<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
Commission File Number 1-11512
______________________
SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
______________________
State of Incorporation: Delaware I.R.S. Employer ID. No. 04-2857552
161 First Street
Cambridge, MA 02142-1221
(Address of principal executive offices)
(617) 661-0540
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value, 9,118,549 shares outstanding
as of January 31, 1999.
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<PAGE>
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1: FINANCIAL STATEMENTS
Page
----
<S> <C>
Consolidated Balance Sheets (Unaudited).................................... 1
Consolidated Statements of Operations (Unaudited).......................... 2
Consolidated Statements of Cash Flows (Unaudited).......................... 3
Notes to Interim Consolidated Financial Statements (Unaudited)............. 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 7
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS............................................................. 11
PART II: OTHER INFORMATION
Items No. 1 through 6...................................................... 12
Signature.................................................................. 14
</TABLE>
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1998 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 605,763 $ 1,201,610
Marketable securities............................................... 639,338 657,431
Accounts receivable, net of allowance of $58,043
at December 31, 1998 and $51,836 at September 30, 1998............ 3,633,489 3,347,405
Unbilled contract costs, net of allowance of $57,611
at December 31, 1998 and September 30, 1998....................... 1,648,240 1,196,318
Inventory .......................................................... 4,295,723 3,678,067
Prepaid expenses and other assets................................... 213,206 358,308
Amounts due from related party...................................... 6,455 596,453
------------ ------------
Total current assets............................................. 11,042,214 11,035,592
Property and equipment, net............................................. 2,885,582 2,677,786
Intangibles, net ....................................................... 2,915,109 2,967,988
Investment in Beacon Power Corporation.................................. 1,215,746 1,458,183
Other assets 71,551 27,041
------------ ------------
Total assets..................................................... $ 18,130,202 $ 18,166,590
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit...................................................... $ 5,000 --
Accounts payable.................................................... 1,599,650 $ 1,447,897
Accrued payroll and payroll related expenses........................ 375,378 352,701
Deferred revenue.................................................... 342,116 197,930
Other accrued expenses.............................................. 348,424 385,999
Current portion of long-term debt................................... 170,415 146,594
------------ ------------
Total current liabilities........................................ 2,840,983 2,531,121
Long-term liabilities:
Long-term debt...................................................... 197,641 221,462
------------ ------------
Total long-term liabilities...................................... 197,641 221,462
Commitments and contingencies...........................................
Stockholders' equity:
Preferred stock; $.01 par value, 1,000,000 shares authorized;
none issued and outstanding....................................... -- --
Common stock, $.01 par value, 15,000,000 shares authorized;
9,018,549 shares issued at December 31, 1998 and
September 30, 1998................................................ 90,185 90,185
Additional paid-in capital.......................................... 28,377,718 28,377,718
Retained earnings/(deficit)......................................... (13,131,968) (12,870,440)
Net unrealized losses on marketable securities, net of tax effect... (16,046) (10,380)
Treasury stock, at cost; 40,300 shares at December 31, 1998
and 28,300 shares at September 30, 1998........................... (228,311) (173,076)
------------ ------------
Total stockholders' equity....................................... 15,091,578 15,414,007
------------ ------------
Total liabilities and stockholders' equity....................... $ 18,130,202 $ 18,166,590
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Revenue............................................... $3,747,432 $3,695,619
---------- ----------
Cost of revenue....................................... 2,727,931 2,678,785
Selling, general and administrative expenses.......... 850,218 1,378,992
Research and development expenses..................... 100,883 265,031
Goodwill amortization................................. 77,758 55,187
---------- ----------
Total operating expenses.............................. 3,756,790 4,377,995
---------- ----------
Operating loss........................................ (9,358) (682,376)
Loss from Investment in Beacon Power Corporation...... (272,437) --
Interest income, net.................................. 20,267 53,164
