<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 March 31, 1999
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, 9,161,409 shares outstanding
as of April 30, 1999.
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Page
----
ITEM 1: FINANCIAL STATEMENTS
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.......................... 8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................. 13
PART II: OTHER INFORMATION
Items No. 1 through 6.................................................. 14
Signature.............................................................. 16
<PAGE>
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
---------------- ----------------
1999 1998
---------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 233,861 $ 1,201,610
Marketable securities ........................................................ 381,078 657,431
Accounts receivable, net of allowance of $20,000 at March 31, 1999 and
$51,836 at September 30, 1998 ............................................... 3,182,711 3,347,405
Unbilled contract costs, net of allowance of $57,611 at March 31, 1999 and
September 30, 1998............................................................ 2,654,094 1,196,318
Inventory ...................................................................... 5,270,640 3,678,067
Prepaid expenses and other assets............................................... 357,918 358,308
Amounts due from related party.................................................. -- 596,453
------------ ------------
Total current assets....................................................... 12,080,302 11,035,592
Property and equipment, net.......................................................... 3,019,149 2,677,786
Intangibles, net .................................................................... 3,345,485 2,967,988
Investment in Beacon Power Corporation............................................... 1,215,746 1,458,183
Other assets......................................................................... 259,554 27,041
------------ ------------
Total assets............................................................... $ 19,920,236 $ 18,166,590
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................................. $ 1,521,481 --
Accounts payable................................................................ 1,455,712 $ 1,447,897
Accrued payroll and payroll related expenses.................................... 505,580 352,701
Deferred revenue................................................................ 177,408 197,930
Other accrued expenses.......................................................... 424,936 385,999
Current portion of long-term debt............................................... -- 146,594
------------ ------------
Total current liabilities.................................................. 4,085,117 2,531,121
Long-term liabilities:
Long-term debt.................................................................. -- 221,462
------------ ------------
Total long-term liabilities................................................ -- 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, 20,000,000 shares authorized; 9,161,409 shares
issued at March 31, 1999 and 9,018,549 shares at September 30, 1998........... 91,614 90,185
Additional paid-in capital...................................................... 29,135,280 28,377,718
Retained earnings/(deficit)..................................................... (13,134,686) (12,870,440)
Net unrealized losses on marketable securities, net of tax effect............... (15,085) (10,380)
Treasury stock, at cost; 44,500 shares at March 31, 1999 and 28,300 shares
at September 30, 1998......................................................... (242,004) (173,076)
------------ ------------
Total stockholders' equity................................................. 15,835,119 15,414,007
------------ ------------
Total liabilities and stockholders' equity............................ $ 19,920,236 $ 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 For the six months ended
March 31, March 31,
1999 1998 1999 1998
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenue...................................................... $3,784,553 $4,325,548 $7,531,985 $ 8,021,167
---------- ---------- ---------- -----------
Cost of revenue.............................................. 2,590,014 3,052,082 5,317,945 5,730,867
Selling, general and administrative expenses................. 1,025,748 1,163,303 1,875,966 2,542,295
Research and development expenses............................ 51,717 21,999 152,600 287,030
Goodwill amortization........................................ 94,035 82,408 171,793 137,595
---------- ---------- ---------- -----------
Total operating expenses..................................... 3,761,514 4,319,792 7,518,304 8,697,787
---------- ---------- ---------- -----------
Operating income/(loss)...................................... 23,039 5,756 13,681 (676,620)
Loss from Investment in Beacon Power Corporation............. -- (969,984) (272,437) (969,984)
Other income/(loss).......................................... (9,012) -- (9,012) --
Interest income/(expense), net............................... (16,745) 53,199 3,522 106,363
---------- ---------- ---------- -----------
Net loss..................................................... $ (2,718) $ (911,029) $ (264,246) $(1,540,241)
========== ========== ========== ===========
Net loss per weighted average share, basic and diluted....... $.00 $(.10) $(.03) $(.17)
