Incorporated.
53
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.31(2) --SatCon Registration Rights Agreement, dated as of October 21,
1999, between the Registrant and Mechanical Technology
Incorporated.
10.32(2) --MTI Registration Rights Agreement, dated as of October 21, 1999,
between Mechanical Technology Incorporated and the Registrant.
10.33(2) --Form of Stock Purchase Warrant issued on October 21, 1999 by the
Registrant to Mechanical Technology Incorporated.
10.34(2) --Form of Stock Purchase Warrant issued on October 21, 1999 by
Mechanical Technology Incorporated to the Registrant.
10.35(3) --Sublease, dated November 16, 1999, between the Registrant and
Northrop Grumman Corporation.
10.36(3) --Transition Services Agreement, dated as of November 16, 1999,
between the Registrant and Northrop Grumman Corporation.
10.37(3) --Memorandum of Understanding, entered into on November 16, 1999,
between the Registrant and Northrop Grumman Corporation.
10.38(3) --Registration Rights Agreement, dated as of November 16, 1999,
between the Registrant and Northrop Grumman Corporation.
10.39(3) --Form of Stock Purchase Warrant issued on November 16, 1999 by
the Registrant to Northrop Grumman Corporation.
10.40(3) --Form of Stock Purchase Warrant to be issued to Northrop Grumman
Corporation upon the satisfaction of certain conditions.
16(16) --Letter Regarding Registrant's Change in Certifying Accountant.
21.1 --Subsidiaries of the Registrant.
23.1 --Consent of PricewaterhouseCoopers LLP.
23.2 --Consent of Arthur Andersen 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 Current Report on
Form 8-K dated October 21, 1999
(3) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated November 16, 1999.
(4) Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 33-49286).
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 1997.
(6) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated August 25, 1999.
(7) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1994.
(8) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1996.
(9) Incorporated by reference to Exhibit B to the Registrant's Definitive
Schedule 14A filed January 26, 1999.
(10) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated May 28, 1997.
54
(11) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated October 23, 1998.
(12) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the period ended September 30, 1998.
(13) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated January 4, 1999.
(14) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the period ended June 30, 1999.
(15) Incorporated by reference to Exhibits to the Registrant's Amendment No. 1
to the Quarterly Report on Form 10-Q for the period ended March 31, 1999.
(16) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated May 12, 1999.
(*) Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K.
55