---------- ----------
Net loss.............................................. $ (261,528) $ (629,212)
========== ==========
Net loss per weighted average share,
basic and diluted................................... $ (.03) $ (.07)
========== ==========
Weighted average number of common shares,
basic and diluted................................... 8,980,249 8,845,266
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $ (261,528) $ (629,212)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 218,347 203,618
Allowance for unbilled contract costs............. -- (7,175)
Allowance for doubtful accounts................... 6,207 6,377
Loss from Investment in Beacon Power Corporation.. 272,437 --
Changes in operating assets and liabilities:
Accounts receivable............................ (292,291) (498,364)
Prepaid expenses and other assets.............. 145,102 201,844
Unbilled contract costs........................ (451,922) 301,919
Inventory...................................... (617,656) (120,466)
Other assets................................... 545,488 (55,644)
Accounts payable............................... 151,753 (31,693)
Accrued expenses and payroll................... (14,898) (235,466)
Deferred revenue............................... 144,186 3,538
---------- ----------
Total adjustments.................................... 106,753 (231,512)
---------- ----------
Net cash used in operating activities..................... (154,775) (860,724)
---------- ----------
Cash flows from investing activities:
Sales and maturities of marketable securities........... 12,428 9,288
Patent and intangible expenditures...................... (30,360) (118,622)
Capital expenditures.................................... (342,905) (575,487)
Investment in Beacon Power Corporation.................. (30,000) --
---------- ----------
Net cash used in investing activities..................... (390,837) (684,821)
---------- ----------
Cash flows from financing activities:
Repayment of borrowings................................ -- (27,611)
Proceeds from line of credit............................ 5,000 --
Proceeds from exercise of stock options................. -- 7,004
Proceeds from exercise of warrants...................... -- 1,231,650
Purchase of treasury stock.............................. (55,235) --
---------- ----------
Net cash (used in)/provided by financing activities....... (50,235) 1,211,043
---------- ----------
Net decrease in cash and cash equivalents................. (595,847) (334,502)
Cash and cash equivalents at beginning of period.......... 1,201,610 4,256,504
---------- ----------
Cash and cash equivalents at end of period................ $ 605,763 $3,922,002
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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SatCon Technology Corporation
Notes to Interim Consolidated Financial Statements (Unaudited)
Note A. Basis of Presentation
- -----------------------------
The accompanying unaudited consolidated financial statements include the
accounts of SatCon Technology Corporation and its majority-owned subsidiaries
(collectively, the "Company") as of December 31, 1998 and have been prepared by
the Company in accordance with generally accepted accounting principles for
interim financial reporting and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All intercompany accounts and transactions
have been eliminated. These consolidated financial statements, which in the
opinion of management reflect all adjustments (including normal recurring
adjustments) necessary for a fair presentation, should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1998. Operating results for
the three-month period ended December 31, 1998 are not necessarily indicative of
the results that may be expected for any future interim period or for the entire
fiscal year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Note B. Significant Events
- --------------------------
Beacon Power Corporation
On October 23, 1998, the Company entered into a Securities Purchase Agreement
(the "Agreement") with Beacon Power Corporation ("Beacon"), Perseus Capital,
L.L.C. ("Perseus"), Duquesne Enterprises ("Duquesne") and Micro Generation
Technology Fund, L.L.C ("Micro", and together with Perseus and Duquesne the
"Purchasers"). 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 (the "Common
Stock"), valued at the average fair value for the fifteen trading days before
and after notice of exercise of the Put Right. The aggregate consideration
received by Beacon was $4,750,000. The Put Right is exercisable within sixty
days of the second, third, forth and fifth anniversary of the closing date of
the transaction, upon certain events of bankruptcy of Beacon and upon the
occurrence of certain going private transactions involving the Company. If the
Put Right were to be exercised, the Company would most likely recognize a loss
equal to the value of the Company's shares issued upon exercise of the Put
Right. The Company retained approximately 19.9% of Beacon's outstanding voting
stock. Accordingly, as a result of the third-party financing obtained on October
23, 1998 the Company's remaining investment in Beacon from October 23, 1998
going forward will be accounted for on a cost basis.