========== ========== ========== ===========
Weighted average number of common shares, basic and diluted.. 9,066,226 8,954,871 9,023,237 8,900,069
</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 six months ended
March 31,
1999 1998
-------------------- --------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss ......................................................... $ (264,246) $(1,540,241)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization............................... 467,089 426,414
Allowance for unbilled contract costs....................... -- (7,175)
Allowance for doubtful accounts............................. (31,836) 13,487
Allowance for inventory..................................... (208,776) --
Loss from Investment in Beacon Power Corp................... 272,437 969,984
Loss on sale of marketable securities....................... 9,012 --
Changes in operating assets and liabilities:
Accounts receivable...................................... 34,420 (794,518)
Prepaid expenses and other assets........................ (189,801) 73,451
Unbilled contract costs.................................. (1,457,776) 335,009
Inventory................................................ (1,413,350) (661,669)
Other assets............................................. 744,322 (65,208)
Accounts payable......................................... 14,115 102,648
Accrued expenses and payroll............................. 59,123 (329,056)
Deferred revenue......................................... (20,522) 165,862
----------- -----------
Total adjustments.............................................. (1,721,543) 229,229
----------- -----------
Net cash used in operating activities............................... (1,985,789) (1,311,012)
----------- -----------
Cash flows from investing activities:
Sales and maturities of marketable securities..................... 262,504 566,883
Patent and intangible expenditures................................ (40,167) (399,753)
Capital expenditures.............................................. (280,974) (667,702)
Acquisitions...................................................... (245,876) --
Investment in Beacon Power Corporation............................ (30,000) (1,676,540)
----------- -----------
Net cash used in investing activities............................... (334,513) (2,177,112)
----------- -----------
Cash flows from financing activities:
Repayment of borrowings.......................................... (100,000) (42,842)
Proceeds from line of credit...................................... 1,521,481 --
Proceeds from exercise of stock options........................... -- 581,739
Proceeds from exercise of warrants................................ -- 1,221,873
Purchase of treasury stock........................................ (68,928) --
----------- -----------
Net cash provided by financing activities........................... 1,352,553 1,760,770
----------- -----------
Net decrease in cash and cash equivalents........................... (967,749) (1,727,354)
Cash and cash equivalents at beginning of period.................... 1,201,610 4,256,504
----------- -----------
Cash and cash equivalents at end of period.......................... $ 233,861 $ 2,529,150
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
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 March 31, 1999 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 and six-month period ended March 31, 1999 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
affect 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.
4
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
Issuance of Common Stock
On January 4, 1999, the Company issued 100,000 shares of Common Stock to two
individuals in connection with the purchase by K&D MagMotor Corp., a wholly-
owned subsidiary of the Company, of certain assets and assumption of certain
liabilities of Inductive Components, Inc. ("Inductive") and Lighthouse Software,
Inc. ("Lighthouse," and together with Inductive, the "Sellers"). These shares
were issued in reliance upon the exemptions from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"), or Regulation
D promulgated thereunder, relative to sales by an issuer not involving any
public offering.
On March 9, 1999, the Company issued 42,860 shares of Common Stock to an
escrow agent in connection with a consulting agreement entered into by the
Company and Mr. Albert R. Snider pusuant to which Mr. Snider will perform such
consulting, advisory and related services as the Company 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.
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. On May 7, 1999,
the Company increased the Line of Credit to $3,000,000.
Acquisitions
On January 4, 1999, the Company acquired substantially all of the assets and
assumed certain of the liabilities of Inductive and Lighthouse pursuant to the
terms of an Asset Purchase Agreement, dated as of January 4, 1999, among K&D,
the Company, Inductive, Lighthouse 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 the Sellers
consisted of (i) 100,000 shares of the Company's Common Stock and (ii) the
repayment of $245,876 of debt owed by the Sellers to a third-party bank.
On March 31, 1999, the Company entered into an agreement to purchase
substantially all of the assets and assume certain liabilities of HyComp, Inc.
pursuant to the terms of an Asset Purchase Agreement dated March 31, 1999 by and
between HyComp, Inc. and HyComp Acquisition Corp., a wholly-owned subsidiary of
the Company (the "HyComp Asset Purchase Agreement").