The Company will continue to review its investment in Beacon. While the
Company continues to be optimistic regarding the long term prospects for Beacon
and flywheel technology, Beacon has not yet successfully introduced a flywheel
product and will need substantial additional financing to continue its
operations. If in the future the Company determines that its investment in
Beacon does not have any remaining value, the Company would take appropriate
actions to write-off the remaining cost of its investment.
Issuance of Common Stock Purchase Warrants
On November 11, 1998, the Company issued to certain individuals, who formerly
held warrants issued by the Company in connection with the Company's initial
public offering in November 1992, Common Stock Purchase Warrants to purchase up
to 67,125 shares of the Company's Common Stock at an exercise price of $11.43
per share. These warrants expire on November 11, 1999 and were issued in
reliance upon the exemptions from registration under Section 4(2) of the
Securities Act or Regulation D
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promulgated thereunder, relative to sales by an issuer not involving any public
offering.
Line of Credit
On December 16, 1998, the Company obtained a $2,000,000 discretionary demand
line of credit (the "Line of Credit"), bearing interest at the bank's prime rate
of interest plus 1 1/2%. Available borrowings are based on a formula of eligible
accounts receivable and inventory and will be used for capital expenditures,
working capital and general corporate purposes.
Note C. Income per Share
------------------------
The following is the reconciliation of the numerators and denominators of the
basic and diluted per share computations of loss:
<TABLE>
<CAPTION>
For the three months ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Net loss.................................. $ (261,528) $ (629,212)
Basic:
Common shares outstanding, beginning
of period............................... 8,990,249 8,769,146
Weighted average common shares issued
during the period....................... -- 76,120
Weighted average shares repurchased
during the period....................... (10,000) --
---------- ----------
Weighted average shares outstanding
--basic................................. 8,980,248 8,845,266
========== ==========
Net loss per weighted average share,
basic................................... $ (0.03) $ (.07)
========== ==========
Diluted:
Weighted average shares outstanding
--basic................................. 8,980,248 8,845,266
Weighted average common stock
equivalents (a)......................... -- --
---------- ----------
Weighted average shares outstanding
--diluted............................... 8,980,248 8,845,266
========== ==========
Net loss per weighted average share,
diluted................................. $ (0.03) $ (.07)
========== ==========
</TABLE>
- --------------
(a) not included if antidilutive
On January 15, 1999, the Company granted options to purchase up to 334,000
shares of the Company's Common Stock. These options are exercisable at a price
of $5.688 and expire in January 2009. On January 26, 1999, the Company granted
additional options to purchase up to 40,000 shares of the Company's Common
Stock. These options are exercisable at a price of $5.875 and expire in January
2009. The shares of Common Stock or potential shares of Common Stock outstanding
at the end of the period would not have changed materially if these transactions
occurred before the end of the period.
Note D. Inventory
- -----------------
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
---- ----
<S> <C> <C>
Raw material................... $2,394,468 $1,783,803
Work-in-process................ 1,780,424 1,788,241
Finished goods................. 120,831 106,023
---------- ----------
$4,295,723 $3,678,067
========== ==========
</TABLE>
5
<PAGE>
Note E. Comprehensive Income
- ----------------------------
As of October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130
requires that changes in comprehensive income be shown in a financial statement
that is displayed with the same prominence as other financial statements.
Financial statements for prior periods must be restated.
The Company's total comprehensive income is as follows:
<TABLE>
<CAPTION>
For the three months ended
December 31,
<S> <C> <C>
Net loss........................................... $ (261,528) $ (629,212)
=========== ==========
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on securities.......... $ (5,666) $ 1,966
----------- ----------
Other comprehensive income/(loss).................. $ (5,666) $ 1,966
----------- ----------
Comprehensive loss................................. $ (267,194) $ (627,246)
=========== ==========
</TABLE>
Note F. Subsequent Events
- -------------------------
On January 4, 1999, the Company issued 100,000 shares of Common Stock to two
individuals in connection with K&D MagMotor Corp.'s, a wholly-owned subsidiary
of the Company, purchase of certain assets and assumption of certain liabilities
of Inductive Components, Inc. and Lighthouse Software, Inc. These shares were
issued in reliance upon the exemptions from registration under Section 4(2) of
the Securities Act or Regulation D promulgated thereunder, relative to sales by
an issuer not involving any public offering.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 as amended,
and Section 27A of the Securities Exchange Act of 1933, as amended (the
"Securities Act"). For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes", "anticipates",
"plans", "expects", and similar expressions are intended to identify forward-
looking statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below under the caption "Factors Affecting Future Results".
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
revenue for certain items in the Company's Statements of Operations for each
period:
<TABLE>
<CAPTION>
For the three
months ended
December 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
Revenue................................................. 100.0% 100.0%
Cost of revenue........................... 72.8 72.5
Selling, general and administrative..................... 22.7 37.3
Research and development................................ 2.7 7.2
Goodwill amortization................................... 2.0 1.5
Total operating expenses (excluding cost of revenue).... 27.4 46.0
Operating loss.......................................... (0.2) (18.5)
Loss from Investment in Beacon Power Corporation........ (7.3) --
Interest income, net.................................... 0.5 1.5
Net loss................................................ 7.0 (17.0)
</TABLE>
Three Months Ended December 31, 1998 ("Q1 1999") Compared to the Three Months
- -----------------------------------------------------------------------------
December 31, 1997 ("Q1 1998")
- -----------------------------
Revenue. The Company's revenue increased approximately $52,000 or 1.4%, from
Q1 1998 to Q1 1999. The increase is attributable to increased sale of
manufactured products of approximately $301,000. The Company began shipping
production orders for the Company's Integrated Suspension and Motor system
("ISAM") during Q1 1999. This increase in revenue was partially offset by
decreases in revenue related to research and development contracts.
Cost of Revenue. Cost of revenue increased approximately $49,000 or 1.8%,
from Q1 1998 to Q1 1999. The increase in cost of revenue is attributable to
increased sale of manufactured products partially offset by a decrease in effort
on research and development contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased approximately $529,000 or 38.3% from Q1 1998
to Q1 1999. The decrease is primarily the result of the recapitalization of
Beacon. During 1997, the Company formed Beacon, a wholly-owned subsidiary, to
continue the work of the Company's Energy Systems Division. During a
recapitalization of Beacon in December 1997, the Company converted a significant
portion of its ownership of Beacon to convertible preferred stock. The Company
retained approximately 19.9% of Beacon's outstanding voting stock. Although the
Company owned less than 20% of the outstanding voting stock of Beacon, based on
other factors, there was a presumption that the Company had the ability to
exercise significant influence, and the equity method was required for the fair
presentation subsequent to this recapitalization. The Company's share of losses
from Beacon is shown as a single amount in the statement of operations, ''Loss
from Investment in Beacon Power Corporation.'' On October 23, 1998, Beacon
completed a $4,750,000 private placement of equity securities with Perseus,
Duquesne and Micro. Beacon is utilizing the proceeds from the private placement
to continue field trials and begin early production of the 20C1000 Cable/Telecom
Flywheel System. Beacon's focus is limited to providing flywheel energy storage
products for stationary terrestrial applications. The Company is neither
required to consolidate nor reflect
7
<PAGE>
its pro-rata share of Beacon's losses for any period subsequent to the third-
party financing Beacon obtained in October 1998. This decrease was partially
offset by increases of expenses related to K&D MagMotor and SatCon Film
Microelectronics, Inc. ("FMI").