5
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
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 For the six months ended
March 31, March 31,
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss........................................................ $ (2,718) $ (911,029) $ (264,246) $(1,540,241)
Basic:
Common shares outstanding, beginning of period.................. 8,978,249 8,918,844 8,990,249 8,769,146
Weighted average common shares issued during the period......... 90,477 36,027 45,238 130,923
Weighted average shares repurchased during the period........... (2,500) -- (12,250) --
---------- ---------- ---------- -----------
Weighted average shares outstanding--basic...................... 9,066,226 8,954,871 9,023,237 8,900,069
========== ========== ========== ===========
Net loss per weighted average share, basic...................... $ 0.00 $ (0.10) $ (.03) $ (.17)
========== ========== ========== ===========
Diluted:
Weighted average shares outstanding--basic...................... 9,066,226 8,954,871 9,023,237 8,900,069
Weighted average common stock equivalents (a)................... -- -- -- --
---------- ---------- ---------- -----------
Weighted average shares outstanding--diluted.................... 9,066,226 8,954,871 9,023,237 8,900,069
========== ========== ========== ===========
Net loss per weighted average share, diluted.................... $ 0.00 $ (0.10) $ (.03) $ (.17)
========== ========== ========== ===========
</TABLE>
(a) not included if antidilutive
Note D. Inventory
- -------------------
Inventory consists of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------------- -------------------
<S> <C> <C>
Raw material............................................................. $2,297,687 $1,783,803
Work-in-process.......................................................... 2,406,484 1,788,241
Finished goods........................................................... 566,469 106,023
------------------- -------------------
$5,270,640 $3,678,067
=================== ===================
</TABLE>
6
<PAGE>
SATCON TECHNOLOGY CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
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 For the six months ended
March 31, March 31,
1999 1998 1999 1998
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss.......................................................... $(2,718) $(911,029) $(264,246) $(1,540,241)
======= ========= ========= ===========
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on securities...................... $ 961 $ 4,170 $ (4,705) $ 6,136
------- --------- --------- -----------
Other comprehensive income/(loss)................................. $ 961 $ 4,170 $ (4,705) $ 6,136
------- --------- --------- -----------
Comprehensive loss................................................ $(1,757) $(906,859) $(268,951) $(1,534,105)
======= ========= ========= ===========
</TABLE>
Note F. Subsequent Events
- --------------------------
On April 12, 1999, the Company completed the acquisition of HyComp, Inc.
pursuant to the terms of the HyComp Asset Purchase Agreement. The aggregate
consideration paid by the Company for the acquired assets of HyComp, Inc. was
approximately $750,000. In addition, the Company assumed certain liabilities
aggregating approximately $250,000.
7
<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 Act of 1933. 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. The 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 Statement of Operations for each
period:
<TABLE>
<CAPTION>
For the three months For the six months
Ended March 31, Ended March 31,
-----------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue....................................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue............................................... 68.4 70.6 70.6 71.4
Selling, general and administrative expenses.................. 27.1 26.9 24.9 31.7
Research and development expenses............................. 1.4 0.5 2.0 3.6
Goodwill amortization......................................... 2.5 1.9 2.3 1.7
Total operating expenses (excluding cost of
revenue).................................................... 31.0 29.3 29.2 37.0
Operating income/(loss)....................................... 0.6 0.1 0.2 (8.4)
Loss from Investment in Beacon Power Corporation.............. - (22.4) (3.6) (12.1)
Other income/(loss)........................................... (0.2) - (0.1) -
Interest income/(expense), net................................ (0.4) 1.2 - 1.3
Net loss...................................................... (0.1) (21.1) (3.5) (19.2)
</TABLE>
Three Months Ended March 31, 1999 ("Q2 1999") Compared to the Three Months
- --------------------------------------------------------------------------
Ended March 31, 1998 ("Q2 1998")
- --------------------------------
Revenue. The Company's revenue decreased approximately $541,000 or 12.5%,
from Q2 1998 to Q2 1999. The decrease is primarily attributable to a reduction
in revenue related to research and development contracts.
Cost of revenue. Cost of revenue decreased approximately $462,000 or 15.1%,
from Q2 1998 to Q2 1999. The decrease in cost of revenue is primarily
attributable to a decrease in effort on research and development contracts.
Research and development expenses. Research and development expenses increased
approximately $30,000 or 135.1% from Q2 1998 to Q2 1999. The increase is
attributable to the continued development of magnetic bearings and suspension
systems and electro-optic and sensor inspection systems.
Goodwill amortization. Goodwill amortization increased approximately $12,000
or 14.1% from Q2 1998 to Q2 1999. This was primarily the result of goodwill
recorded in connection with the acquisition of Inductive and Lighthouse in
January 1999.
Other income/(loss),net. Other income/(loss), net decreased approximately
$9,000 from Q2 1998 to Q2 1999. The loss was the result of the sale of a
marketable security.
Interest income/(expense), net. Interest income/(expense), net decreased
approximately $70,000 or 131.5% from Q2 1998 to Q2 1999. The decrease is the
result of increased borrowings under the Line of Credit to approximately
$1,521,000 at March 31, 1999 and the decrease in marketable securities of
approximately $1,035,000 or 73.1% from March 31, 1998 to March 31, 1999.