Research and development. Research and development expenses decreased
approximately $164,000 or 61.9% from Q1 1998 to Q1 1999. The decrease is
primarily the result of the recapitalization of Beacon. This decrease was
partially offset by increases of expenses related to the continued development
of magnetic bearings and suspension systems and electro-optic and sensor
inspection systems.
Goodwill amortization. Goodwill amortization increased approximately $23,000
or 40.9% from Q1 1998 to Q1 1999. This was primarily the result of the final
installment of the non-compete agreement in connection with the acquisition of
FMI in April 1997.
Loss from Investment in Beacon Power Corporation. On May 20, 1997, the Company
formed its subsidiary, Beacon, through a strategic partnership with Duquesne, a
subsidiary of DOE, Inc., to manufacture and distribute the Company's flywheel
energy storage systems. Duquesne made an initial investment totaling $5,000,000
in the Company to fund flywheel product development. Beacon assumed the
activities of the Company's Energy Systems Division which was formed in October
1995 to focus on the product development and marketing of flywheel "Inertial
Battery" systems for such markets as utilities, cable television and
telecommunications, where uninterruptible power supplies (UPS) are critical to
maintaining services. In December 1997, Beacon obtained equity financing from
private investors and the Company converted a significant portion of its
ownership of Beacon to convertible preferred stock. The Company retained
approximately 19.9% of Beacon's outstanding voting stock. On October 23, 1998,
Beacon completed a $4,750,000 private placement of equity securities with
Perseus, Duquesne and Micro. Beacon is utilizing the proceeds from the private
placement to continue field trials and began early production of the 20C1000
Cable/Telecom Flywheel System. Beacon's focus is limited to providing flywheel
energy storage products for stationary terrestrial applications.
The Company has been advised by its independent accountants that they concur
with the Company's view that the Company is neither required to consolidate nor
reflect its pro-rata share of Beacon's losses for any period subsequent to the
third-party financing Beacon obtained in October 1998. Consequently, for the
remainder of the fiscal year ending September 30, 1999, the Company will carry
its investment in Beacon at its remaining cost of approximately $1,216,000 and
will not be consolidating or otherwise reflecting Beacon's results of operations
in the Company's financial statements.
The Company will continue to review its investment in Beacon. While the
Company continues to be optimistic regarding the long term prospects for Beacon
and the flywheel technology, Beacon has not yet successfully introduced a
flywheel product and will need substantial additional financing to continue its
operations. If in the future the Company determines that its investment in
Beacon does not have any remaining value, the Company would take appropriate
actions to write-off the remaining cost of its investment.
Interest income, net. Interest income, net decreased approximately $33,000
or 61.9% from Q1 1998 to Q1 1999. The decrease is primarily the result of the
decrease in marketable securities of approximately $1,330,000 or 67.5% from
December 31, 1997 to December 31, 1998.
Liquidity and Capital Resources
The Company's cash and cash equivalents was approximately $606,000 as of
December 31, 1998, a decrease of approximately $596,000 from September 30, 1998.
Cash used in operating activities was approximately $155,000 for Q1 1999,
compared to approximately $861,000 for Q1 1998. The cash used in operating
activities is primarily the result of an increase in inventory related to the
introduction of a new line of standard regulators.
On December 16, 1998, the Company obtained a $2,000,000 discretionary demand
line of credit (the "Line of Credit"), bearing interest at the bank's prime rate
of interest plus 1 1/2%. Available borrowings are based on a formula of eligible
accounts receivable and inventory and will be used for capital expenditures,
working capital and general corporate purposes.
The Company anticipates that its existing cash resources, cash flow from
operations and the Line of Credit will be sufficient to fund its operations
through at least December 31, 1999, and to repurchase up to 5 percent of the
outstanding shares of the Company's Common Stock under a stock repurchase
program (the "Repurchase Program") provided that the Company meets its
8
<PAGE>
operating plan. Under the Repurchase Program, the Company plans to purchase
shares of the Company's Common Stock on the open market from time to time,
depending on market conditions. To the extent cash flows from operations is
insufficient to fund the Company's activities, it may be necessary to raise
additional funds through equity or debt financing. The Company's ability to
generate cash from operations depends upon, among other things, revenue growth,
its credit and payment terms with vendors and collection of accounts receivable.
If such sources of cash prove insufficient, the Company will be required to make
changes in its operations or to seek additional debt or equity financing. There
can be no assurance that cash generated from operations will be sufficient to
meet its operating requirements or that additional debt or equity financing will
be available on terms acceptable to the Company, or at all.
Effects of Inflation
The Company believes that inflation and changing prices over the past three
years have not had a significant impact on the Company's net sales and revenues
or on income from continuing operations.
Factors Affecting Future Results
The Company's future results remain difficult to predict and may be affected
by a number of factors which could cause actual results to differ materially
from forward-looking statements contained in this Quarterly Report on Form 10-Q
and presented elsewhere by management from time to time. These factors include
business conditions within the automotive, telecommunications, industrial
machinery, and semiconductor industries and the world economies as a whole, and
competitive pressures that may impact research and development spending. The
Company's revenue growth is dependent on technological developments and contract
research and development for both the government and commercial sectors and no
assurance can be given that such investments will continue or that the Company
can successfully obtain such funds. In addition, the Company's future growth
opportunities are dependent on the introduction of new products that must
penetrate automotive, telecommunications, industrial, and computer market
segments. No assurance can be given that new products can be developed, or if
developed, will be successful; that competitors will not force prices to an
unacceptably low level or take market share from the Company; or that the
Company can achieve or maintain profits in these markets. Because of these and
other factors, past financial performances should not be considered an indicator
of future performance. Investors should not use historical trends to anticipate
future results and should be aware that the Company's stock price frequently
experiences significant volatility.
On October 23, 1998, the Company entered into the Agreement with Beacon,
Perseus, Duquesne and Micro. Pursuant to the terms of the Agreement, (i) the
Purchasers purchased from Beacon and Beacon issued, sold and delivered to the
Purchasers 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; (iii) the Company granted the
Purchasers the the Put Right; and (iv) upon exercise of the Put Right pursuant
to the terms of the Agreement, the Company must pay the consideration
contemplated by the agreement in shares of the Company's Common Stock, valued at
the average fair value for the fifteen trading days before and after notice of
exercise of the Put Right. The aggregate consideration received by Beacon was
$4,750,000. The Put Right is exercisable within sixty days of the second, third,
forth and fifth anniversary of the closing date of the transaction, upon certain
events of bankruptcy of Beacon and upon the occurrence of certain going private
transactions involving the Company. If the Put Right were to be exercised, the
Company would most likely recognize a loss equal to the value of the Company's
shares issued upon exercise of the Put Right.
Effect of Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information." SFAS 131 is effective for fiscal years beginning after December
15, 1997 and establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products and
services, geographical areas and major customers. The Company will adopt SFAS
131 in the fiscal year ending September 30, 1999. This Statement need not be
applied to interim financial periods in the initial year of application,
however, comparative information for interim financial statements in the year of
application will be reported in financial statements for interim periods in the
second year of application.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 is effective for fiscal years beginning after June 15,
1999 and
9
<PAGE>
establishes a new model for accounting for derivatives and hedging activities.
The Company will adopt SFAS 133 beginning in the first quarter of the fiscal
year ending September 30, 2000.
Adoption of SFAS 131 and SFAS 133 are not expected to have a material impact
to the Company's consolidated financial position, results of operations or cash
flows, and any effect will be limited to the form and content of its
disclosures.
Effects of Year 2000
The year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Certain
computer programs that have date-sensitive software and use two digits only may
recognize a date using "00" as the year 1900 rather than the year 2000.