8
<PAGE>
Six Months Ended March 31, 1999 ("Q2 1999 YTD") Compared to the Six Months Ended
- --------------------------------------------------------------------------------
March 31, 1998 ("Q2 1998 YTD")
- ------------------------------
Revenue. The Company's revenue decreased approximately $489,000 or 6.1%, from
Q2 1998 YTD to Q2 1999 YTD. The decrease is primarily attributable to a
reduction in revenue related to research and development contracts. This
decrease in revenue was partially offset by increases of sale of manufactured
products. The Company began shipping production orders for Satcon's Integrated
Suspension and Motor System ("ISAM") during 1999.
Cost of revenue. Cost of revenue decreased approximately $413,000 or 7.2%,
from Q2 1998 YTD to Q2 1999 YTD. The decrease in cost of revenue is primarily
attributable to a decrease in effort on research and development contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased approximately $666,000 or 26.2% from Q2 1998
YTD to Q2 1999 YTD. 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 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 $134,000 or 46.8% from Q2 1998 YTD to Q2 1999 YTD. 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 $34,000
or 24.9% from Q2 1998 YTD to Q2 1999 YTD. This was primarily the result of the
acquisition of Inductive and Lighthouse by K&D Magmotor Corp.
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 Generation Technology Fund, L.L.C. 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 not required to consolidate or 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
ended 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 its financial statements.
The Company will continue to review its investment in Beacon. While the
Company continues to be optimistic regarding the long term prospects for Beacon
and the flywheel technology, Beacon has not yet successfully introduced a
flywheel product and will need substantial additional financing to continue its
operations. If in the future the Company determines that its investment in
Beacon does not have any remaining value, the Company would take appropriate
actions to write-off the remaining cost of its investment.
9
<PAGE>
Other income/(loss),net. Other income, net increased approximately $9,000
from Q2 1998 YTD to Q2 1999 YTD. The loss was the result of the sale of a
marketable security.
Interest income/(expense), net. Interest income, net decreased approximately
$103,000 or 96.7% from Q2 1998 YTD to Q2 1999 YTD. The decrease is the result of
increased borrowings under the Line of Credit to approximately $1,521,000 at
March 31, 1999 and the decrease in marketable securities of approximately
$1,035,000 or 73.1% from March 31, 1998 to March 31, 1999.
Liquidity and Capital Resources
The Company's cash and cash equivalents was approximately $234,000 as of March
31, 1999, a decrease of approximately $968,000 from September 30, 1998. Cash
used in operating activities was approximately $1,986,000 for Q2 1999 YTD,
compared to approximately $1,311,000 for Q2 1998 YTD. 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. On May 7, 1999,
the Company increased the Line of Credit to $3,000,000.
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 March 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 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 are 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 technology developments and contract
research and development for both the government and commercial sectors and no
assurance can be given that such investments will continue or that the Company
can successfully obtain such funds. In addition, the Company's future growth
opportunities are dependent on the introduction of new products that must
penetrate automotive, telecommunications, industrial, and computer market
segments. No assurance can be given that new products can be developed, or if
developed, will be successful; that competitors will not force prices to an
unacceptably low level or take market share from the Company; or that the
Company can achieve or maintain profits in these markets. Because of these and
other factors, past financial performances should not be considered an indicator
of future performance. Investors should not use historical trends to anticipate
future results and should be aware that the Company's stock price frequently
experiences significant volatility.
10
<PAGE>
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 Put Right to cause the Company, in circumstances described below,
to purchase all of the Shares and all of Beacon's Common Stock issuable upon
conversion of the Shares; and (iv) upon exercise of the Put Right pursuant to
the terms of the agreement, the Company must pay the consideration contemplated
by the agreement in shares of the Company's Common Stock, valued at the average
fair value for the fifteen trading days before and after notice of exercise of
the Put Right. The aggregate consideration received by Beacon was $4,750,000.
The Put Right is exercisable within sixty days of the second, third, forth and
fifth anniversary of the closing date of the transaction, upon certain events of
bankruptcy of Beacon and upon the occurrence of certain going private
transactions involving the Company. If the Put Right were to be exercised, the
Company would most likely recognize a loss equal to the value of the Company's
shares issued upon exercise of the Put Right.
Effect of Recent Accounting Pronouncements
In June 1997, the 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 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 fiscal year 1999. Based on available information, the
Company does not believe any material exposure to significant business
interruption exists as a result of Y2K compliance issues. Accordingly, the
Company has not adopted any formal contingency plan in the event its Y2K project
is not completed in a timely manner. These costs and the timing in which the
Company plans to complete its Y2K modifications and testing processes are based
on management's best estimates. However, there can be no assurance that the
Company will timely identify and remediate all significant Y2K problems, that
remedial efforts will not involve significant time and expense or that such
problems will not have a material adverse effect on the Company's business,
results of operations or financial position.
11
<PAGE>
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.
12
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. These securities are classified as
available for sale, and consequently are recorded on the balance sheet at market
value, with the 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 March 31, 1999, which are sensitive
to changes in interest rates:
<TABLE>
<CAPTION>
For the years ended September 30,
Total Face Total 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 $ 48,695 $ 48,695 $ 55,578
Average Interest Rate 5.6% 5.6% 5.6% 5.6% 5.6% 5.6%
</TABLE>
13
<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 judgement 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 additional claims sought 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. On January 28, 1999, Mr. Snider
filed a motion asking the court to reconsider its January 21, 1999 order. On
February 12, 1999, the District Court also denied the motion.
Pursuant the the terms of the Agreement, dated March 1, 1999, by and between
the Company, FMI and Mr. Snider (the "Settlement Agreement"), the parties
reached a definitive settlement arangement regarding this litigation. On March
9, 1999, the parties filed a Stipulation of Dismissal With Prejudice with the
District Court and no further action is required by either party with respect to
this matter.
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. Sneder entered into a consulting agreement pursuant to which Mr.
Snider will perform such 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.
Disclosure relating to this litigation was previously set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998 and the Company's Quarterly Report on Form 10-Q for the quarterly period
ended December 31, 1998.
Item 2. Changes in Securities and Use of Proceeds:
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 and Lighthouse. 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, the Company issued 42,860 shares of Common Stock to an
escrow agent in connection with a consulting agreement entered into by the
Company and Mr. Snider pusuant to which Mr. Snider will perform such consulting,
advisory and related services as the Company 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.
Item 3. Defaults upon Senior Securities:
Not applicable.
14
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders:
At the Company's Annual Meeting of Stockholders (the "Annual Meeting") held on
March 17, 1999, the Company's stockholders approved the following:
<TABLE>
<CAPTION>
PROPOSAL FOR AGAINST/ ABSTAIN BROKER
WITHHELD NON-VOTES
<S> <C> <C> <C> <C>
(1) To elect the following
Class II Directors:
John P. O'Sullivan 8,398,584 0 323,960 0
Michael C. Turmelle. 8,394,846 0 327,698 0
The other directors of the Company, whose terms of office as directors continued
after the Annual Meeting are Marshall J. Armstrong, Anthony J. Villiotti,
David B. Eisenhaure and James L. Kirtley, Jr., Ph.D.
(2) To approve an amendment
to the Company's Certificate
of Incorporation increasing from
15,000,000 to 20,000,000 the
number of authorized shares of
Common Stock. 8,465,834 201,266 55,444 0
(3) To approve the Company's
1998 Stock Incentive Plan. 5,359,339 616,696 25,714 2,720,795
(4) To ratify the selection of
PricewaterhouseCoopers LLP as
Independent auditors for the
fiscal year ending
September 30, 1999. 8,684,549 31,096 6,899 0
</TABLE>
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 January 11, 1999, the Company filed a Current Report on Form 8-K, dated
January 4, 1999, in connection with the Asset Purchase Agreement, dated January
4, 1999, among K&D MagMotor Corp., a wholly-owned subsidiary of SatCon
Technology Corporation, Inductive, Lighthouse and Thomas Glynn, the sole
stockholder of Inductive and the majority stockholder of Lighthouse.
15
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
SATCON TECHNOLOGY CORPORATION
Date: May 17, 1999 By: /S/ MICHAEL C. TURMELLE
------------------------------------
Michael C. Turmelle, Vice President,
Chief Financial Officer, Treasurer and
Secretary
(Principal Financial and Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 233,861
<SECURITIES> 381,078
<RECEIVABLES> 3,182,711
<ALLOWANCES> 20,000
<INVENTORY> 5,270,640
<CURRENT-ASSETS> 12,080,302
<PP&E> 3,019,149<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,920,236
<CURRENT-LIABILITIES> 4,085,117
<BONDS> 0
0
0
<COMMON> 91,614
<OTHER-SE> 15,743,505
<TOTAL-LIABILITY-AND-EQUITY> 19,920,236
<SALES> 0
<TOTAL-REVENUES> 7,531,985
<CGS> 0
<TOTAL-COSTS> 5,317,945
<OTHER-EXPENSES> 2,200,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (264,246)
<INCOME-TAX> 0
<INCOME-CONTINUING> (264,246)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (264,246)
<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>