The Company recognizes the need to ensure its operations will not be adversely
impacted by the Y2K software failures and has established a project team to
address the Y2K risks. The project team has coordinated the identification of,
and will coordinate the implementation of, changes to computer hardware and
software applications that will attempt to ensure availability and integrity of
the Company's information systems and the reliability of its operational systems
and manufacturing processes. The Company is also assessing the potential overall
impact of Y2K on its business, results of operations and financial position.
The Company has reviewed its information and operational systems and
manufacturing processes in order to identify those products, services or systems
that are not Y2K compliant. As a result of this review, the Company has
determined that it will be required to modify or replace certain information and
operational systems so that they will be Y2K compliant. These modifications and
replacements are being, and will continue to be, made in conjunction with the
Company's overall system initiatives. The total cost of these Y2K compliance
measures has not been, and is not anticipated to be, material to the Company's
financial position or its results of operations. The Company expects to complete
its Y2K project during the fiscal year ending September 30, 1999. Based on
available information, the Company does not believe any material exposure to
significant business interruption exists as a result of Y2K compliance issues.
Accordingly, the Company has not adopted any formal contingency plan in the
event its Y2K project is not completed in a timely manner. These costs and the
timing in which the Company plans to complete its Y2K modifications and testing
processes are based on management's best estimates. However, there can be no
assurance that the Company will timely identify and remediate all significant
Y2K problems, that remedial efforts will not involve significant time and
expense or that such problems will not have a material adverse effect on the
Company's business, results of operations or financial position.
The Company also faces risks to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the Company
transacts business do not comply with the Y2K requirements. The Company is
identifying significant suppliers and customers to determine the extent to which
the Company is vulnerable to these third parties' failure to remediate their own
Y2K issues. In the event any such third party cannot provide the Company the
products, services or systems that meet the Y2K requirements on a timely basis,
the Company's results of operations could be materially and adversely affected.
To the extent Y2K issues cause significant delays in, or cancellation of,
decisions to purchase the Company's products or services, the Company's
business, results of operations or financial position would be materially
adversely affected.
10
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
The Company maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. These securities are classified as
available for sale, and consequently are recorded on the balance sheet at market
value, with the unrecorded gain or loss recorded through the equity section.
These instruments are not leveraged, and are not held for purposes of trading.
The following table summarizes derivative financial instruments included in
marketable securities held by the Company at December 31, 1998, which are
sensitive to changes in interest rates:
<TABLE>
Total Total
For the years ended September 30, Face Fair
Description 1999 2000 2001 2002 2003 Thereafter Value Value
- ----------------- ---- ---- ---- ---- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Floater $350,000 $350,000 $325,500
Average Interest Rate 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%
CMO $ 57,590 $ 57,590 $ 64,463
Average Interest Rate 5.6% 5.6% 5.6% 5.6% 5.6% 5.6%
Structured Notes $250,000 $250,000 $249,375
Average Interest Rate 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
</TABLE>
11
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings:
On December 12, 1997, FMI filed suit against Albert R. Snider for breach of
certain representations made by Mr. Snider, including statements of inventory
balances, in the Asset Purchase Agreement, dated as of April 3, 1997, between
FMI and Mr. Snider relating to the purchase by the Company of the business of
FMI. The suit was filed in the United States District Court in Boston,
Massachusetts. The parties dismissed the lawsuit because settlement discussions
between the Company and Mr. Snider were ongoing. However, those settlement
discussions were unsuccessful, and the lawsuit was reinstated on July 17, 1998.
Mr. Snider filed a counterclaim seeking, among other things, payments allegedly
due from the Company under a promissory note and unspecified damages under the
Massachusetts unfair trade practices statute. Mr. Snider's motion for partial
summary judgment on the promissory note counterclaim was denied by the District
Court on October 15, 1998.
On December 30, 1998, Mr. Snider filed a motion to amend his counterclaim,
seeking to assert two additional claims against the Company for: (i) the
Company's breach of an alleged promise to make Mr. Snider a member of the
Company's Board of Directors; and (ii) alleged misrepresentations in the
Company's financial statements. The proposed additional claims seek unspecified
damages, and/or an order requiring the Company to offer Mr. Snider a seat on the
Company's Board of Directors. On January 21, 1999, the District Court denied Mr.
Snider's motion to amend his counterclaim. Mr. Snider has filed a motion asking
the Court to reconsider its January 21, 1999 order. The Company has opposed this
motion. The parties have initiated discovery. The Company believes it has
sufficient reserves on the books of FMI for the overstatement in inventory
balances.
Item 2. Changes in Securities and Use of Proceeds:
Recent Sales of Unregistered Securities
On November 11, 1998, the Company issued to certain individuals, who formerly
held warrants issued by the Company in connection with the Company's initial
public offering in November 1992, Common Stock Purchase Warrants to purchase up
to 67,125 shares of the Company's Common Stock at an exercise price of $11.43
per share. These warrants expire on November 11, 1999 and were issued in
reliance upon the exemptions from registration under Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, relative to sales by an
issuer not involving any public offering.
On January 4, 1999, the Company issued 100,000 shares of Common Stock to two
individuals in connection with MagMotor's purchase of certain assets and
assumption of certain liabilities of Inductive Components, Inc. and Lighthouse
Software, Inc. These shares were issued in reliance upon the exemptions from
registration under Section 4(2) of the Securities Act or Regulation D
promulgated thereunder, relative to sales by an issuer not involving any public
offering.
Item 3. Defaults upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
Item 5. Other Information:
Not applicable.
Item 6 Exhibits and Reports on Form 8-K:
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 30, 1998, the Company filed a Current Report on Form 8-K, dated
October 23, 1998, in connection with the Securities Purchase Agreement, dated
October 23, 1998, by and among Beacon Power Corporation, Perseus Capital,
L.L.C., Duquesne Enterprises, Micro Generation Technology Fund, L.L.C. and the
Company.
12
<PAGE>
On January 14, 1999, the Company filed a Current Report on Form 8-K, dated
January 4, 1999, in connection with the Asset Purchase Agreement, dated as of
January 4, 1999, among K&D MagMotor Corp., the Company, Inductive Components,
Inc.("Inductive"), Lighthouse Software, Inc. ("Lighthouse") and Thomas Glynn,
the sole stockholder of Inductive and the majority stockholder of Lighthouse.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 605,763
<SECURITIES> 639,338
<RECEIVABLES> 3,633,489
<ALLOWANCES> 0
<INVENTORY> 4,295,723
<CURRENT-ASSETS> 11,042,214
<PP&E> 2,885,582<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,130,202
<CURRENT-LIABILITIES> 2,840,983
<BONDS> 0
0
0
<COMMON> 90,185
<OTHER-SE> 15,001,393
<TOTAL-LIABILITY-AND-EQUITY> 18,130,202
<SALES> 0
<TOTAL-REVENUES> 3,747,432
<CGS> 0
<TOTAL-COSTS> 2,727,931
<OTHER-EXPENSES> 1,028,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (261,528)
<INCOME-TAX> 0
<INCOME-CONTINUING> (261,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (261,528)
<EPS-PRIMARY> (0.03)<F2>
<EPS-DILUTED> (0.03)<F2>
<FN>
<F1>PP&E IS SHOWN NET OF ACCUMULATED DEPRECIATION AS REPORTED WITHIN THE FORM 10-Q
ON THE BALANCE SHEET.
<F2>IN ACCORDANCE WITH SFAS NO. 128, "EARNINGS PER SHARE - BASIC" IS REPORTED AS
THE VALUE FOR THE [EPS-PRIMARY] TAG AND "EARNINGS PER SHARE - DILUTED" IS
REPORTED AS THE VALUE FOR THE [EPS-DILUTED] TAG
</FN>
</TABLE>
